FTC Report Accuses PBMs Of Negatively Impacting Patients And Pharmacies

The Federal Trade Commission interim report released this week is scathing in its criticism of intermediaries in the prescription drug supply chain, pharmacy benefit managers. The study evaluates the impact of PBMs on access to and affordability of medicines. Here, the Commission accuses PBMs of raising patients’ out-of-pocket costs and driving independent pharmacies out of business, owing to what the agency deems to be anti-competitive practices stemming in part from vertical integration and consolidation in the PBM, health insurer and specialty pharmacy industries.

To most lay people, hearing the acronym PBM probably means nothing. But PBMs serve as key intermediaries at the center of the complex and often opaque U.S. pharmaceutical distribution chain. Most Americans’ drug benefit—the portion of their insurance that involves pharmaceutical care—is managed by a PBM. In fact, PBMs negotiate the terms and conditions for access to prescription drugs of around 275 million Americans.

The FTC opened an investigation in June 2022 into six large PBMs: CVS Caremark, Express Scripts, OptumRx, Humana, Prime Therapeutics, and MedImpact Healthcare Systems.

On July 9th, the agency posted interim findings from its investigation that are highly critical of PBMs. And according to Forbes, the FTC announced the next day that it will sue CVS Caremark, Express Scripts and Optum Rx for “driving up the prices of some medications, like insulin, while pushing customers away from cheaper alternatives.”

This shouldn’t come as a surprise as the FTC has repeatedly warned of legal action against PBMs if its inquiry finds proof that PBMs are unduly blocking competitors. Indeed, two years ago the FTC raised the stakes when the agency included rhetoric such as “commercial bribery” in statements to describe what it perceived as anti-competitive practices in the insulin market.

A STAT News story summarized this week’s interim report’s main message that “middlemen in the pharmaceutical supply chain” wield such “enormous power” that these companies “can affect the ability of many Americans to access and afford their medicines.”

This is partly due to the degree of market concentration. A rule of thumb is that an oligopoly exists when the top five firms in a particular industry account for more than 60% of the total market. According to the FTC, the three largest PBMs processed nearly 80% of the roughly 6.6 billion prescriptions dispensed by U.S. pharmacies in 2023.

Following a series of recent mergers and acquisitions, the leading PBMs are now each part of healthcare behemoths that also include health insurers, pharmacies and healthcare provider services.

Due to their size and the manner in which vertical integration has rolled multiple entities in the drug supply chain into one conglomerate, PBMs have considerable control over which drugs are available to patients, at what price, and where patients can access them.

PBMs generally prefer that customers use their own affiliated businesses, which can create a set of conflicts of interest that can disadvantage unaffiliated pharmacies and raise out-of-pocket costs for patients.

The FTC report asserts that PBMs exert substantial, and in the Commission’s view, undue influence over independent pharmacies. Between 2013 and 2022, roughly 10% of independent retail pharmacies in rural areas in the U.S. closed. The report implies that PBMs may have contributed to this, as pharmacies “struggle to navigate contractual terms imposed by PBMs that they find confusing, unfair, arbitrary, and harmful to their businesses.” Independent pharmacies usually lack the leverage to negotiate favorable rates.

PBMs began in the 1960s as claims processors for insurers, gradually expanding their administrative services over time to include designing formularies (lists of pharmaceuticals covered by insurance) and negotiating drug prices with drug manufacturers on behalf of their clients, which include health plans, employers and others.

It’s when PBMs started to take advantage of their increasingly important position in the drug supply chain that problems emerged, from the perspectives of policymakers, legislators, pharmacies and patient groups.

Spread pricing, for example, is a practice where PBMs charge payers or plan sponsors a (sometimes much) higher price for medications than the acquisition cost and what they reimburse pharmacies, keeping the difference as profit. This practice has particularly drawn the ire of pharmacists around the country. Several bills in Congress have been introduced to ban spread pricing, including the PBM Transparency Act.

Another focal point of policy discussion has been rebates. Rebates are payments from drug manufacturers to PBMs in exchange for moving market share towards preferred products on the formulary.

