FTC Releases Interim Findings on Pharmacy Benefit Managers

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Jul 12 2024

On July 9, 2024, the Federal Trade Commission (FTC or Commission) published an interim staff report on pharmacy benefit managers (PBMs) and their role in the US healthcare landscape (the Interim Report). Its issuance comes two years after the FTC initiated its study into the nation’s six largest PBMs and their impact on the accessibility and affordability of prescription drugs.

PBMs are companies that manage prescription-drug transactions for insurers and employers and negotiate discounts with drug manufacturers on behalf of those customers. In other words, PBMs act as middlemen between drug manufacturers and insurers. The FTC asserts that this intermediary role provides PBMs with an opportunity to manipulate the drug supply chain to enrich themselves at the expense of smaller, independent pharmacies and patients. According to the FTC, vertical integration with health plans and pharmacies, including specialty pharmacies, enables PBMs to wield significant control in negotiations with drug manufacturers, “inflating drug costs and squeezing Main Street pharmacies.”

Key topics in the Interim Report

Within the 71-page report, the Commission lays out its reasoning that large PBMs are able to exercise “significant market power” in the pharmaceutical industry in ways that harm independent pharmacies and ultimately, consumers. In particular:

Vertical Integration: Theories of harm related to vertical integration have been a mainstay of the Biden Administration. The Interim Report continues this trend, describing “decades of mergers and acquisitions” in the PBM industry and the parallel process of the vertical integration of PBMs upstream (e.g., with suppliers of goods and services such as private labelers), midstream (e.g., with specialty pharmacies), and downstream (e.g., with major healthcare insurers). According to the Interim Report, consolidation has enabled the so-called “Big 3” PBMs—UnitedHealth Group’s OptumRx, Cigna Group’s Express Scripts and CVS Health’s Caremark—to manage roughly 80 percent of prescription drug claims across the US in 2024, up from 52 percent of such claims in 2004. And the parallel trend of vertical integration throughout the value chain that connects drug manufacturers to payors, according to the Interim Report, has enabled PBMs to exercise significant control “without transparency and accountability to the public.”
Self-Preferencing: The FTC contends that vertically integrated PBMs have both the incentive and ability to steer patients to affiliated businesses to the detriment of independent pharmacies. In particular, the Interim Report alleges that PBMs have benefitted from expansion into “specialty pharmacies”—pharmacies that dispense specialty medications to patients—by steering prescriptions to their own downstream pharmacies through the use of exclusivity provisions for payors or narrow, preferred pharmacy networks. The Interim Report discusses the impact of these practices on drug cost and availability, asserting that health plans managed by the so-called Big 3 reimbursed their affiliated pharmacies at rates sometimes 20 to 40 times higher than the National Average Drug Acquisition Cost.
Abusive Contracting Practices: The Interim Report also asserts that PBMs force independent pharmacies to accept “unfair, arbitrary, and harmful contractual terms,” including lower reimbursement rates and the right of the PBM to unilaterally change existing agreements by deeming a pharmacy’s submission of claims to constitute an effective acceptance of new or revised terms. Moreover, PBMs are alleged to negotiate “extraordinarily opaque” contracts with pharmacies, leaving those small businesses in the dark with respect to key performance measures and reimbursement factors. This topic was also explored extensively in the Commission’s RFI on PBMs issued in February 2022.
Rebate practices: In its June 2022 policy statement on pharmaceutical rebates and fees, the Commission asserted that “[f]or many years, the Commission has received complaints about rebates and fees paid by drug manufacturers to pharmacy benefit managers (PBMs) and other intermediaries to favor high-cost drugs that generate large rebates and fees that are not always shared with patients.” The Interim Report further explores this topic, alleging that PBMs have entered into contracts with drug manufacturers to condition rebates on removing lower-cost drugs from their formularies. According to the Interim Report, moreover, PBMs’ decisions regarding which drugs to place on formularies are premised on maximizing profits for themselves and their health plan clients.

Notably, the decision of the Commission to issue the Interim Report was not unanimous. Commissioner Melissa Holyoak dissented, arguing that the Interim Report lacks rigorous economic analysis, fails to connect the dots between this Interim Report and the Commission’s prior report on PBMs issued in 2005, and omits an examination of how PBM practices affect consumer prices. Although Commissioner Andrew Ferguson voted to issue the Interim Report, his concurring opinion criticized its reliance on case studies and public comments, many of which were submitted anonymously.

The Interim Report may signal future challenges to PBMs. The FTC reportedly is preparing to sue the three largest PBMs for rebate practices related to the sale of insulin.

Authors

Washington, DC

Jul 12 2024

Key topics in the Interim Report

Vertical Integration: Theories of harm related to vertical integration have been a mainstay of the Biden Administration. The Interim Report continues this trend, describing “decades of mergers and acquisitions” in the PBM industry and the parallel process of the vertical integration of PBMs upstream (e.g., with suppliers of goods and services such as private labelers), midstream (e.g., with specialty pharmacies), and downstream (e.g., with major healthcare insurers). According to the Interim Report, consolidation has enabled the so-called “Big 3” PBMs—UnitedHealth Group’s OptumRx, Cigna Group’s Express Scripts and CVS Health’s Caremark—to manage roughly 80 percent of prescription drug claims across the US in 2024, up from 52 percent of such claims in 2004. And the parallel trend of vertical integration throughout the value chain that connects drug manufacturers to payors, according to the Interim Report, has enabled PBMs to exercise significant control “without transparency and accountability to the public.”
Self-Preferencing: The FTC contends that vertically integrated PBMs have both the incentive and ability to steer patients to affiliated businesses to the detriment of independent pharmacies. In particular, the Interim Report alleges that PBMs have benefitted from expansion into “specialty pharmacies”—pharmacies that dispense specialty medications to patients—by steering prescriptions to their own downstream pharmacies through the use of exclusivity provisions for payors or narrow, preferred pharmacy networks. The Interim Report discusses the impact of these practices on drug cost and availability, asserting that health plans managed by the so-called Big 3 reimbursed their affiliated pharmacies at rates sometimes 20 to 40 times higher than the National Average Drug Acquisition Cost.
Abusive Contracting Practices: The Interim Report also asserts that PBMs force independent pharmacies to accept “unfair, arbitrary, and harmful contractual terms,” including lower reimbursement rates and the right of the PBM to unilaterally change existing agreements by deeming a pharmacy’s submission of claims to constitute an effective acceptance of new or revised terms. Moreover, PBMs are alleged to negotiate “extraordinarily opaque” contracts with pharmacies, leaving those small businesses in the dark with respect to key performance measures and reimbursement factors. This topic was also explored extensively in the Commission’s RFI on PBMs issued in February 2022.
Rebate practices: In its June 2022 policy statement on pharmaceutical rebates and fees, the Commission asserted that “[f]or many years, the Commission has received complaints about rebates and fees paid by drug manufacturers to pharmacy benefit managers (PBMs) and other intermediaries to favor high-cost drugs that generate large rebates and fees that are not always shared with patients.” The Interim Report further explores this topic, alleging that PBMs have entered into contracts with drug manufacturers to condition rebates on removing lower-cost drugs from their formularies. According to the Interim Report, moreover, PBMs’ decisions regarding which drugs to place on formularies are premised on maximizing profits for themselves and their health plan clients.

The Interim Report may signal future challenges to PBMs. The FTC reportedly is preparing to sue the three largest PBMs for rebate practices related to the sale of insulin.