(Pittsburgh) March 15, 2018 As pharmaceutical drug costs continue to rise for health care providers and consumers across the nation, the County and its contractors must do all it can to control these costs to its Kane Regional Health Centers, which provide skilled long-term and rehabilitation care to more than 1,000 mostly indigent residents, Allegheny County Controller Chelsa Wagner said today.

“The Kane Centers provide a vital resource to County residents–including many of our most vulnerable–by providing a quality, low-cost option for long-term elder care that could otherwise be out of reach for some families,” Wagner said. “To be able to continue to provide this service well into the future, the County must make sure it is controlling costs to the best of its ability by pursuing best practices for procurement, especially of costly medications.”

The Kane Centers’ drug costs totaled more than $8.8 million in 2016, but management has not reliably confirmed that it is getting the best prices on its pharmaceutical purchases, nearly all of which are from the pharmaceutical distributor McKesson under terms negotiated by the joint purchasing organization Intalere.

While the agreement requires the Kanes to purchase at least 95 percent of its drugs from McKesson in order to receive discounts on select drugs, the audit showed that only 41 percent of drug purchases in 2016 were discounted through the Intalere agreement. In fact, the Kanes received a discount through the agreement on only 10 of its 50 most commonly purchased drugs that year.

The County’s Administrative Code does not require that joint purchasing contracts be competitively bid, unlike most other significant purchases. Joint purchasing agreements allow numerous purchasers to receive a common price negotiated by a third party, in this case Intalere.

“As in virtually every case my office has examined in which competitive bidding is not utilized, it is unknown whether the County is getting the best price available and how the decision to utilize a particular firm was made,” Wagner said. “The County should be using its roughly $9 million annual purchasing power for pharmaceuticals to get the best deal for the taxpayers. When it’s public money being spent, there is an obligation to comparison shop.”

Because the Kane Centers receive a set reimbursement through Medicaid for most of its patients, reducing drug costs would contribute to a greater proportion of costs being met through these reimbursements, rather than falling to residents’ families or the taxpayers. The Kanes also purchase pharmaceuticals for inmates in the Allegheny County Jail, more than half of which go unreimbursed, creating a direct cost to the taxpayers of about $1.8 million in 2016.

While the drug purchasing agreement was not required to be bid, the County’s contract with pharmacy manager Rx Partners tasks that company with analyzing vendor pricing and recommending options to lower costs. It does not appear that this role has been emphasized by the County or Rx Partners, a wholly-owned subsidiary of UPMC. The County paid Rx Partners more than $1.3 million for pharmacy management in 2016.

In 2011, Rx Partners obtained pricing information from one competing drug supplier and Kane Centers management reported that this information was used to complete a limited analysis of cost competitiveness, but no documentation of this study could be provided. In 2016, Rx Partners again obtained pricing information from one competing supplier, but this supplier did not sell a number of drugs commonly used by the Kanes, and no efforts were made to consider clinically equivalent drugs.

Auditors sought pricing information from drug suppliers in order to perform a comparison, but the companies contacted would not provide this information.

“A firm under the umbrella of UPMC, our region’s largest health care provider, should without a doubt know where to get the best prices for our County taxpayers, yet it does not appear that it has been aggressive in these efforts,” Wagner said. “The County administration should be requiring that Rx Partners use its expertise in this field to identify the best deal.”

While urging the County to do more to bring prices down by seeking the best price from a range of potential vendors, Wagner acknowledged that the County is hamstrung by an opaque system of drug pricing that impacts all health care consumers.

A 2017 study by University of Southern California researchers reported that “more than $1 in every $5 in spending on prescription drugs goes towards profits of firms in the pharmaceutical distribution system.”

McKesson was the top U.S. drug wholesaler by revenue in 2017, according to Modern Distribution Management. The U.S.C. study reports that the top three U.S. wholesalers account for two-thirds of the market. “Market concentration is an important indicator of companies’ ability to earn extraordinary returns,” the report states.

“Drug makers and distributors have been making headlines for price gouging and for pushing products like opioids which have caused vast problems in our communities,” Wagner said. “We need action at all levels of government to hold these hugely profitable companies accountable, and to ensure that consumers and the taxpayers are not being soaked for essential medicines.”

The full Performance Audit Report can be viewed here.