“Curiouser and curiouser!” Cried Alice (she was so much surprised, that for the moment she quite forgot how to speak good English). — Lewis Carroll, Alice’s Adventures in Wonderland
Let’s start more modestly, if less cleverly, with “curious.”
The Federal Trade Commission (FTC) announced Sept. 20 that it had filed a complaint:
against the three largest prescription drug benefit managers (PBMs)—Caremark Rx, Express Scripts (ESI), and OptumRx—and their affiliated group purchasing organizations (GPOs) for engaging in anticompetitive and unfair rebating practices that have artificially inflated the list price of insulin drugs, impaired patients’ access to lower list price products, and shifted the cost of high insulin list prices to vulnerable patients.
The commission later posted a redacted version of the complaint—which is partly a competition complaint but not, apparently, an antitrust complaint. It’s a pure Section 5 (of the FTC Act) complaint that’s one part competition and two-parts consumer protection. Concerns about competition in the health-care sector are legitimate–important, even. If we focus on price, safety, and effectiveness of and access to prescription drugs, one might have any number of policy concerns—including, but hardly limited to, antitrust concerns—about entities or conduct anywhere along the chain of development, marketing, and distribution. But the FTC complaint is a puzzle.
Here’s the quick and dirty:
- The complaint is all Section 5 all the time, with a. one count alleging a competition violation (Section 5’s prohibition of “unfair methods of competition” (UMC)); and b. two counts alleging consumer-protection violations (Section 5’s prohibition of “unfair or deceptive acts or practices” (UDAP—in this case, just “unfair”); and c. zero counts alleging violations of the Sherman Act or the Clayton Act.
- The complaints were filed with the FTC itself, which can hear such complaints in its “Part 3” administrative process.
- It’s hard to discern a solid competition case in the FTC’s complaint, even acknowledging that the reach of Section 5 may be somewhat broader than the reach of the Sherman and Clayton Acts.
- It’s also hard to discern a solid UDAP case, not least because the plain language of Section 5 itself stipulates that “The Commission shall have no authority under this section . . . to declare unlawful an act or practice on the grounds that such act or practice is unfair unless the act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition.” Even if we accept all of the FTC’s factual allegations as true, it’s not at all clear that they’ve dealt with this key statutory clarification.
- Still, the FTC is likely to win the first round of this case, because Part 3 administrative hearings are decided by the FTC itself, and the FTC majority tends to find itself convincing.
- That’s especially true since the FTC, under Chair Lina Khan’s leadership, effectively demoted the agency’s administrative-law judges. They no longer issue decisions, but merely recommendations to the same commissioners who authorized issuing a complaint in the first place.
- And that’s not necessarily the end of the story, because decisions of the commission can be appealed to federal court, where the FTC may face tough sledding on both the facts and the law.
- What, exactly, is the FTC saying about the contributions of pharmaceutical manufacturers, insurers (and plan sponsors), pharmacies, and federal and state programs and regulations to the pricing and access problems they identify?
- The FTC’s prayer for relief is somewhat vague, but it’s at least clear that it would restrict both pricing and plan design. And while the complaint is focused on insulin drug products, it seems the FTC might extend its relief across all drug products, given that the complaint mentions other drug classes (at least in passing) and that the prayer for relief only mentions “drugs,” but not insulin specifically.
- While we’re on remedies, is it likely that price competition would be more vigorous with the contemplated relief? If PBMs are—as the FTC subtitled its recent interim staff report on PBMs—“inflating drug costs and squeezing Main Street pharmacies,” would they not otherwise, absent the conduct at-issue, be able to inflate drug costs (prices)?
- One wonders about the limit on FTC jurisdiction imposed by the McCarran-Ferguson Act, which exempts “the business of insurance” from the commission’s jurisdiction under the FTC Act, but not necessarily all business activities of insurance companies.
- In sum, I don’t know that all involved are acting in compliance with all relevant laws and regulations. But I do know that the FTC’s case is a confusing one, and that it might (and should) face tough sledding in the courts, supposing it makes its way to federal court. There is considerable evidence that at least some of the practices attacked in the FTC’s complaint can be—and are, at least on average—procompetitive. That evidence does not appear to be refuted in the complaint itself, or in the recently published interim staff report on PBMs.
This is complicated, so I’m dividing the piece into two parts. In this one, I’ll provide an FTC-focused primer on PBMs; that is, an abridged account of what they do and what the FTC has learned about them.
