CVS used its role as a pharmacy middleman for the Ohio Medicaid program to pay some of its biggest retail competitors far less than it pays its own stores, according to a section in a state report that CVS is fighting in court to keep secret.

For example, CVS would have to pay Walmart and Sam’s Club almost half again as much — 46 percent more — for generic drugs if CVS were to equal the rates it was paying its own pharmacies, according to a copy of the unredacted report for the Ohio Department of Medicaid that was obtained by The Dispatch.

Also, CVS would have to pay pharmacies in Ohio-based Kroger stores rates 25 percent higher if it were to match what it was paying its own stores during the year ending March 31, 2018, the report said.

“I don’t know how this is legal,” said Ryan Bane, pharmacy director for Riesbeck’s Food Markets. The grocery chain operates pharmacies in five of its 11 Ohio stores. The analysis showed that CVS’ pharmacy middleman would have to pay Riesbeck’s 29 percent higher rates for generic drugs to equal what it was paying its own pharmacies.

“How does this happen?” Bane asked.

Mike DeAngelis, senior director of corporate communications for CVS Health, said late Friday that the reimbursement from the middleman, pharmacy benefit manager CVS Caremark, “is competitive across independent pharmacies and chain pharmacies. A pharmacy’s performance measurements affect the reimbursement it receives, such as its medication adherence and generic dispensing rates. Reimbursement rates also vary between the different types of retailers that operate pharmacies.”

Under Ohio’s Medicaid system last year, pharmacy benefit managers determined both how much they charged the state for a prescription drug and, in turn, how much they reimbursed each pharmacy for that drug.

Critics say the state report is strong evidence that CVS was, in essence, using taxpayer money to give its own retail stores an unfair advantage in the marketplace.

At the same time this issue is being scrutinized in Ohio, CVS is attempting to convince a federal judge that its $70 billion proposed merger with insurance giant Aetna doesn’t pose a threat to competition in the pharmacy marketplace.

“This is startling information, the degree of difference” between what CVS was paying some large competitors and what it paid itself, said Thomas Greaney, former assistant chief of the U.S. Justice Department’s Antitrust Division.

Greaney, now a professor at the University of California Hastings College of Law, helped plan the American Medical Association’s opposition to the CVS-Aetna merger, which is now being reviewed by U.S. District Court Judge Richard Leon in Washington, D.C.

“I think this will certainly get his attention, that there is conduct consistent with the theory the Justice Department chose not to pursue,” Greaney said, referring to the fact that the Justice Department didn’t raise objections to the possibility that a merged company could use its clout as both an insurer and pharmacy middleman to stifle competition among retailers.

In the merger case, CVS is arguing that it won’t use its access to Aetna’s patient information and market share to give its other businesses an advantage — even though it has a financial incentive to do so, said Neeraj Sood, director of research at the University of Southern California’s Schaeffer Center for Health Policy and Economics. That fact that CVS is reimbursing some retail competitors at a far lower rate than it’s reimbursing its own “shows they’re not doing that.” He added, “I’m sure the judge will notice this.”

The Ohio Medicaid report shows big differences in reimbursement rates for generic drugs, which made up 86 percent of drug transactions, according to a subsequent analysis done by former state auditor and current Attorney General Dave Yost. Reimbursements for brand-name drugs were fairly consistent between CVS and its retail competitors.

The Medicaid report found no evidence of anti-competitive reimbursement practices by CVS, but it looked only at the pharmacy benefit manager’s reimbursements to independent pharmacies in asking that question. CVS has long maintained it pays local pharmacies higher rates than it does CVS stores, and the report confirms that.

DeAngelis said, “The Ohio Department of Medicaid released information that CVS Caremark reimbursed independent pharmacies at a higher rate than CVS Pharmacy in a press release and an executive summary three months before the redacted report was released, as one of its stated objectives was to determine whether or not independent pharmacies were being put at a competitive disadvantage.”

CVS allowed the two lines of the report that confirmed its claims about independent pharmacies to be made public. But it wants to keep secret the rest of the information on two pages that show what CVS Caremark paid to other pharmacy groups operating in Ohio; those figures are blacked out on the version of the report released to the public.

DeAngelis didn’t respond to several questions, such as why CVS wants to keep so much of the report secret from the public. When the censored version of the report was released in September, he said, “While some questioned the need for redactions, the disclosure of our proprietary rates, formulas and negotiation strategy to lower the drug prices charged by pharmaceutical manufacturers would have significantly impacted our ability to negotiate the lowest rates and fees for our clients in a highly competitive market, which would ultimately cost the state and the taxpayers more.”

Though the state Medicaid report shows that some of CVS’ biggest competitors faced the biggest disadvantages as a result of its reimbursement practices, smaller pharmacies also faced challenges. Ritzman Pharmacy, for example, announced this month that it is selling its 20 northeastern Ohio stores to CVS, which says it plans to close 17 of them and reopen at least two as CVS stores.

