FTC Challenges Pharmaceutical Benefit Managers

On September 20, 2024, the Federal Trade Commission (FTC) initiated legal action against the three leading pharmaceutical benefit managers (PBMs) — Caremark Rx, Express Scripts (ESI), and Optum Rx—accusing them of breaching competition and consumer protection regulations.

This commentary explores the economic controversies linked to PBMs that culminated in the lawsuit. A follow-up piece will examine the details of the case tomorrow.

Overview of PBMs

Recent moves by the FTC paint PBM practices as both harmful and anti-competitive. However, a significant body of economic research suggests that PBM activities provide economic benefits.

FTC Staff’s Critical 2024 Perspective on PBMs

In July 2024, the FTC released an interim staff report shedding light on the role of PBMs:

“PBMs occupy a central position within the intricate pharmaceutical distribution network that supplies various medicines from manufacturers to patients. These intermediaries negotiate the terms under which hundreds of millions of Americans gain access to prescription drugs. After years of mergers and acquisitions, the top three PBMs now control close to 80% of all prescriptions filled in the United States. Additionally, they are vertically integrated, functioning as health plans, pharmacists, and fulfilling other roles within the drug supply chain. Consequently, they exert significant influence over both drug accessibility and the prices patients face, which can lead to serious consequences for the public. In fact, nearly 30% of Americans surveyed report rationing or forgoing their prescribed medications due to cost concerns.”

The interim report’s findings further stated:

“An analysis of the current market landscape reveals that the largest PBMs are now commonly owned by the dominant health insurers. Moreover, these conglomerates operate some of the country’s largest retail, mail-order, and specialty pharmacies, which directly compete with independent local pharmacies. These relationships may enable PBMs and their affiliates to steer a growing share of prescription revenues towards their own pharmacies through practices like specialty drug classification, preferential pricing for themselves, and specific pharmacy contracting strategies. While this [i]nterim [r]eport focuses on the effects of these market changes on the operations and sustainability of independent pharmacies, we also highlight initial evidence pointing to the PBM-pharmaceutical company rebate systems that require closer scrutiny and potential regulation.”

One of the main concerns the FTC has raised involves PBMs’ negotiations with pharmaceutical manufacturers for rebates to ensure their drugs are included in insurance formularies. The worry is that these companies may inflate their list prices to offer larger rebates, which PBMs then absorb, ultimately increasing consumer costs. Thus, rather than offering savings, the PBM rebate system may pose a threat to consumers through what is known as the “rebate wall” problem:

“Since the portion of the rebate retained by payers is often calculated as a percentage of a drug’s list price, payers are incentivized to favor branded drugs with higher list prices and larger rebates over more affordable options like biosimilars, specialty generics, or even lower-priced branded alternatives. New market entrants, lacking the sales volume of established companies, cannot offer comparable rebates to payers, further entrenching the dominance of originator drugs.”

Research Supporting the Economic Benefits of PBM Practices

The concerns highlighted in the 2024 interim report conflict with economic research suggesting that PBM rebate practices deliver economic advantages.

The Evolution of the FTC’s Position on PBMs

In contrast to the 2024 interim report, a 2005 FTC report concluded that PBM negotiations help reduce both average drug prices and insurance premiums. Unlike the 2024 interim report, which lacks extensive data and economic analysis, the 2005 report provided a thorough economic evaluation based on large datasets.

FTC Commissioner Melissa Holyoak dissented from the 2024 report, criticizing its use of “loaded language,” inconsistent methodology, and absence of comprehensive industry data, which she argued fell short of the FTC’s research quality standards. She also faulted the report for not addressing why or how the empirical findings from the 2005 report no longer apply. As Holyoak noted, the 2005 findings demonstrated that PBM negotiations delivered efficiencies that promoted competition by lowering prices and insurance premiums.

A Summary of the PBM Rebate System

PBMs act as intermediaries, negotiating with drug manufacturers to secure more favorable pricing through a rebate system. According to Mercatus Center scholar Satya Marar, these rebates help reduce drug costs, lower insurance premiums for patients and employers, and promote competition to gain advantageous formulary positions, which incentivizes further research and development of new treatments.