Today’s tour will take us back to the FTC’s 2005 PBM report; 2005-2015 PBM-related research, advocacy, and merger investigations (such as the FTC’s investigation of the Express Scripts/Medco Health Solutions merger, which the commission closed in 2012); and the recent FTC study of PBMs, conducted under Section 6(b) of the FTC Act, which led to (or at least preceded) the 2024 interim staff report. (I previously kvetched about the 2024 report being exceedingly thin on systematic analysis and empirical findings here; and I heartily recommend a dissenting statement on the report’s issuance by FTC Commissioner Melissa Holyoak.”)
We’ll also touch on some more recent academic research and a new report on PBMs from Compass Lexecon economists Dennis W. Carlton, Mary Coleman, Nauman Ilias, Theresa Sullivan, and Nathan Wilson.
What Are PBMs and What Do They Do?
Private-sector entities that offer medical coverage—employers, unions, managed-care providers—are health “plan sponsors.” Plan sponsors may offer prescription-drug coverage. as well. PBMs provide a complex array of management services to plan sponsors, with the specific services (or bundle of services) varying across PBMs and their clients. Recognizing that variation, we can crib a very high-level description of PBMs from the FTC’s 2005 report:
Plan sponsors often hire PBMs to manage these pharmacy benefits on their behalf. As part of the management of these benefits, PBMs assemble networks of retail and mail pharmacies so that the plan sponsor’s members can fill prescriptions easily and in multiple locations. PBMs also negotiate with pharmaceutical manufacturers for payments that can lower the price that plans and members pay for prescription drugs.
PBM management of prescription-drug benefits often includes formulary design. In consultation with health plans (or plan sponsors) they decide which drugs will be covered for each covered medical condition, and the terms under which those drugs will be covered. Those terms might vary according to tiers, with, e.g., lower (and sometimes zero) copayments for drugs in the preferred tier and higher copayments for drugs in less-preferred tiers (or obtained via less-preferred channels).
As the FTC’s complaint itself notes, the defendant PBMs offer health plans an array of standardized commercial formularies that plan sponsors can adopt “off the shelf.” They also assist plans in developing custom formularies that “can range from a client making a few deviations to a standardized PBM formulary to a fully customized formulary tailored to a client’s specific needs.” Larger plans and sponsors may have a substantial hand in formulary design, and may even undertake plan design in-house or in consultation with firms outside the PBM space.
Analogously, the networks of retail pharmacies may be open, tiered (with lower copayments for preferred pharmacies), or restricted (“narrow networks”).
In brief, PBMs, both large and small, provide various services and various bundles of services to plan sponsors, including claims processing and adjudication, rebate negotiation, retail-network formation and management, consultation on plan benefit design, and drug-formulary design and management, among others.
A given plan might contract for some services, but not others. And, indeed, PBMs are not the only entities to provide some of the services they offer. For example, a 2019 report by the U.S. Government Accountability Office (GAO) on PBMs found that “Part D plan sponsor contracts varied by the number of services provided by PBMs” and that “[p]lan sponsor contracts varied in the number of PBMs used to provide one or more of the drug management services” provided by PBMs.
Vertical Integration in the PBM Sector
Both the FTC’s 2005 report and its 2024 report note significant vertical integration in the sector. For example, Congress expressly requested the 2005 report in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) because PBMs’ ownership of mail-order pharmacies had raised concerns about possible conflicts of interest. The 2024 report observes further vertical integration as, “[d]ownstream, PBMs are vertically integrated with large health insurers which, through their health plans and plan sponsor services, provide coverage for hundreds of millions of Americans.”
While vertical integration can be anticompetitive, it does not tend to be (see, e.g., Francine Lafontaine and Margaret Slade here; James Cooper, Luke Froeb, Dan O’Brien, Michael Vita here; and David Reiffen and Michael Vita here). And while vertical integration involving PBMs can raise conflict-of-interest concerns, such concerns were not borne out by the FTC’s 2005 report.
At the time of the 2005 report, FTC staff reviewed diverse documents, including high-level business documents and contracts, both downstream (between PBMs and health-plan sponsors) and upstream (between PBMs and pharmaceutical manufacturers). There were also two stages of data collection (aggregate data on prices, generic substitution, and dispensing rates; and then, individual claims data) and analysis. The staff found, for example, that mail-order prices from the large PBMs were, on average, lower than retail prices for the same drug products and same-sized prescriptions, and that average mail-order prices at integrated (retailer-owned) PBMs were lower than retail prices for the same drug products and same-sized prescriptions.
That is, the FTC concluded that, in general (or on average), for the 2002-03 period studied, PBM ownership of mail-order pharmacies did not disadvantage plan sponsors but, on net, provided cost savings. At the same time, the nature of the 6(b) study and the data collected imposed certain limitations on the analysis, and the report duly noted, e.g., that:
[b]ecause… [the] data were aggregated, they do not answer the question whether each plan sponsor has negotiated the best possible deal or whether each PBM has fulfilled its contractual obligations due to each of its plan sponsor clients.