CVS would have to pay Ritzman rates that are 2 percent higher for generics if it were to match what it was paying its own pharmacies, the report says. That margin helped CVS buy a competitor and close most of its stores, said Antonio Ciaccia, a spokesman for the Ohio Pharmacists Association.

Greaney said economists have names for such behavior: “vertical foreclosure” and “raising rivals’ costs.”

“This is the most straightforward way to do it,” he said.

Low reimbursements on Medicaid prescriptions also were among the reasons Riesbeck’s Food Markets closed its store in the Eastern Ohio village of Wintersville last fall.

“We know we’re lucky to break even with Medicaid” prescriptions, Bane said, adding that his pharmacies often lose money filling Medicaid prescriptions.

Indeed, Medicaid’s own report casts doubt on the notion that CVS reimbursements were sustainable for pharmacies that were its retail competitors.

“Findings do not indicate that the pharmacies were reimbursed adequately to be profitable,” it said.

And though CVS pharmacies were among those the report referred to, the same analysis found that CVS’ middleman arm charged taxpayers $197 million more for drugs than it paid pharmacies.

Walmart and Kroger officials declined to comment for this story. Walmart raised concerns about CVS’ practices by announcing last week that it was suspending most of its business with the pharmacy benefit manager, CVS Caremark. Walmart said it was “standing up to” CVS and criticized its “unregulated power to direct members on where to fill their scripts, disrupting patients’ health care.”

CVS and Walmart announced Friday that they had come to an agreement, but an industry analyst told Business Insider on Thursday that CVS has a long-term strategy to drive customers out of Walmart pharmacies and into its own.

Sen. Bill Coley, R-Cincinnati, long a critic of CVS, noted that he hasn’t seen the unredacted report, but he said that if numbers quoted to him by The Dispatch are accurate, it is “shocking.”

“We want to be pro-competition and pro-free enterprise,” he said. “They’re acting as a monopoly, using the government to give them an unfair advantage over Kroger and Walmart.”

The member of the Joint Medicaid Oversight Committee added, “We have to ask whether we want this company participating in the Ohio (Medicaid) program.”

Though CVS reimbursed two of its large retail competitors much less than it did itself, the rates it paid another, Walgreens, were 17 percent higher than it paid itself. DeAngelis was asked to explain but did not answer.

The Ohio Department of Medicaid commissioned the analysis last year after The Dispatch did an analysis of its own, using reimbursement data obtained from more than 40 community pharmacists.

The state then obtained all data from the $2.5 billion spent on drugs by Medicaid managed-care plans, and its analysis determined that CVS Caremark — which represents four of the five plans — and the other, OptumRx, were billing taxpayers 8.8 percent more for drugs than they were paying the pharmacists who dispensed them. That amounted to a $224 million differential. The state report said that the PBMs were charging Ohio taxpayers three to six times the standard industry rate.

The Medicaid department initially released only a summary of the report, and then it released a report with numerous redactions that were made at the demand of the pharmacy benefit managers, CVS and OptumRx.

The pharmacy benefit managers and the state have been locked for months in a court battle over release of the full report. The sides haggled until early December just over rules governing how to handle the redacted information.

Franklin County Common Pleas Court Judge Jenifer French delayed a hearing on the matter until April 30. That would push a decision and possible release of the redacted information past the time when Ohio will get a two-year budget from Gov. Mike DeWine and possibly past the time when the federal court decides whether to approve the CVS-Aetna merger.

State Medicaid officials hinted last year that there could be problems with reimbursements to the larger chain pharmacies, but never disclosed the scope of the problem.

Barbara Sears, then the director of the Ohio Department of Medicaid, told colleagues last fall at a conference of the National Association of Medicaid Directors in Washington, D.C., “there were some allegations that there may be some anti-competitive behavior going on both with reimbursement differentiation between independent pharmacies and the larger pharmacies.”

But even as early as March 2018, Sears noted, “This is not an Ohio Medicaid problem. This is impacting all 50 states. It’s a CVS Caremark issue, and it’s not just impacting independent pharmacies.” Sears said “larger chains” also have complained about reimbursement rates.

Sears announced in August that Medicaid would switch to a transparent, pass-through-pricing model that pays pharmacy benefit managers a set fee per transaction and requires them to pay pharmacies the same amount they bill the state.

“We are going to try and follow every penny,” said Sears, who resigned as the state Medicaid director at the end of last year.

Ohio’s community pharmacists long have complained that in the Medicaid program, CVS has reimbursed them below their costs and then offered to buy their stores. They’ve been skeptical of CVS’ statements that a strict “firewall” keeps it from sharing information gleaned by its middleman business with its retail operation.

Sood, of USC, said it doesn’t have to share the information to derive an advantage.

“Despite whether there’s a firewall, CVS Caremark knows CVS retail is part of the same business,” Sood said. “It’s not like they’re blind to which pharmacy they’re negotiating with.”

As Ciaccia of the pharmacists’ association put it, “Caremark knows what they contracted to pay Kroger. Caremark knows what they contracted to pay Walmart. They have to know that when they slide an offer across the table to CVS, it’s a lot more.”