The Federal Trade Commission is stepping up its pursuit of its new favorite bogeyman: Pharmacy Benefit Managers. Two months ago, the FTC issued an evidence-free report claiming that PBMs “may be profiting by inflating drug costs.” Now the agency has filed an administrative complaint against the three largest PBMs—CVS Caremark, Express Scripts, and OptumRx—alleging that they engaged in anticompetitive and unfair rebating practices that have artificially inflated the list price of insulin drugs and increased patients’ out-of-pocket costs.
PBMs manage prescription drug benefits on behalf of the employers, unions, and insurers that sponsor drug plans. PBMs negotiate formularies—lists of covered drugs—in order to obtain the cheapest, most effective drugs for their clients. Drug manufacturers accept lower prices—usually delivered as discounts and rebates off of the manufacturers’ list prices—in exchange for access to those plans and increased sales.
This is known as selective contracting, and it is neither illegal nor rare. It has been common in health-care services since the 1980s. In 2014, FTC economists recognized that selective contracting “has long been seen as an important tool to enhance competition and lower costs in markets for health care goods and services. Both economic principles and empirical evidence support that view.”
But chairwoman Lina Khan’s FTC is a different animal. Section 5 of the Federal Trade Commission Act prohibits “[u]nfair methods of competition . . . and unfair or deceptive acts or practices in or affecting commerce.” Under Khan, the agency has jettisoned longstanding practice and previous guidance that limited unfair-competition enforcement to antitrust violations. Now, as a 2022 policy statement explains, Khan’s FTC has expanded the notion of unfair competition “to encompass various types of unfair conduct that tend to negatively affect competitive conditions.”
The agency is applying this vague standard to PBMs, but these companies perform a meaningful service. Sponsors use rebate savings to lower enrollees’ premiums. Medicare Trustees credit PBM rebates with holding down overall Medicare Part D spending. Drug plans clearly value these services. Nearly all private and government plans voluntarily utilize PBMs to manage their drug benefits. Plan sponsors compensate PBMs based on the rebates and discounts they obtain, aligning PBMs’ incentives with plan sponsors’ interest in low net prices.
University of Chicago economist Casey Mulligan estimates that delinking PBMs’ pay from their performance in obtaining rebates would change drug pricing and utilization. The result would be to redistribute billions of dollars from patients and taxpayers to drug manufacturers and pharmacies. Rebates would fall; premiums would rise. Since the federal government pays most Medicare Part D premiums, annual federal spending would increase by several billion dollars.
The FTC alleges that, in pursuit of higher rebates and profits, PBMs “systematically exclude” low list-price insulins from their formularies in favor of high list-price, highly rebated insulins, and successfully pressure insulin manufacturers to raise list prices in order to compete for formulary access.
Yet the FTC provides little evidence beyond anecdotes from manufacturers’ executives. It cites a 2020 USC Schaeffer Center study that found a roughly one-to-one positive correlation between rebates and list prices. The study did not prove that larger rebates caused manufacturers to raise list prices. All it showed is that PBMs negotiate larger rebates to offset manufacturers’ higher prices.
It would make little sense for a PBM to favor higher list prices. A manufacturer-set higher list price applies to all PBMs. Pushing for higher list prices increases the fees competing PBMs can earn, without lowering costs for its own clients. But when a PBM negotiates a lower net price, only its own clients benefit, thereby enhancing that PBM’s competitive position.
Nevertheless, the FTC claims that in pursuit of a “chase-the-rebate strategy,” PBMs “prioritized negotiating rebate amounts over [lower] net prices.” The agency provides no proof—at least in the unredacted parts of its heavily redacted claim—that PBMs accept higher net prices for their clients as long as they get a higher rebate. The FTC repeatedly acknowledges that it was the manufacturers who raised prices to preserve their own profits: “Indeed, the insulin manufacturers often raised their list prices in lockstep.”
The agency cites several examples where PBMs excluded low list-price versions of insulins from formularies in favor of high list-price versions of the same drug. But it does not provide information on which version had a lower, negotiated, net price. If negotiations for the high-price version resulted in a lower net price, PBMs would be obliged to choose it for the formulary.
The FTC even claims that manufacturers are setting high list prices for new insulin products entering the market to satisfy PBMs’ demand for rebates. Setting a high benchmark for negotiations is a more likely explanation. In addition, newer drugs may have advantages over older drugs that can justify higher prices. And the Inflation Reduction Act’s limitations on price increases beyond inflation encourage high launch prices.
In fact, nearly all the rebates and discounts PBMs obtain are passed back to plan sponsors. The U.S. Government Accountability Office found that PBMs retained less than 1 percent of rebates in the Medicare Part D program. Rebates for all drugs have been rising, but list prices have been rising more. Manufacturers of single-source drugs and drugs with few therapeutic alternatives have the market power to raise list prices and worry about negotiating rebates later.
The FTC is rightly concerned that high list prices increase out-of-pocket costs to the uninsured and to the insured whose cost sharing (co-insurance and deductible) is calculated based on list prices. But plan sponsors, not PBMs, typically determine the terms of cost sharing and whether rebates are directed back to patients at the point of sale or retained to lower premiums for all enrollees. At equal net prices, plan sponsors likely prefer high list prices because it transfers more of the cost to patients through higher cost sharing.
The most peculiar aspect of the FTC’s claim is its timing. Average monthly out-of-pocket costs for insulins have been declining, dropping from $25.79 in 2019 to $18.64 in 2023. Total out-of-pocket spending by patients for insulins declined 36 percent from 2019. The FTC complaint acknowledges that in March 2023, the three manufacturers that collectively supply 96 percent of insulin in the U.S. announced 70 percent reductions in their products’ list prices. A May 2020 Trump administration voluntary model for Medicare Part D sponsors capped monthly insulin copays at $35—and 2,159 Medicare drug plans signed on, benefiting more than 800,000 Medicare beneficiaries, with annual out-of-pocket savings that RAND estimated between $198 and $441. And the Inflation Reduction Act mandated $35 monthly insulin copay caps for Medicare starting in 2023.
None of these facts deterred the FTC. Its complaint seeks to expand the agency’s powers by targeting a politically unpopular scapegoat for high drug prices. And it is just the first step in a flawed process. The complaint’s allegations will be tried before an administrative law judge. After the ALJ’s decision, the same FTC commissioners that voted to bring the complaint will decide whether to sustain the ALJ’s ruling on appeal. Even judges on the liberal Ninth Circuit Court of Appeals have acknowledged “legitimate questions about whether the FTC has stacked the deck in its favor in its administrative proceedings.” The Court noted that FTC does not dispute it “has not lost a single [administrative] case in the past quarter-century.” The agency always rules in its own favor.
Ultimately, the FTC will have to defend its allegations in a federal court, where this case will likely join the unprecedented string of high-profile defeats that the agency has suffered under Khan’s leadership. Maybe then the agency’s extravagant legal interpretations will cease.
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