FTC Issues Interim Staff Report on Prescription Drug Middlemen: What Does It Mean and What Happens Next?

On Tuesday, July 9, 2024, the Federal Trade Commission (FTC) voted 4-1 to publish an interim staff report (Interim Report) in connection with its policy inquiry into Pharmacy Benefit Managers (PBMs) titled “Pharmacy Benefit Managers: The Powerful Middlemen Inflating Drug Costs and Squeezing Main Street Pharmacies.” The Interim Report delivers the FTC’s preliminary findings from its PBM inquiry, launched in June 2022, and summarizes the FTC’s views with respect to PBMs’ impact on the accessibility and affordability of prescription drugs in the United States.

Background

PBMs are at the center of the complex pharmaceutical distribution chain that delivers a wide variety of medicines from manufacturers to patients, serving as middlemen and negotiating the terms and conditions for access to prescription drugs for hundreds of millions of Americans. In recent years, PBMs have vertically integrated with health plans, pharmacies, and other players in the pharmaceutical supply chain. With this vertical integration and a growing importance in the pharmaceutical distribution chain, PBMs are now under increasing scrutiny. In the last few years, Attorneys General in Ohio, Hawaii, Oklahoma, and Arkansas have challenged PBMs’ conduct under state antitrust and unfair competition laws, and private plaintiffs have also filed suit.¹

The FTC’s Inquiry

In June 2022, the FTC voted to issue orders pursuant to Section 6(b)² of the Federal Trade Commission Act to the six largest PBMs — Caremark Rx, LLC; Express Scripts, Inc.; OptumRx, Inc.; Humana Pharmacy Solutions, Inc.; Prime Therapeutics LLC; and MedImpact Healthcare Systems, Inc. (the PBM respondents). The FTC’s 6(b) orders requested data and documents regarding the PBM respondents’ businesses and contracting practices.³ Later, in May 2023, the FTC issued additional orders to Zinc Health Services, LLC; Ascent Health Services, LLC; and Emisar Pharma Services LLC, which are each rebate aggregating entities, sometimes referred to as “group purchasing organizations,” that negotiate drug rebates for commercial insurance coverage on behalf of PBMs.⁴

The Interim Report

The FTC is continuing its 6(b) study into the PBM industry but issued an Interim Report on its findings on July 9, 2024. While it is rare for the FTC to issue a preliminary report following the issuance of 6(b) orders, particularly when it acknowledges that it has not received all of the requested information from study respondents, a majority of the FTC voted 4-1 to issue the Interim Report to provide “an update to the public about the study’s progress” because the FTC believes it has “an obligation to inform the public as findings become available.”⁵ The three Democratic commissioners in the majority stated that they believed the Interim Report can “inform the constellation of state and federal policymakers who are also scrutinizing the PBMs.”⁶

The Interim Report highlights several key insights gathered from public comments, documents, and data obtained in response to the FTC’s orders, as well as from publicly available information. According to the Interim Report, FTC staff has reviewed more than 1,200 public comments to identify areas of concern, as well as initial submissions of internal documents and data from PBM respondents and their affiliates. FTC staff has also interviewed various industry experts and participants and reviewed other public data and information.

Based on this preliminary investigation, the Interim Report sets forth the following key findings:

