Federal Trade Commission Asserts Significant Anticompetitive Harms in Interim Staff Report on the Pharmacy Benefit Manager Industry
July 15, 2024, Covington Alert
On July 9, 2024, the Federal Trade Commission (“FTC”) voted 4-1 (with Commissioner Melissa Holyoak dissenting) to release an Interim Staff Report (the “Interim Report”) entitled: Pharmacy Benefit Managers: The Powerful Middlemen Inflating Drug Costs and Squeezing Main Street Pharmacies. The Interim Report describes what FTC staff has uncovered to date during a two-year investigation of the country’s six largest pharmacy benefit managers (“PBMs”). The agency claims that vertical integration and market consolidation have allowed a few PBMs to exert power over drugs and consumer prices as well as unaffiliated pharmacies. The Interim Report also attempts to explain some of the complexities in how PBMs operate within the healthcare industry that may lead to high drug costs, including the use of specialty prescription designations, steering mechanisms, and preferential reimbursement rates for PBM-affiliated pharmacies. While the Interim Report states that it principally focuses on PBMs’ relationships with pharmacies rather than drug manufacturers, it includes a discussion about rebate contracts between drug manufacturers and PBMs that the report suggests may impede access to generic and biosimilars.
The FTC’s investigation into the PBMs began in June 2022, when a bipartisan Commission unanimously voted to authorize the study pursuant to Section 6(b) of the FTC Act. To collect information for that study, the FTC issued special Orders for documentation to the six largest PBMs – Caremark Rx, LLC; Express Scripts, Inc.; OptumRx, Inc.; Humana Pharmacy Solutions, Inc.; Prime Therapeutics LLC; and MedImpact Healthcare Systems, Inc. (“PBM Respondents”). In May and June 2023, the FTC issued supplemental Orders to certain PBM-affiliated entities: Zinc Health Services, LLC; Ascent Health Services, LLC, and Emisar Pharma Services, LLC.
The Interim Report is based on FTC staff’s review of 1,200 public comments, internal documents and data from several of the PBM Respondents, interviews with industry experts and participants, and public data and information. The Interim Report does not include any specific next steps, suggest when a final report may be issued, or indicate potential enforcement; instead, it asserts that “further scrutiny and potential regulation” are “urgently warranted.”
Commissioner Holyoak issued a dissenting statement, stressing the lack of any empirical evidence supporting the Interim Report’s claims about the impact of PBM conduct on consumer welfare. For example, she highlighted that the Interim Report did not engage with the economic findings of—or explain its contradictions with—the FTC’s previous PBM report, which it issued in 2005. She explained that the Interim Report, in fact, relies on no new empirical analysis in support of its findings nor any empirical evidence regarding PBM’s market power, the competitive environment in which they operate, or how PBMs’ conduct affects consumer prices. Similarly, in his concurring statement, Commissioner Andrew N. Ferguson expressed concern with the Interim Report’s reliance on public comments submitted in response to a request for information on the impact of PBM practices, particularly anonymous comments, and that the Interim Report only provides case studies on two specialty drugs that are not necessarily representative of other prescription medications. He also noted that while the Interim Report raises concerns over PBMs’ Order compliance, the Commission has taken no steps to enforce the Orders in court and has instead prioritized advancing this Interim Report.
Chair Lina M. Khan, joined by Commissioners Alvaro M. Bedoya and Rebecca Kelly Slaughter issued a statement defending the Interim Report, arguing that it lays out an initial economic analysis and that the PBM industry has changed significantly since the agency issued its 2005 PBM report. Chair Khan also stressed the importance of public comments.
The Interim Report describes the PBM industry and provides three primary takeaways: (1) that increased concentration and vertical integration have led to PBMs gaining significant power over prescription drug access and prices; (2) that increased concentration and vertical integration may have enabled PBMs to lessen competition, disadvantage rivals, and inflate drug costs; and (3) that rebate contracts between PBMs and brand drug manufacturers may impair or block less expensive competing products.
