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A lawsuit against a massive health insurer provides a rare glimpse into the secretive ways drug-industry middlemen drum up profits

  • Centene just settled litigation over the practices of its pharmacy benefit managers, or PBMs.
  • As part of the $88 million settlement in Ohio, the Ohio attorney general’s complaint was unsealed.
  • The complaint offers a rare glimpse at how some PBMs make money.
  • See more stories on Insider’s business page.

In March, Ohio’s attorney general sued Centene, the largest provider of government health insurance, for allegedly overcharging the state’s Medicaid agency by tens of millions of dollars.

The lawsuit targeted the practices of Centene’s pharmacy benefit manager, or PBM — a type of middleman that sits between pharmaceutical companies and health plans or employers.

PBMs negotiate discounts known as rebates from drugmakers, set up networks of pharmacies, process drug claims, and design drug formularies. They say they can help their customers secure better prices for drugs.

But PBMs have come under scrutiny in recent years for the role critics say they play in driving up the cost of prescription drugs. One way they do this is through a practice called “spread pricing,” which is when the PBM charges an employer or other customers, like Medicaid agencies, more than it pays for drugs and pockets the difference.

Secret contracts make it nearly impossible to know how PBMs make money, and for employers and other customers to know when they’re getting a bad deal. But a number of states are investigating the organizations in hopes of bringing their opaque billing practices to light.

pharmacist pills



Lucas Jackson/Reuters


Ohio is one state making inroads. On Monday, Centene said it agreed to fork over $88.3 million to settle the lawsuit in Ohio, though it denied any wrongdoing. Separately, it also agreed to pay $55 million to settle claims in Mississippi.

 “These agreements reflect the significance we place on addressing their concerns and our ongoing commitment to making the delivery of healthcare local, simple and transparent,” Brent Layton, Centene’s president of health plans, markets and products, said in a statement.

Centene set aside an additional $1.1 billion to settle similar PBM lawsuits in other states, and it said it’s restructured its PBM operations to eliminate spread pricing.

Ohio’s complaint against Centene was unsealed as part of the settlement, and it offers a rare look at how some PBMs make money. Ohio alleged that Centene overcharged the state’s Medicaid program and thus, taxpayers, by marking up its pharmacy costs and failing to disclose discounts. It used a web of subcontractors to hide its practices from the Ohio Medicaid department, the lawsuit alleged.

Centene CEO Michael Neidorff has said the Ohio’s allegations are unfounded.

Ohio’s lawsuit provides rare details about complex PBM practices

Ohio Attorney General Dave Yost in front of a microphone

Ohio Attorney General Dave Yost

Justin Merriman/Getty Images


In Ohio, Centene operates as Buckeye Health Plan, which is one of five health plans that receives fees from Ohio’s Medicaid department to coordinate healthcare for more than 3 million low-income people in the state.

The plans work with PBMs to handle prescription drug benefits for people enrolled in Medicaid, which is jointly funded by the federal government and the state.

Like other big insurers, Centene owns its own PBMs. But in Ohio, Centene did something unusual, according to the lawsuit, which was filed by Ohio Attorney General Dave Yost.

Instead of having one its own PBMs handle drug benefits for Medicaid plan members, Centene entered into an arrangement in 2016 in which it farmed out those responsibilities to CVS Caremark, the PBM owned by CVS Health. That’s because Centene found that CVS had negotiated better pharmacy discounts and prices for claims processing, the lawsuit alleged. CVS declined to comment for this story.

That arrangement “created an opaque and multi-layered billing process” that allowed Centene to keep Ohio Medicaid in the dark about what Centene paid for prescription drugs for its members,” the lawsuit stated.

According to the complaint, CVS Caremark sent an invoice to Centene’s PBM, Envolve Pharmacy Solutions, each week listing all the charges it paid for Buckeye-related claims. Envolve then turned around and billed the Buckeye health plan significantly more for the same set of claims, the lawsuit alleged.

In one example detailed in the lawsuit, Caremark billed Envolve almost $7 million for a single week in September 2018. Envolve then billed Buckeye $7.4 million for the same week.

Ohio’s investigation found that Envolve didn’t disclose discounts it got from Caremark, instead charging Buckeye the undiscounted price for processing pharmacy claims.

Envolve also marked up pharmacy dispensing fees by about $1.45 per transaction, according to the complaint. Caremark paid the pharmacies and charged a $0.50 cent dispensing fee to Envolve, and then Envolve charged Buckeye a dispensing fee of $1.95 per claim, the lawsuit said.

Buckeye paid Envolve’s invoices using the money it got from Ohio Medicaid. Centene did not disclose or pass on the cost savings that Envolve received from its arrangement with CVS to the Medicaid program or the state, violating its agreement with the agency, the lawsuit alleged.

“Centene, Buckeye and Envolve secretly retained these monies for themselves to pad Centene’s profits at the expense of the taxpayers of the state of Ohio,” the complaint stated.

Ohio’s lawsuits could prompt reforms in other states

The dispute between Ohio and the PBMs operating in the state has been going on for years. In addition to Centene, Ohio Attorney General Dave Yost has sued the PBM Express Scripts, which is owned by insurer Cigna, as well as UnitedHealth Group’s OptumRx for overcharging state agencies.

A state audit in 2018 conducted after an extensive investigation by the Columbus Dispatch found that two PBMS overcharged the Ohio Medicaid program to the tune of roughly $224 million. Those included CVS Caremark and OptumRx, which contracted with Ohio’s five Medicaid plans, including Centene.

Since then, Ohio has worked to overhaul its Medicaid program to reduce pharmacy costs. It moved to using a single PBM called Gainwell Technologies, instead of relying on multiple companies. It also hired another firm to set be a PBM watchdog and set reimbursement rates. The new structure will launch in early 2022.

Antonio Ciaccia, CEO of drug-pricing research firm 46brooklyn who previously lobbied for the Ohio Pharmacists Association, said he expects to see changes in how Medicaid agencies work with PBMs in other states.

“I think you could expect to see sweeping Medicaid reform, and we’ve already seen those dominoes falling. And I think you’ll see enhanced movement on stripping PBMs of their price-setting capabilities completely,” he said.

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