The Federal Trade Commission on Tuesday slammed pharmacy benefit managers, saying in a scathing 71-page report that “these powerful middlemen may be profiting by inflating drug costs and squeezing Main Street pharmacies.”
The regulator’s study marks a major step-up in scrutiny of benefits managers under the agency’s chair, Lina Khan. It represents a remarkable response for an agency that has long taken a hands-on approach to policing these companies.
The FTC has so far stopped short of bringing a lawsuit or other enforcement action against a benefits administrator. But the industry fears the report could lead to a formal investigation into its practices or a lawsuit accusing benefit managers of anti-competitive behavior. The agency’s findings could also fuel legislative efforts in Congress and states to impose restrictions on the industry.
The three largest benefit managers — CVS Health’s Caremark, Cigna’s Express Scripts and UnitedHealth Group’s Optum Rx — collectively process about 80 percent of prescriptions in the United States. Hired by employers and government health insurance programs like Medicare, benefit managers are responsible for negotiating prices with drug manufacturers, paying pharmacies and helping decide which drugs are available and at what cost to patients.
Benefits managers are supposed to save money for everyone. But in recent years, the industry has become more entrenched and taken more control over how patients get their drugs, a change that critics say is driving up drug costs.
In a statement on Tuesday, Ms Khan said the agency’s investigation showed “how dominant pharmacy benefit managers can drive up drug costs — including by overcharging patients for cancer drugs.” He went on to say the agency found evidence of “how PBMs can pressure independent pharmacies that many Americans — especially those in rural communities — depend on for needed care.”
Benefit managers defend their business practices, saying they save money for employers, governments and patients. They say their scale gives them critical leverage to take on the real culprit of high drug prices, pharmaceutical companies. And they say they’re just being stingy with their customers’ money when they pay low prices outside pharmacies to reimburse them for buying and dispensing drugs.
“In reality, the market for pharmacy benefit companies is dynamic, diverse and has become even more competitive,” the industry’s main lobbying group said in a statement last year.
The FTC’s report detailed a number of ways that profiteers appeared to inflate the cost of prescription drugs. As an example, he pointed to an important business activity – the companies’ affiliated pharmacies, including warehouse-based operations that mail prescriptions to patients. The agency looked at two generic cancer drugs and found that benefit managers often paid their pharmacies far more than it would have cost to buy those drugs from a wholesaler. The practice translated into nearly $1.6 billion in revenue in less than three years for the three largest conglomerates, according to the report.
The agency also noted the role of benefit managers in agreements intended to prevent competition in favor of a single product. These are arrangements in which a drug manufacturer pays a large rebate, which is handled by the benefits administrator and returned to the employer, in exchange for restrictions that push the drug company’s product to patients while discouraging similar and potentially cheaper products. The report suggested that this practice may be illegal because it hinders competition.
The FTC has historically given benefit managers the benefit of the doubt because it viewed their mission to lower drug prices as good for consumers. The agency has pursued a series of mergers, saying in 2012 that there was intense competition.
Benefit managers have “done a very adept job of avoiding regulation,” said David Balto, a Washington antitrust lawyer who served on the commission during the Clinton administration and is a vocal critic of intermediary companies.
Over the past decade, the top three benefits managers have steadily gained more market share. By the end of 2018, each had joined the same company as a giant insurance company. Critics said the corporate structure created an uneven playing field that squeezed out smaller competitors. The Trump and Biden administrations became more skeptical about whether patients benefited.
Under the leadership of Ms. Khan, who became chairman in 2021, the FTC made it clear that it was closely monitoring benefit managers and other large companies.
With a more expansive view of anticompetitive harm than her predecessors, Ms Khan has been aggressive in taking on large businesses across industries including technology, supermarkets and pharmaceuticals. Her efforts to block corporate mergers have drawn mixed results and criticism that she is overstepping her authority.
In a 2022 speech, Ms Khan said benefits administrators “exerted extraordinary influence that can have life and death consequences”, while also “being extremely opaque and complex”. This, he said, “is a combination that is always worth careful consideration.”