But in brief, on net and on average, PBMs were saving plan sponsors money.
What’s Changed Over the Past Two Decades?
Of course, things can change over the course of decades, so the 2005 report’s findings do not impugn the impetus for further study in the 2020s. But the 2024 interim report was something of a disappointment. At best.
As I noted upon its release, the report was heavy on sturm und drang, and informal musings about increased concentration and vertical integration, together with many suggestions that there might now be competitive problems in the industry. But the interim report was exceedingly light on economic analysis and either legal or economic findings.
With apologies to the always-constrained staff, what I mostly recommend about the interim report is a serious and considered dissent by Commissioner Melissa Holyoak. …
As Holyoak points out, the interim staff report is awfully thin on both economic and legal analysis. Anecdotes and case studies are fine as illustrations. But illustrations of what? Where is the systematic analysis of data? Apart from issue spotting—and the dramatic characterization of potential problems—where is the legal analysis?
The staff spent about two years reviewing millions of documents to produce rather little of substance. To be sure, a proper industry study would be a heavy lift indeed (certainly, the narrower, yet more substantial, 2005 report was), and there’s only so much one should expect from under-resourced staffers, even before we ask about the role of agency leadership.
Even the report’s title was a bold announcement of something other than the sober assessment we would expect of an FTC Bureau of Economics report or, traditionally, the FTC’s Office of Policy Planning: “Pharmacy Benefit Managers: The Powerful Middlemen Inflating Drug Costs and Squeezing Main Street Pharmacies.”
Really? Whatever the reasonable expectation might be, a polemic is not it.
Were any of the specific findings of the 2005 report repudiated by the 2024 report? No, not really, although much rhetorical shade was thrown. And while the 2005 report can still be found on the FTC website, it is overlain with a bright yellow warning label that it is there “for reference only,” and that the commission has since issued a “Statement Concerning Reliance on Prior PBM-Related Advocacy Statements and Reports that No Longer Reflect Current Market Realities,” which cautions the public and policymakers against relying on certain FTC materials.
But there were no concrete findings about, for example, the impact of PBMs—large or otherwise—on average costs to plan sponsors or on average pharmaceutical prices, whether along vertically integrated chains of distribution or otherwise. There were no findings that the range or quality of prescription-drug coverage had declined or, specifically, that it had declined due to PBM conduct. And there was no explanation which of the 2005 observations were no longer reliable, or how the FTC had determined their unreliability.
As it happens, FTC staff research on PBMs, PBM practices, and policies regulating PBMs and, e.g., tiering, had not been dormant in between the 2005 report and the study that led to the 2024 interim report. As I noted in my July post, FTC and FTC staff’s competition advocacy over this period involved varied reviews of pertinent economic literature, including studies published in peer-reviewed journals by experienced staff in the FTC’s Bureau of Economics.
That includes this 2020 paper by Daniel Hosken, David Schmidt (both from the FTC), and Matthew Weinberg (from Ohio State University), which found that the adoption of restrictions on selective contracting with pharmacies (commonly negotiated by PBMs) raised the average prices paid by affected plans. That result was consistent with findings by other studies of laws restricting such practices, including “any willing provider” and “freedom of choice” laws (see, e.g., here and here).
The 2019 GAO report noted above also found that drug “utilization management services [provided by PBMs and other entities] were associated with savings for the Medicare program, Part D plans, or beneficiaries.”
Independent academic research has also found benefits to selective contracting. For example, a 2021 study by Amanda Starc and Ashley Swanson found that benefits to selective pharmacy contracting extend through plan sponsors to patients: “the average enrollee benefits from preferred pharmacy contracting due to reduced out-of-pocket (OOP) costs at preferred pharmacies.” And a 2016 literature review by Elena Fernandez, Jennifer McDaniel, and Norman Carroll found that the literature “supported higher adherence [to prescribed therapy] through the mail-order dispensing channel rather than through retail pharmacies.”
These results are consistent with findings regarding health care more generally. For example, a 2020 paper by Eline van den Broek-Altenburg and Adam Atherly, using panel data from a nationally representative sample of families and individuals, found that “restricted network plans, on average, save $761 per enrollee.”
Why Was Prior FTC Research on PBMs Disowned?
