West Virginia saved $38 million the first year it dumped managed care and handled pharmacy benefits for state workers and Medicaid recipients through a state university.

But Ohio refuses to even consider such a model for its multibillion-dollar Medicaid system, claiming such a change actually would cost the state money.

How can that be?

Pharmacy benefit managers are a relatively new player in the health-care world. Like managed care, they purport to save money by driving down costs — particularly for prescription drugs.

In Ohio's Medicaid setup, PBMs are middlemen. On one side of them are the managed-care companies hired by the state to administer Medicaid, a state-federal health-care program for the poor and disabled. On the other side of PBMs are pharmacies that provide the drugs to Medicaid recipients.

The PBMs stand accused in Ohio and elsewhere of taking too big of a cut in their middleman role. That "spread pricing" hurts pharmacies because they barely get enough to cover their costs in many instances. And that hurts taxpayers because they purportedly are overcharged.

In West Virginia, an audit alerted state officials that public employees were being charged 1 percent more for prescription-drug claims than PBMs were charging pharmacies. That may not sound like a lot, but lawmakers found the differential was costing the public an extra $10 million in one year.

Vicki Cunningham, West Virginia's director of pharmacy, said the PBM costs were "excessive" and "not sustainable."

West Virginia’s state pharmacy board said eliminating the four managed-care businesses in the state, three of which operated jointly with PBMs, is saving the state $38 million in its first year. Instead of managed care, the state returned to a fee-for-service model, in which doctors and other health-care providers are paid for each service performed — in this case, prescriptions.

The state is now using the West Virginia University School of Pharmacy to determine which drugs should be available to the public and how they are covered, said Richard D. Stevens, executive director of the West Virginia Pharmacists Association.

"There is no incentive for the school to be a middleman to make money off the public," Stevens said.

"PBMs need to be audited, especially those that are used to provide care for public employees. In many cases the public is penalized and they don’t even know it."

Ohio Medicaid officials are keeping managed care but want stricter regulations of, and more transparency from, PBMs.

Ohio tried a fee-for-service model early in the Gov. John Kasich administration, said Greg Moody, director of the Governor's Office of Health Transformation, but found such a "carve out" costs the state more. One reason is that it plays into the hands of major drug manufacturers, which love it when states formerly covered by managed care stretched over multiple states reduce their bargaining power by negotiating as just a single state, he said.

Moody cited a 2015 study by the Menges Group that "resoundingly confirms the cost-effectiveness" of keeping Medicaid prescriptions within managed care. The net savings for the 28 states doing it the same way as Ohio was 14.6 percent.

Part of the reason Ohio remains wedded to the managed-care model is how it finances Medicaid. The state would lose $100 million from the little-known health insurer corporation franchise fee if recipients used fee-for-service instead of managed care, Medicaid staffers have calculated.

An intangible that would be lost is the ability to coordinate treatment for individuals under the umbrella of managed care.

Yet another factor: fee-for-service rates are set by the legislature, which means they turn into a political issue subject to lobbying every time they change, Moody said. Managed care has given Ohio predictability in its budgets.

The leaders of the state Medicaid office repeatedly stress that they have kept overall annual cost increases at 2 percent since 2014, so the fact that prescription-drug prices are climbing 8 or 9 percent a year is not that big of a concern to them.

Regulation of PBMs has largely been left to the states. Lawsuits have been rare, and when an award is won it is for a fraction of the more than $280 billion PBMs are estimated to make annually.

The most-significant lawsuit was filed a decade ago by 28 state attorneys general against CVS Caremark and was settled for $38.5 million. The suit alleged Caremark was "deceptive" by steering patients to certain medications to increase profits.

States have opted instead for more regulations in the form of licensing to track PBMs and their business relationships.

For example, Arkansas requires PBMs to provide at or above cost reimbursements for generic drugs to pharmacies to protect the druggists from having to fill orders at a loss.

drowland@dispatch.com

@darreldrowland

lsullivan@dispatch.com

@dispatchsully