On September 20, 2024, the Federal Trade Commission sued the three largest pharmaceutical benefit managers (PBMs) – Caremark Rx, Express Scripts (ESI), and Optum Rx – alleging competition and consumer protection law violations.
This commentary provides information on controversies surrounding the economic effects of PBMs that led up to the suit. Tomorrow a follow-up commentary will assess the lawsuit itself.
Background on PBMs
Recent FTC actions portray PBM practices as harmful and anticompetitive. However, there is substantial economic research that indicates PBM activity is economically beneficial.
Critical 2024 FTC Staff View of PBMs
A July 2024 FTC interim staff report on PBMs discusses the role they play:
“PBMs are at the center of the complex pharmaceutical distribution chain that delivers a wide variety of medicines from manufacturers to patients. PBMs serve as middlemen, negotiating the terms and conditions for access to prescription drugs for hundreds of millions of Americans. Due to decades of mergers and acquisitions, the three largest PBMs now manage nearly 80 percent of all prescriptions filled in the United States. They are also vertically integrated, serving as health plans and pharmacists, and playing other roles in the drug supply chain as well. As a result, they wield enormous power and influence over patients’ access to drugs and the prices they pay. This can have dire consequences for Americans, with nearly three in ten surveyed Americans reporting rationing or even skipping doses of their prescribed medicines due to high costs.”
The interim report concludes:
“Analysis of the current industry landscape indicates the largest PBMs have come under common ownership with the largest, most dominant health insurers. In addition, these healthcare conglomerates operate some of the largest retail, mail order, and specialty pharmacies in the country, which compete with local independent pharmacies. Given these relationships, PBMs and their affiliated entities may have the incentive and ability to engage in steering a growing share of prescription revenues to their own pharmacies through specialty drug classification, self-preferential pricing, and pharmacy contracting procedures to target and control the business operations of pharmacies. While this [i]nterim [r]eport principally focuses on the impact of these changing market dynamics on the operation and vitality of the nation’s pharmacies, we also share initial evidence about PBM and brand pharmaceutical rebating practices that urgently warrant further scrutiny and potential regulation.”
The FTC has focused critical attention on PBMs’ negotiation of rebates with pharmaceutical companies that compete to have their drugs included in insurance companies’ lists of approved drugs (formularies). A key concern is that pharma firms may raise their list prices in order to offer larger rebates, with PBMs pocketing the extra amounts but actually raising prices to consumers. As such, the PBM rebate system is characterized not as a source of beneficial discounts, but as a cause of potential consumer harm, stemming from a hypothesized “rebate wall” problem:
“Because the portion of the rebate retained by payers is often based on a percentage of a drug’s list price, payers have incentives to establish formularies that favor branded drugs with higher list prices and larger rebates over lower priced biosimilars, specialty generics, or even branded competitors. Rival drugs entering the market lack sufficient sales volume to be able to offer the same level of rebates to payers that originator firms can provide.”
Research Finding PBM Practices Are Economically Beneficial
Concerns raised in the 2024 interim report are at odds with economic research that finds PBM rebating practices are economically beneficial.
The FTC’s Changing Views on PBMs
A 2005 FTC report found that PBM negotiations lower average drug prices and insurance premiums. Unlike the 2024 interim report, which was short on hard data and economic analysis, the 2005 report featured an economic evaluation of large amounts of data.
FTC Commissioner Melissa Holyoak dissented from the 2024 interim report. She explained that this report’s “loaded language,” lack of a transparent and consistent methodology, and lack of industrywide data failed to meet the quality standards for FTC research. She also criticized the 2024 report’s failure to explain how or why the 2005 report’s empirical findings no longer hold. This was a serious omission, because, as Holyoak pointed out, the 2005 report’s findings on prices and insurance premiums were evidence of procompetitive efficiencies.
The PBM Rebate System In A Nutshell
PBMs are intermediaries that specialize in negotiating with drug manufacturers for better deals on drugs through a rebate system. As Mercatus Center scholar Satya Marar points out, the “rebates allow for lower drug costs, lower insurance premiums for patients and employers, and . . . competition to secure favorable formulary listings [that] provides incentives for the research and development of new cures.”