The Interim Report’s Description of PBMs
The Interim Report summarizes how PBMs began as claims processing and administrative service entities in the 1960s and evolved over time to act as intermediaries between the various actors within the pharmaceutical supply chain, such as drug manufacturers, pharmacies, and private or government health insurers (payers). According to the Interim Report, services that PBMs offer include: designing drug formularies for health plan clients, contracting with drug manufacturers and pharmacies, designing pharmacy networks, providing utilization management, and processing claims or data for health insurers.
The Interim Report also describes how the “Big 3” PBMs – CVS Caremark, Express Scripts, and OptumRx have established separate, affiliated entities called group purchasing organizations (“PBM GPOs”) in the past several years, where they moved certain traditional PBM services into these newly created PBM GPOs, specifically rebate contract negotiations with drug manufacturers. These PBM GPOs are Ascent, Zinc, and Emisar, the recipients of the FTC’s supplemental Orders for documentation in 2023. The Interim Report refers to these PBM GPOs as “rebate aggregators,” and suggests that these PBM GPOs were formed to retain revenue from incremental fee structures that do not pass onto a PBM client, and to avoid regulatory or legislative reform.
The Interim Report States that the Six Largest PBMs Collectively Have Market Power
The Interim Report claims that the provision of PBM services is highly concentrated because six PBMs manage 94% of prescription drug claims in the U.S. (and perhaps a higher share in certain regions or states). The Interim Report explains that over the last 20 years, these six PBMs have consolidated market power through uncontested mergers and acquisitions and increased revenue from vertically integrated affiliates. The rest of the market, the Interim Report contends, is comprised of 60 smaller PBMs that commonly contract with larger PBMs, further concentrating market power in the largest PBMs. Thus, the Interim Report asserts that the concentration among PBMs leaves pharmacists, health insurers, and drug manufacturers with little choice but to contract with the largest PBMs.
The Interim Report also describes how the largest PBMs have vertically integrated with other segments of the pharmaceutical supply chain and the healthcare sector. For example, all of the six-biggest PBMs are integrated with health insurance companies, some of which require their clients to use the affiliated PBM, as well as health care groups. Additionally, the parent companies of the three largest PBMs also own entities focused on the private labeling of drugs.
The Interim Report Asserts that PBMs’ Market Power Has Lessened Competition, Disadvantaged Rivals, and Inflated Drug Costs
The Interim Report claims—based primarily on 600 public comments, some of which were anonymous—that horizontal consolidation and vertical integration have created (i) financial conflicts of interest and self-preferencing incentives, (ii) high reimbursement rates, and (iii) outsized bargaining power to disadvantage smaller pharmacies. The Interim Report details the various mechanisms in which it says that PBMs wield this market power.
- Steering Prescriptions to PBM-Affiliated Pharmacies
The Interim Report describes how PBMs manage their formularies and preferred pharmacy networks to favor their own affiliated pharmacies. The Interim Report also explains how PBMs may use their relatively broad discretion to designate drugs as “specialty” drugs. This designation often triggers various contract provisions, such as exclusivity provisions, to require the use of the PBM’s affiliated specialty pharmacy. The Interim Report contends—based on internal documents—that PBMs have financial incentives to steer customers to fill their specialty drug prescriptions at the PBMs’ own affiliated specialty pharmacies, which now accounts for 68 percent of specialty dispensing revenue nationwide.
