States are the new battleground for drug price middlemen

State Medicaid programs believe they are being ripped off on drug prices, and pharmacy benefit managers — the middlemen that negotiate drug prices on behalf of insurers and employers — are in their crosshairs.

The bottom line: "You will be hard-pressed to find a state that now isn't looking into this," an Illinois pharmacist told the Columbus Dispatch, the newspaper that has reported extensively on PBMs in Ohio.

Driving the news: State officials say PBMs are manipulating the system for their own gain.

• West Virginia, as we reported earlier this year, already fired its PBMs.
• Ohio has audited CVS and OptumRx and found those two companies have kept $224 million through "spread pricing" — a practice where PBMs retain the difference between what they bill insurers and employers and what they pay to pharmacies.
• Pennsylvania's top auditor released a scathing report last week that said the state should consider cutting ties with PBMs and negotiating drug benefits on its own.
• Arkansas, Connecticut and Kentucky likewise are investigating PBM practices and are trying to crack down on spread pricing. Connecticut's comptroller said PBMs "operate in the shadows."

The other side: The PBM lobby says PBMs keep drug prices in check and are transparent, and the states and firms that hire them are "experienced negotiators."

Between the lines: The big PBMs see the writing on the wall and are trying to insulate themselves from changes.

• Express Scripts is selling itself to Cigna, mimicking the structure of CVS and OptumRx by burying its pharmacy benefits accounting inside a larger organization.
• CVS is launching a new model next year that guarantees every dime of a drug rebate goes back to employers and insurers. But other smaller PBMs have been doing this for years already. Derica Rice, president of CVS Caremark, told me the company created this option after fielding "frustrations" from employers.