Estimates of PBM Benefits
The economic benefits of PBM activities may be quite substantial. In a July 2022 National Bureau of Economic Research working paper, The Value of Pharmacy Benefits Management, University of Chicago Economics Professor Cases Mulligan concluded that PBMs generate substantial net economic value and innovation:
“[P]harmacy benefit management is worth at least $145 billion annually beyond its resource costs. PBM services add at least $192 billion annually in value to society compared to a manufacturer price-control regime. Requiring all PBM services to be self-provided by plan sponsors would forgo about 40 percent of the net value of PBM services largely by increasing management costs. Due to changes in the incidence of PBM services over the drug life cycle, the services encourage innovation even though they reduce the profits of incumbent manufacturers.”
What’s more, Satya Marar points out that required changes in PBM practices could harm the public fisc:
“The Congressional Budget Office . . . concluded that forcing drugmaker rebates to PBMs to be passed on through drug-price subsidies to end consumers at the point of sale would increase premiums and deliver smaller discounts on dugs, thereby increasing costs to the Medicare public health system by $170 billion over 10 years and to Medicaid by $7 billion.”
Empirical Research Contradicts Negative View of PBMs
Most recently, a July 2024 empirical Compass Lexecon report by eminent University of Chicago Economics Professor Dennis Carlton dispels the notion that the PBM rebates system is anticompetitive and raises raise prices. The report finds:
· “Claims that PBMs are earning excess profits that have been increasing over time and are responsible for high drug prices are not supported by the data on PBM margins.”
· “Claims that PBMs do not benefit plan sponsors because PBMs do not pass through the negotiated rebates and administrative fees from drug manufacturers to the plan sponsors are not supported by the data on rebate pass-through rates.”
· “Claims that the amount that plan sponsors pay to PBMs for prescription far exceeds the amount that PBMs pay to pharmacies (this difference is often referred to as the ‘retail spread’ are not supported by the data.”
· “Claims that PBMs’ negotiation of rebates from drug manufacturers leads to a higher growth rate in list prices for rebated drugs are not supported by the data on rebates and list prices.”
· “Claims that PBMs’ negotiation of rebates from drug manufacturers leads to a higher growth rate in list prices for rebated drugs with higher rebates are not supported by the data on rebates and list prices for individual drugs.”
· “Claims that PBMs’ negotiation of rebates from drug manufacturers
leads to a higher growth rate in overall net drug prices paid by plan sponsors and members are not supported by the data on rebates and overall net prices.”
· “Claims that the largest PBMs face no competition are not supported by the data on shares.”
· “Claims that independent pharmacies are disadvantaged relative to non-affiliated chain pharmacies – because independent pharmacies receive lower reimbursement rates than non-affiliated chain pharmacies for the same drugs – are not supported by the data on reimbursement rates.”
· “Claims that independent pharmacies are being driven out of business by PBMs are not supported by the data on retail pharmacy locations.”
· “Claims that PBM practices are disadvantaging independent pharmacies relative to chain pharmacies are not supported by the data on independent pharmacy and selected chain pharmacy gross margins.”
· “Claims that PBMs’ mail-order pharmacies are growing at the expense of non-affiliated retail pharmacies are not supported by the data on prescriptions filled.”
· “Claims that PBMs have inflated drug costs by the use of their affiliated pharmacies are not supported by the data on the overall payments of plan sponsors and members for all drugs.”
Overall Assessment
The negative view of PBMs set forth in a recent interim FTC staff report is at odds with economic research on the economic benefits of PBMs.
The FTC should not issue a final version of the 2024 interim report unless and until staff fully addresses the serious deficiencies revealed by Commissioner Holyoak’s dissent. If these errors cannot be corrected, a final report should not be released and the interim report should be withdrawn. A failure to do so would seriously damage the FTC’s reputation for reputable high quality academic research.