The FTC’s current leadership has added “warning labels” to various commission and staff advocacies on PBM-related issues, much like the label attached to the 2005 report. For example, we are warned about the (Obama era) FTC’s 2014 comments to the Centers for Medicare & Medicaid Services (CMS), which noted:
Based on FTC staff’s experience in this area, as well as our review of empirical studies of preferred provider contracting and any willing provider and FOC laws, there are two clear and consistent conclusions in the literature:
- Selective contracting with pharmacies and other health care providers can lower prices paid by plans and their beneficiaries; and
- Any willing provider and FOC laws tend to raise prices or spending because they impair the ability of Part D plan providers to engage in selective contracting.
That’s of interest because, among other things, the FTC’s prayer for relief in its new complaint would impose novel, and somewhat open-ended, restrictions on both formulary design and plan design. And warning labels aside, there are no concrete findings in the 2024 report that are inconsistent with those “clear and consistent” conclusions.
As I will discuss in Part 2 of this post, the FTC argues that PBMs negotiate rebates from drug manufacturers to the detriment of competition and consumers. That was not the finding of the 2005 report.
And note, also, that a new report from Compass Lexecon finds that, between 2018 and 2021, for the three largest PBMs, the overall real net price (the sum of the payments by plan sponsors and members) “decreased by 5% for rebated branded drugs, while it increased by 4% for non-rebated branded drugs. Thus, while real net prices have increased over time for non-rebated branded drugs that do not face meaningful branded competition, real net prices declined over time for rebated branded drugs for which PBMs can foster competition among drug manufacturers.”
The Compass Lexecon report also finds that “overall PBM pass-through of rebates from manufacturers to plan sponsors is very high, close to 100% in 2020 and 2021, the most recent full years for which we have data.” That is consistent with the findings of the 2019 GAO report:
PBMs retained less than 1 percent of these rebates, passing the rest to plan sponsors. Plan sponsors in turn may use rebates to help offset the growth in drug costs, helping control premiums for beneficiaries.
The Compass Lexecon report is framed as a response to the FTC and other critics of PBMs and, as the authors disclose, their research was funded by Caremark, Express Scripts, and Optum Rx. At the same time, they provide considerable and clear discussion, and concrete findings, on PBM practices, markups, and the net prices and retail spread for prescription drugs based on data submitted by the largest PBMs–findings. Moreover, the report’s findings are broadly consistent with earlier research by the FTC, other government agencies, and academic researchers, while the FTC’s interim staff report offers no countervailing analysis or findings.
Note, also, that the Compass Lexecon authors are experienced academic and agency economists. Dennis Carlton, for example, is a former deputy assistant attorney general in the U.S. Justice Department’s (DOJ) Antitrust Division, in addition to being the David McDaniel Keller Professor of Economics Emeritus at the University of Chicago’s Booth School of Business. Nathan Wilson is an 11-year veteran of the FTC, where he served as deputy assistant director of the Bureau of Economics, an economic adviser to Commissioner Terrell McSweeny, and as a staff economist. Mary Coleman also served in the FTC’s Bureau of Economics, first as a staff economist and later as deputy director for antitrust.
Additional data and analytic approaches could, of course, yield somewhat different results. But we are left with the question of why there are no such results—whether consistent, contrary, or simply confounding—in the FTC’s 2024 report. The FTC has access to the same data, and then some.
And, as I have noted before, background work on the report began in 2021. The commission contemplated compulsory orders in February 2022 (perhaps leading to the apparently instant departure of Marta Wosinska, who had only recently been appointed director of the FTC’s Bureau of Economics). Revised orders were issued in June 2022. So, the staff spent two to three years reviewing millions of documents to produce an unsigned “interim staff report” that shared no such data, no such analysis, and no such findings.
Conclusion
As we’ll see in the next post, what’s missing from the interim staff report matters, because it seems to be missing from the FTC’s complaint, as well. If we want to know whether PBMs have, in violation of the antitrust laws, caused harm to competition somewhere along the chain of manufacturing and distribution—somewhere, in some market—we’d at least like to know whether and how prescription-drug development, manufacturing, distribution, or sales have been harmed.
Has output declined? Have prices increased, on net, in real dollars? Is the FTC alleging, at a minimum, that actual retail out-of—pocket prices have increased for the typical consumer, whether that is measured by mean, median, or modal prices?
There can be no doubt that drug expenditures are considerable, or that some pharmaceutical and biological drugs are extremely expensive. A 2022 report by the Congressional Budget Office (CBO) observed that, “[n]ationwide per capita use of prescription drugs has increased in recent years,” and that branded pharmaceuticals may be especially expensive, with branded prices having increased on average. That observation is a matter of considerable policy interest and concern.
It does not, however, make out a viable complaint, under the antitrust laws or the FTC Act, against any specific PBMs or PBM practices. In the next post, we’ll consider the details of the FTC’s complaint under the FTC Act.