Noel C. Rodriguez – Last month, the Federal Trade Commission (FTC) filed a lawsuit against “The Big Three” pharmacy benefit managers (PMBs)– CVS Caremark, Express Scripts, and OptumRx– claiming that these companies manipulate drug prices to their advantage and contribute to the harsh realities Americans face in trying to afford life-saving medications.
PBMs have played a significant role in the American healthcare system since the 1960s, when they were created to function as intermediaries between drug manufacturers, health insurance companies, and pharmacies. They negotiate drug prices and take over the administrative duties involved in managing costs.
PBMs operate in a complex and opaque system. First, individuals pay premiums to their health insurance company or employer-sponsored healthcare plan. These insurance companies then pay PBMs to negotiate discounts in the form of rebates on essential, high-demand prescriptions with drug manufacturers and pharmacies.
While PBMs negotiate on behalf of insurance companies, they also influence the placement of prescription drugs on formularies, which are tiered lists of medications that determine the share of the drug costs paid by individuals at the pharmacy versus by the insurance company. To encourage consumers to choose their drugs, manufacturers offer rebates to PBMs to incentivize favorable positions on the list, essentially competing for preferred spots on the formulary. Part of the rebate goes to the insurance company to provide customers discounts, while the remaining portion goes to the PBM.
This system appears theoretically sound, but the rebate amount and distribution schemes are considered confidential proprietary information, so the percentage of the rebate going to PBMs remains unknown. Part of the FTC’s criticism of this system is that drug manufacturers are encouraged to raise the list price of medications to create a larger rebate for PBMs. Hence, their drug gets a better spot on the formulary. Raising the list price, or the original sticker price without any discounts, means uninsured patients may pay the full price, and patients with insurance that requires a high deductible or high coinsurance will pay more based on that increased list price.
The FTC’s suit targets this convoluted pricing system as well as the “horizontally concentrated and vertically merged” PBM giants, alleging that Caremark, Optum Rx, and Express Scripts administer over 80% of the United States’ prescriptions.
In 2012, Express Scripts acquired Medco Health Solutions, combining the then first and third largest PBMs. Optum Rx acquired Catamaran three years later, combining the third and fourth largest PBMs. Then, in 2018, Caremark merged with Aetna (which had its own PBM), resulting in the United States’ largest PBM. In addition to these massive mergers, The Big Three are all affiliated with insurance companies and pharmacies in some capacity. Express Scripts is a subsidiary of Cigna, Optum Rx is a subsidiary of UnitedHealth, CVS Caremark is a subsidiary of CVS Health, and each of the three has strong relationships with a number of specialty pharmacies, which the FTC alleges are often paid twenty to forty times the national average drug acquisition cost because of their affiliation.
The FTC’s administrative complaint emphasizes how these major mergers, acquisitions, and integrations raise major concerns of reduced competition in the healthcare space and accuses The Big Three of engaging in a number of anticompetitive strategies to ensure market competition remains law. Specifically, the FTC highlights the potential for conflicts of interest to develop when considering the inner workings of a vertically integrated PBM-insurer-pharmacy entity. For example, in the FTC’s Interim Staff Report, PBM-affiliated pharmacies were accused of steering prescriptions away from independent pharmacies and towards their affiliated pharmacies, as well as providing their affiliated pharmacies higher reimbursement rates when compared to nonaffiliated pharmacies.
PBMs are no stranger to scrutiny, but this lawsuit is one of many that defines a new era of the FTC and suggests a potential shift in how antitrust regulations may be applied to PBMs and the entire healthcare sector. The current FTC administration has been characterized by a surprising number of challenges to vertical deals and suggests aggressive enforcement against vertical consolidation in the healthcare supply chain. The FTC may push for divestitures or structural remedies that would require PBMs to separate affiliated business operations, such as breaking up an integrated PBM-insurer-pharmacy entity into its individual components. Vertical mergers in healthcare could also face higher regulatory barriers, including pre-merger investigations to assess anticompetitive risks. Critics of the war on PBMs argue that attempts to restructure the PBM business model may change how effectively the pharmaceutical middlemen manage underlying spending and could weaken their incentive to aggressively negotiate prices.
Current trends in antitrust law may be attributed in part to the appointment of Lina Khan, the youngest-ever chair of the FTC. She has shifted the focus of American antitrust policy beyond traditional price effects and monopolistic behavior and towards a broader interpretation that considers impacts on innovation, market access, and consumer choice.
On October 30th, FTC Chair Lina Khan spoke to University of Miami law students in Professor John Newman’s antitrust class. She discussed her early work in anti-monopoly research and how witnessing first-hand the effects of consolidation and unbalanced power dynamics on everyday consumers shaped her approach to antitrust policy. Khan continues to keep the everyday consumer in mind and has taken strong stances on the current state of the pharmaceutical industry, especially when it comes to the case against PBMs. In fact, The Big Three have requested Khan’s removal from the case, alleging potential bias, even citing an article Khan wrote while in law school where she asserted that PBMs “keep drug prices high.”
Whether the Commission will keep Khan on the case is not yet known, but the request adds yet another layer of complexity to an already high-stakes legal battle. This lawsuit brings to a head years of frustration Americans have in the healthcare system and steadily increasing prices for the medications they need to survive. The outcome of this case has the potential to create sweeping reform and reshape the future of healthcare access and drug pricing methods, which can improve the quality of life for millions.