Estimates of PBM Benefits

The economic advantages of PBM activities may be significant. In a July 2022 working paper from the National Bureau of Economic Research titled The Value of Pharmacy Benefits Management, University of Chicago Economics Professor Casey Mulligan found that PBMs create considerable net economic value and drive innovation:

“[P]harmacy benefit management is worth at least $145 billion annually, exceeding its resource costs. PBM services contribute at least $192 billion in annual value to society compared to a scenario where manufacturers set price controls. Forcing plan sponsors to provide PBM services themselves would reduce PBM service benefits by approximately 40%, mainly due to increased management costs. Furthermore, PBM services foster innovation, even though they may reduce the profits of established manufacturers.”

Satya Marar also warns that changes to PBM practices could have a negative impact on public finances:

“The Congressional Budget Office found that mandating the pass-through of manufacturer rebates directly to consumers as drug-price subsidies would raise premiums, deliver smaller drug discounts, and ultimately increase costs to the Medicare system by $170 billion over the next decade and add $7 billion to Medicaid expenses.”

Empirical Research Challenges the Negative Perception of PBMs

A July 2024 empirical report from Compass Lexecon, led by renowned University of Chicago Economics Professor Dennis Carlton, refutes claims that PBM rebate systems are anticompetitive or drive up prices. The report’s findings include:

• PBM Profitability: Data does not support claims that PBMs are generating excessive profits over time or contributing to high drug prices.
• Rebate Pass-Through: The assertion that PBMs fail to pass rebates and administrative fees from drug manufacturers to plan sponsors is not backed by evidence on rebate pass-through rates.
• Retail Spread: The claim that plan sponsors pay PBMs significantly more for prescriptions than PBMs pay pharmacies (the “retail spread”) is not substantiated by the data.
• Impact on Drug List Prices: Claims that PBM-negotiated rebates lead to faster increases in list prices for rebated drugs are not supported by data on rebates and list prices.
• Rebates and Price Growth: There is no data to support the notion that rebates lead to higher price growth for drugs with larger rebates.
  • Overall Drug Prices: The claim that PBM rebates contribute to rising net drug prices for plan sponsors and members is not backed by the data on rebates and net prices.
• Competition Among PBMs: Data contradicts the argument that the largest PBMs face no competition in the market.
• Independent Pharmacy Reimbursement: Claims that independent pharmacies are paid lower reimbursement rates than non-affiliated chain pharmacies for the same drugs are not supported by the data.
• Pharmacy Closures: The idea that PBMs are driving independent pharmacies out of business is not supported by data on retail pharmacy locations.
• Independent vs. Chain Pharmacies: Data on gross margins does not support claims that PBM practices disadvantage independent pharmacies compared to chain pharmacies.
• Mail-Order Pharmacies: Data does not support the claim that PBMs’ mail-order pharmacies are growing at the expense of non-affiliated retail pharmacies.
• Affiliated Pharmacies: There is no evidence that PBMs have inflated drug costs through the use of their affiliated pharmacies based on overall payments by plan sponsors and members.

Overall Conclusion

The negative portrayal of PBMs in the recent interim FTC report conflicts with economic research demonstrating their benefits. Before issuing a final version of the 2024 report, the FTC must address the significant issues raised in Commissioner Holyoak’s dissent. If these shortcomings cannot be remedied, the final report should not be released, and the interim report should be retracted. Failing to do so could severely undermine the FTC’s reputation for producing high-quality, credible research.

At Mediserv Pharmacy, we understand the complexities surrounding pharmaceutical benefit managers and how these industry practices can affect access to affordable medications for local communities. As a trusted, independent pharmacy located in the Bronx, New York, Mediserv Pharmacy is committed to providing our customers with personalized care and ensuring they receive the medications they need at fair prices. We serve as a local solution amidst the evolving dynamics of the pharmaceutical industry, helping patients navigate the challenges posed by PBM practices.

For more information about our services, visit us at mediservpharmacy.com.