Rebates are premised on preferred formulary positioning of products over competitors. This implies not only that the drug is covered but that it is on a formulary tier with lower patient cost-sharing and fewer conditions of reimbursement such as prior authorization.

Additional rebates may be stipulated in contracts that include step edit requirements, meaning that patients must try and fail on the preferred drug before being able to access competing products.

When a patient fills a prescription for a medication that carries a rebate, the drug maker remits an amount to the PBM, according to terms laid out in the contract. In turn, the PBM passes through part of the rebate to the patient’s plan sponsor, while keeping a portion as profit.

From a drug maker’s perspective, rebates can function as a way to boost or maintain market share for products. Accordingly, PBMs can do a number of things to help ensure certain drugs get sufficient volume uptake. Their main tool for this purpose is formulary management, specifically placing a rebated product on a preferred spot on the formulary.

Rebates mutually benefit PBMs and the manufacturers of the drugs that are given preferred positioning. Further, rebates can help to mitigate increases in beneficiary premiums by lowering net costs for health plans, employers and other clients for whom PBMs work.

But while rebates may help PBMs, health plans and employers financially, they have no direct positive effect for patients. They’re not directly passed through to patients at the pharmacy counter. Additionally, patients’ out-of-pocket costs are often calculated on the basis of percentages of list, not net prices. The former can be substantially higher than the latter.

Just as with spread pricing, Congress has been actively preparing proposed legislation to improve transparency around rebates, including the Modernizing and Ensuring PBM Accountability Act.

The FTC report may give added impetus to lawmakers to pass the acts they’ve been debating in Congress. This is because the Commission’s study discloses actual evidence that PBMs and brand pharmaceutical manufacturers sometimes enter agreements expressly conditioned on excluding generic drugs and biosimilars from certain formularies in exchange for higher rebates from the manufacturer. These exclusionary contracts impede patient access to lower-cost medicines.

As a result, patients’ out-of-pocket costs are higher because by default they’re forced to take the branded (and rebated) drug product instead of what would normally be a cheaper alternative had there not been an exclusionary contract.

Last year, the Government Accountability Office examined select Medicare’s Part D (outpatient drug) rebate arrangements and their implications for plan sponsors and beneficiaries. The study revealed that payments “paid by beneficiaries or others on their behalf … were more than plan sponsor payments for the majority of the 100 highest rebated Part D drugs.”

And cash-pay patients, including the uninsured, may be impacted, too. If generics or biosimilars are not preferred on formularies or even excluded, frequently there is reduced accessibility to these less expensive alternatives for cash-pay patients as pharmacies may not carry the products as it’s not profitable to do so.

In a rebuttal to the report, the trade group representing PBMs, the Pharmaceutical Care Management Association, issued a statement vociferously criticizing the FTC analysis for “falling far short of being a definitive, fact-based assessment of PBMs or the prescription drug market.” PCMA noted that two FTC commissioners disagreed with the content of the report and one member didn’t think the decision to release it at this time was appropriate.

PCMA contends that the FTC “completely overlooks the volumes of data that demonstrate the value that PBMs provide to America’s healthcare system by reducing prescription drug costs and increasing access to medications.”

Perhaps the final report will address some of the concerns PCMA raises, particularly in light of the dissension among FTC commissioners.

Still, it may take some time for the FTC to complete given the apparent lack of full compliance until now by some of the PBMs subpoenaed for information. Lacking complete information has, according to the FTC, “hindered the ability of the Commission to perform its statutory mission.”

In 2022, the FTC issued special orders to request data and documents from the six largest PBMs regarding their businesses and business practices.

Although the FTC issued these orders more than two years ago, the agency alleges that some of the PBM respondents have not yet fully complied, an accusation denied by the PBMs involved in the inquiry.

Where the standoff goes from here is anyone’s guess. To defenders of PBMs, the intermediaries perform a critical mission, which includes containment of pharmaceutical costs. To critics, on the other hand, PBMs behave badly, raising out-of-pocket costs for ordinary patients and driving independent pharmacies out of business. Ultimately, resolution of the impasse we find ourselves in could occur in the judicial system.