By skyforbes 
The ground rules that govern how state Medicaid agencies may pay pharmacy benefit managers, or PBMs, require a pass-through model and prohibit the practice commonly known as spread pricing. When federal law uses the term pass-through, it means the state (or its managed-care contractor) reimburses the PBM for the exact amount the PBM paid the dispensing pharmacy for a covered outpatient drug and then adds a clearly stated administrative fee. Spread pricing, in contrast, allows a PBM to bill the health plan one figure, pay the pharmacy a smaller one, and retain the difference as profit. CMS first warned that unchecked spreads were inflating Medicaid drug costs in 2019, issuing a State Medicaid Director letter that urged plans to monitor the gap and consider contract language to curb it. Section 44124 goes far beyond gentle advice: it flatly bans spreads and requires every Medicaid PBM arrangement, whether carved into managed care or retained in fee-for-service, to run on pass-through terms.
The drafters of the bill wanted to create an opaque layer to the supply chain. Government auditors have struggled to quantify spreads because many state contracts let PBMs aggregate invoices into a single “ingredient cost” line item. A 2023 inspector-general review found that reporting conventions vary widely: twenty-eight states require health plans to disclose what the pharmacy received from the PBM, two require plans to list what the plan paid the PBM, and six collect no dollar detail at all. That lack of standardization leaves policymakers guessing about the real cost of prescriptions, which total more than $37 billion in Medicaid spending each year. Section 44124 answers by creating a single, federally mandated definition of the paid amount: the invoice price to the pharmacy, without any additional considerations.
Economic studies suggest spreads can reach surprising levels, especially for multisource generic drugs that move in high volume through mail-order channels. The Government Accountability Office summarized several state investigations that uncovered mark-ups ranging from five to as high as seventy-one percent on individual products. One state Medicaid program concluded that eliminating spreads in just its generic portfolio would cut annual outlays by more than $200 million. Although not every plan experiences spreads of that magnitude, the variability itself convinced lawmakers that transparency alone would not suffice; they opted for a blanket prohibition.
Because Section 44124 amends Title XIX rather than issuing stand-alone guidance, its mandate attaches automatically to every state plan and managed-care contract once the effective date arrives. CMS will follow with rule-making that specifies elements such as the acceptable format for pass-through invoices, the timeline for remittance of manufacturer rebates to the state, and the calculation of dispensing-fee floors. Industry observers expect the agency to model those rules on a June 2023 proposal that called for PBMs to charge only the actual ingredient cost plus a “reasonable” administrative fee, payable either per claim or on a per-member-per-month basis, with a complete prohibition on keeping rebates or price-concessions as compensation For health-system administrators, the most direct effect of Section 44124 will materialize in the pharmacy revenue cycle. Under spread contracts, hospitals operating outpatient or specialty pharmacies often find that the PBM margin exceeds the entire dispensing fee, making reimbursement unpredictable. A pass-through framework removes that hidden haircut, leaving the pharmacy with a clearer view of its gross margin. Yet the trade-off is that PBMs will almost certainly renegotiate their flat administrative fees upward to replace lost spread income. The Kaiser Family Foundation examined a companion bill introduced in the previous Congress. It is estimated that a pure pass-through regime could reduce state ingredient payments by nearly 4 percent. However, the final savings would depend on the level of new administrative fees set. Hospitals should prepare their budgets for a modest dip in prescription revenue tied to Medicaid managed-care contracts, offset in part by more stable fee schedules for dispensing.
Operational adjustments will reach beyond dollars and cents. The statute requires PBMs to provide detailed claim-level reporting that itemizes pharmacy invoice prices, rebate pass-backs, and administrative charges. Those data streams will feed into state audit dashboards and likely flow downstream to the health system clients the PBMs serve. Chief information officers should evaluate whether the revenue-cycle platform can ingest the expanded remittance files without manual re-keying. Compliance teams, meanwhile, need protocols to reconcile PBM reports with wholesaler purchase data, because any discrepancy could flag error or fraud under the False Claims Act once pass-through terms become a condition of federal financial participation.
The section also contains an enforcement hook: CMS may disallow federal matching funds if a state fails to ensure that its PBM contracts meet pass-through requirements. That prospect effectively deputizes state Medicaid agencies as the front-line regulators of PBM behavior. Health-system administrators who participate in state pharmacy advisory groups should anticipate a busy rule-drafting season as each agency defines “reasonable” administrative fees and decides whether to set a ceiling on dispensing-fee differentials between independent and chain pharmacies. The discussions will impact retail network adequacy, particularly in rural corridors where low-volume pharmacies rely on higher per-script fees to remain financially viable.
Although Section 44124 addresses Medicaid only, analysts expect ripple effects in commercial and Medicare markets because many PBM contracts use uniform adjudication rules across lines of business. The Federal Trade Commission has already highlighted spread pricing in its ongoing investigation of PBM market power, estimating that three large PBMs generated more than $7 billion in mark-ups between 2017 and 2022. A federal prohibition in the Medicaid sphere strengthens the policy case for comparable guardrails elsewhere. It provides large employer coalitions with a benchmark when they request pass-through terms in their contracts.
In practical terms, hospital and health-system leaders should begin by mapping every PBM relationship that touches Medicaid. Identify whether the contract is carved in or carved out of the managed-care organization, flag any spread clauses, and model what happens when those spreads convert to explicit fees. Engage payer relations staff to ensure the new fee structure is transparent and predictable. Next, audit internal and contract pharmacies for data-capture capacity. Section 44124 will succeed or fail on the integrity of invoice reporting; investing early in robust purchase analytics lowers the risk of post-implementation payment disputes or audit findings. Finally, integrate the pass-through mandate into negotiations with group purchasing organizations. If wholesale acquisition costs rise because PBMs can no longer subsidize their operations with spreads, a leaner GPO contract may recover some of that differential.