- High Reimbursement Rates to PBM-Affiliated Pharmacies
The Interim Report contends that PBMs have payers (like commercial health plans and Medicare Part D) reimburse PBM-affiliated pharmacies for specialty drugs and specialty generics at higher rates compared with unaffiliated pharmacies. To demonstrate FTC staff’s position, the Interim Report highlights the reimbursement rates and pharmacy dispensing revenue for two specialty generic drugs: (1) the prostate cancer treatment Zytiga (abiraterone acetate) and (2) the leukemia treatment Gleevec (imatinib mesylate) (the “case study drugs”). The Interim Report states that health plans managed by PBMs reimburse their PBM-affiliated pharmacies for the two case study drugs at rates 20-to-40 times higher than the National Average Drug Acquisition Cost (NADAC), a measure of pharmacy acquisition costs. The Interim Report further contends that commercial health plans paid affiliated pharmacies roughly 80 to 90 percent more than unaffiliated pharmacies, and Part D plans paid affiliated pharmacies over 30 percent more, for the two case study drugs in 2022.
- Outsized Bargaining Leverage
The Interim Report asserts—based primarily on public comments as well as some internal PBM documents—that PBMs utilize their bargaining power to force smaller pharmacies into unfavorable contracts. Smaller pharmacies that do not contract with large PBMs may forgo a significant patient base.
Additionally, the Interim Report asserts—based on public comments apparently from pharmacists—that PBMs have used their market power to set reimbursement rates below smaller pharmacies’ costs, and such pharmacies are either forced to comply or drop out of the PBM network, thereby reducing their customer base. The Interim Report suggests that PBMs can put downward pressure on the reimbursement rates for rival, unaffiliated pharmacies, disadvantaging them and potentially leading to higher costs and lower quality services for patients.
The Interim Report describes how PBMs use the complexity of the prescription drug reimbursement system to keep contract terms opaque and undefined. For example, PBMs can reimburse pharmacies based on a wide array of drug price metrics, including: Average Wholesale Price (“AWP”), Wholesale Acquisition Cost (“WAC”), or Maximum Allowable Cost (“MAC”). The Interim Report contends that indices like MAC are created and maintained by PBMs, while other indices may be set by drug manufacturers. PBMs may also charge pharmacies post-sale adjustments in the form of fees or clawback payments, which can be tied to a wide and unclear range of pharmacy performance measures. The Interim Report states that many pharmacies, and particularly small and independent pharmacies, lack the resources to predict their reimbursement and revenue streams amidst these complicated and undefined calculations, making it difficult to stay in business.
PBM and Brand Manufacturer Rebate Contracts
As noted above, FTC staff was primarily focused on PBMs’ relationships with pharmacies rather than drug manufacturers. However, the Interim Report states that their initial review of contracts between the PBM Respondents and drug manufacturers shows rebate structures that may impede patient access to generic or biosimilar competitors. Some rebate contract structures highlighted by the Interim Report include: higher or additional rebates for preferred positioning over competitors on a formulary or formulary tier, “brand step” requirements where patients must try and fail the preferred brand before trying competitive products, or “prior authorization” requirements for competing products. The Interim Report also claims that some of the reviewed rebate contracts explicitly grant higher rebates for the exclusion of generics or biosimilars, possibly leading to higher out-of-pocket costs for patients and a reduction in the accessibility of generics overall. The Interim Report calls for further scrutiny of exclusionary rebates and suggests that they may constitute violations of antitrust laws.
Takeaways
Given that this is an Interim Report, it remains to be seen in the coming months whether the FTC will expand these findings and directives in subsequent reports. It is also possible that the agency will identify new areas of behavior by PBMs that it views as potentially anticompetitive, particularly as it relates to harming smaller PBMs—including alternative pass-through model PBMs—and prevent them from gaining significant market share in the overall market for PBM services. The findings in this Interim Report nonetheless demonstrate that the FTC, along with other federal regulators and policymakers, are actively scrutinizing PBM and PBM GPO operations and the healthcare and pharmaceutical industry to better understand potential anti-competitive behavior in this sector of the market.
Covington advises extensively on antitrust, anti-competition, market access, pricing, and reimbursement matters. If you have any questions concerning the material discussed in this client alert, please contact the members of our Antitrust or Health Care practices, including the attorneys identified on this page.
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