The Federal Trade Commission (FTC) recently released an interim staff report detailing its findings on the role and impact of Pharmacy Benefit Managers (PBMs) within the U.S. prescription drug market. This report, part of an ongoing investigation, aims to shed light on the business practices of PBMs and their effect on drug prices, competition, and consumer access to medications.
PBMs act as intermediaries between insurers, pharmacies, and drug manufacturers. They are responsible for negotiating discounts, managing drug formularies, and processing prescription drug claims. PBMs are intended to help control costs and ensure patients access to necessary medications. However, the FTC’s report highlights several concerns about the opaque and potentially anticompetitive practices of PBMs.
The report found that PBMs can have great power over patients’ ability to access and afford prescription drugs. This can allow PBMs great influence in determining which drugs are available, and at what price.
“The FTC’s interim report lays out how dominant pharmacy benefit managers can hike the cost of drugs—including overcharging patients for cancer drugs,” said FTC Chair Lina M. Khan. “The report also details how PBMs can squeeze independent pharmacies that many Americans—especially those in rural communities—depend on for essential care. The FTC will continue to use all our tools and authorities to scrutinize dominant players across healthcare markets and ensure that Americans can access affordable healthcare.”
Key Findings from the FTC Report
- Lack of Transparency and Opaque Pricing Structures
One of the primary concerns raised in the report is the lack of transparency in PBM operations. The FTC found that PBMs often use complex and opaque pricing structures, making it difficult for stakeholders to understand the true cost of prescription drugs. This lack of clarity can lead to higher out-of-pocket costs for consumers and increased expenses for healthcare providers and insurers.
- Rebates and Fees
The report highlights the role of rebates and fees in the PBM business model. PBMs negotiate rebates from drug manufacturers in exchange for including their products on formularies. However, the report suggests that these rebates may not always be passed on to consumers or insurers. Instead, PBMs may retain a significant portion of these rebates, which can distort drug pricing and limit competition.
- Formulary Management and Drug Access
PBMs have significant control over which drugs are covered by insurance plans through their formulary management practices. The FTC found that PBMs may prioritize drugs that offer higher rebates over those that are more cost-effective or clinically appropriate. This can limit patients’ access to necessary medications and drive-up healthcare costs.
- Vertical Integration and Market Power
The FTC report also addresses the issue of consolidation and vertical integration in the PBM industry. Many PBMs are owned by or affiliated with large insurance companies or pharmacy chains. This vertical integration can lead to conflicts of interest and anticompetitive behavior, as PBMs may favor their own affiliated entities over independent competitors. The consolidation of market power among a few large PBMs raises concerns about reduced competition and higher prices for consumers. The report notes that the top three PBMs processed more than 75% of the roughly 6.6 billion prescriptions dispensed by pharmacies in the United States in 2023, with the top six PBMs processing more than 90% of the prescriptions.
- Impact on Independent Pharmacies
Independent pharmacies have long argued that PBMs use their market power to impose unfair terms and reimbursement rates. The FTC’s report supports these claims, finding that PBMs often steer patients to their affiliated pharmacies and/or reimburse independent pharmacies at rates that are unsustainable, forcing many to close or consolidate. This reduction in competition can negatively impact consumer access to pharmacy services, particularly in rural and underserved areas. These practices have allowed pharmacies affiliated with the top three largest PBMs to have high levels of dispensing revenue, in excess of their estimated drug acquisition costs – including almost $1.6 billion in excess revenue on two cancer drugs in less than three years.
- Spread Pricing
Another practice scrutinized in the report is spread pricing, where PBMs charge insurers and payers more for a prescription drug than they reimburse the pharmacy, pocketing the difference. This practice can inflate costs for insurers and ultimately for consumers, without providing any additional value to the healthcare system.
Implications for Policy and Regulation
The FTC’s interim report underscores the need for increased oversight and regulation of PBMs to promote transparency, competition, and fairness in the prescription drug market. Several potential policy recommendations are discussed in the report:
- Enhanced Transparency Requirements
To address the issue of opaque pricing, the FTC suggests implementing stricter transparency requirements for PBMs. This could include mandating the disclosure of rebate amounts, fees, and pricing structures to insurers, pharmacies, and regulators. Greater transparency would allow stakeholders to make more informed decisions and ensure that savings are passed on to consumers.
- Regulation of Rebate Practices
The report recommends revisiting the role of rebates in the PBM business model. Policymakers could consider measures to ensure that rebates are fully passed on to insurers and consumers, rather than being retained by PBMs. This could help to align incentives and reduce the distortion of drug prices.
- Promoting Competition and Fair Reimbursement
To address the impact on independent pharmacies and competition, the FTC suggests exploring policies that promote fair reimbursement rates and prevent anticompetitive practices. This could include measures to limit spread pricing and ensure that reimbursement rates reflect the true cost of dispensing medications.
- Oversight of Vertical Integration
The FTC also highlights the need for greater oversight of vertical integration in the PBM industry. This could involve scrutinizing mergers and acquisitions more closely to prevent excessive consolidation of market power. Additionally, policies could be implemented to ensure that PBMs operate independently of their affiliated entities, reducing conflicts of interest.
Conclusion and Next Steps
The FTC’s interim report provides a comprehensive overview of the current state of the PBM industry and its impact on the prescription drug market. The findings highlight significant concerns about transparency, competition, and fairness in PBM practices. As the FTC continues its investigation, it is crucial for policymakers to consider these findings and explore regulatory measures to address the identified issues. By promoting greater transparency, fair competition, and accountability, policymakers can help to ensure that PBMs fulfill their intended role of controlling costs and improving access to medications for consumers.
As the FTC’s investigation into PBMs is ongoing, further reports and recommendations are expected. Stakeholders – including policymakers, healthcare providers, insurers, and consumers – will need to stay informed about the progress of this investigation and the potential regulatory changes that may arise.
Reactions to the Report
FTC Chair Lina Khan, Commissioner Alvaro Bedoya, and Commissioner Rebecca Kelly Slaughter, wrote a statement supporting the report, noting “how increased concentration and vertical integration have given PBMs significant power over prescription drug access and prices, and explains that these trends may be enabling PBMs to disadvantage rivals and inflate drug costs.”
FTC Commissioner Andrew N. Ferguson concurred with the release of the report, saying, “The prescription-drug market is complex and opaque, and the causes for the rising prices are hard to discern. We cannot promote competition in this complex market unless we understand it.” Ferguson further highlighted “the unusual nature of this particular interim report” and “resource deployment decisions that have hindered the Commission’s ability to complete this 6(b) study in a timely manner.”
FTC Commissioner Melissa Holyoak dissented from the issuance of the Report, saying the work is incomplete and finding fault with the analysis.
“The veil continues to lift exposing the ugly truth that PBMs put profits before patients at every turn.” said Alex Schriver, PhRMA’s Senior Vice President for Public Affairs. “The FTC report makes it clear: PBMs have outsized control over what medicines people can get and the price they pay at the pharmacy counter. They are using their market dominance to drive up costs and drive independent pharmacies out of business. The evidence against PBMs is overwhelming and voters across the country want policymakers to pass reforms that hold middlemen accountable, fix the broken system and lower their costs.”
“I’m proud that the FTC launched a bipartisan investigation into these shadowy middlemen, and its preliminary findings prove yet again that it’s time to bust up the PBM monopoly,” Representative Buddy Carter, who is a pharmacist, said. “I am calling on the FTC to promptly complete its investigation and begin enforcement actions if – and when – it uncovers illegal and anti-competitive PBM practices.”