• Concentration and vertical integration: The FTC found that the PBM services industry has become highly concentrated, and the largest PBMs are now also vertically integrated with the nation’s largest health insurers and specialty and retail pharmacies.
  • The top three PBMs processed nearly 80% of the approximately 6.6 billion prescriptions dispensed by U.S. pharmacies in 2023, while the top six PBMs processed more than 90%. Pharmacies affiliated with the three largest PBMs now account for nearly 70% of all specialty drug revenue.
• Control over drug pricing and access: The Interim Report also found that leading PBMs now exercise significant control over Americans’ ability to access and afford their prescription drugs.
  • The Interim Report found that PBMs oversee these critical decisions about access to and affordability of life-saving medications, without transparency or accountability to the public. This in turn affords PBMs significant control over what drugs are available and at what price, and which pharmacies patients can use to access their prescribed medications.
• Self-preferencing: The FTC asserts that vertically integrated PBMs appear to have the ability and incentive to prefer their own affiliated businesses, creating conflicts of interest that can disadvantage unaffiliated pharmacies and increase prescription drug costs. When insurers and health plans contract with PBMs to manage their prescription drug benefits, those health plans reportedly pay PBM-affiliated pharmacies higher reimbursement rates for specialty drugs, including specialty generics, compared with unaffiliated pharmacies. Pharmacies affiliated with the three largest PBMs are often paid 20 to 40 times National Average Drug Acquisition Cost, and significantly more than unaffiliated pharmacies, for the two case study specialty generic drugs in particular. The Interim Report notes that PBMs may be steering patients to their affiliated pharmacies and away from smaller, independent pharmacies in numerous ways.
  • Steering mechanisms and evidence of specialty prescription steering:
    • Pharmacy network and drug formulary design are among the core services that PBMs provide. PBMs routinely create narrow and preferred pharmacy networks that can advantage their own pharmacies while excluding rivals, and PBMs regularly adjust formularies, including by designating drugs as specialty medications, which triggers exclusivity provisions in contracts with certain payers that require use of PBM-affiliated specialty pharmacies. While PBM payer clients may choose which pharmacy networks and drug formularies to use, information asymmetries can hinder these payers’ ability to make fully informed decisions.
    • Additionally, PBMs may use any number of “[o]ptimization levers” to steer patients to affiliated specialty pharmacies, as internal documents and public comments confirm. For specialty drugs administered in a clinical setting, the American Medical Association reports that PBM contracts may require that a patient’s provider obtain the drug from a PBM-affiliated pharmacy (known as “white bagging”), or they may require the patient to do so and then bring the drug to the provider’s office for administration (“brown bagging”), even when the provider could have otherwise obtained the drug for the patient from the pharmacy typically used by the provider.
    • Moreover, PBM contracts may bundle exclusive services and assets (such as limited distribution drugs) to promote the use of their affiliated pharmacies, and expedite the resolution of drug utilization management requirements (which the PBMs impose) if physicians send patient prescriptions to affiliated pharmacies.
    • PBMs also use information obtained through their vertically integrated insurers to conduct marketing campaigns targeting patients and specialty providers. The National Association of Specialty Pharmacy and other public commenters report that these marketing campaigns employ inaccurate information to coerce patients into switching to affiliated pharmacies. For example, one independent pharmacy reported that the PBM sent its patient a letter that erroneously stated that the pharmacy had been terminated from the network, noting that the patient would “need to select a new specialty pharmacy,” and “[based] on medication [the patient] is taking, we recommend getting your medicine from a network specialty pharmacy.”
    • In addition to having the ability to steer prescriptions to their affiliated pharmacies, PBMs may also have a particularly strong incentive to capture specialty prescriptions at their affiliated pharmacies, given their high prices and margins. As an internal PBM board presentation stated, “[s]teering to … specialty pharmacies” is a “major” driver of value for PBMs. Consistent with that evidence, an FTC staff analysis of data produced in response to the 6(b) orders suggests that PBMs may be steering a high proportion of specialty prescriptions filled by commercial health plan members to their affiliated pharmacies.
  • Steering through expanded specialty drug lists:
    • One potential mechanism that PBMs may use to steer prescriptions to their affiliated pharmacies is to classify drugs as specialty. PBMs and their health plan clients have relatively broad discretion to make specialty classification decisions given the lack of an industry standard or regulatory definition for a specialty drug. Once a drug is added to a PBM’s specialty drug list, this may trigger exclusivity provisions in contracts with certain payers that require use of the PBM’s affiliated specialty pharmacy among various other related steering mechanisms. Moreover, the three largest PBM-affiliated pharmacies may be more likely to fill prescriptions for the drug designated as specialty by virtue of their significant share of the specialty dispensing segment.
    • Public commenters have indicated, for example, that “[m]any PBMs will reclassify a medication as a ‘specialty drug’ primarily based on a very high cost” and then “forc[e] their plan members to fill specialty medications only at pharmacies directly owned by the PBMs.” The Senior Care Pharmacy Coalition, representing more than 300 long-term care pharmacies, similarly stated that PBMs “classify their medications as specialty drugs subject to the convoluted and opaque process whereby pharmacy access to specialty medications is restricted based on largely specious criteria created simply to allow PBMs to drive a significant percentage of specialty pharmacy revenue to payer-affiliated specialty pharmacies.”
• Unfair contract terms: The FTC asserts that increased concentration in the PBM services industry provides PBMs with substantial leverage to enter contractual relationships that disadvantage smaller, unaffiliated pharmacies. Indeed, the Interim Report notes that independent pharmacies generally lack the leverage to negotiate terms and rates when enrolling in PBMs’ pharmacy networks, and subsequently may face effectively unilateral changes in contract terms without meaningful choice and alternatives. The proliferation of complex and opaque contract terms and adjustments has increased uncertainty in pharmacy reimbursements, which can make it difficult for smaller pharmacies to manage basic business operations. For instance, the FTC observed that rates in PBM contracts with independent pharmacies often do not clearly reflect the amount the pharmacy will ultimately be paid.
• Efforts to limit access to low-cost drugs: The Interim Report also notes that PBMs demand drug manufacturers pay drug rebates, some of which are expressly conditioned on limiting access to potentially lower-cost generic and biosimilar competitors.

The Commissioners’ Statements Regarding the Interim Report

In the majority statement, FTC Chair Lina Khan, joined by Commissioners Alvaro Bedoya and Rebecca Kelly Slaughter, discuss the recent outpouring of concern from doctors, patients, and pharmacists the FTC has received about PBMs.⁷ They note that the FTC has heard accounts from doctors and patients about how PBMs’ business practices “may deprive patients of access to the most affordable medicines and how doctors find themselves having to subordinate their independent medical judgment to PBMs’ decision-making at the expense of patient health.” And pharmacists from all over the country have written to the FTC, expressing concern that “PBMs’ business practices are creating risk for their patients while squeezing independent pharmacies that have served their communities for decades.”

Commissioner Andrew Ferguson, a Republican, voted with the FTC’s Democratic Majority to issue the Interim Report, and wrote in concurrence to support the Interim Report. He highlights how the “prescription-drug market is complex and opaque, and the causes for the rising prices are hard to discern,” and how the FTC “cannot promote competition in this complex market unless we understand it.”⁸ However, his concurring statement also “highlight[s] the unusual nature of this particular Interim Report,” both because “most 6(b) studies culminate in a single final report” and because it relies, in large part, on public comments, including those submitted anonymously, all of which should be treated, according to Commissioner Ferguson, with circumspection.

Commissioner Melissa Holyoak’s dissenting statement outlines the reasons why she voted against releasing what she considers to be an incomplete report that fails to meet the FTC’s typically “rigorous standard” for issuing 6(b) reports.⁹ Indeed, Commissioner Holyoak writes that the Interim Report has been plagued by, among other things, “process irregularities and concerns over the substance — or lack thereof — of the original order” and its politicization is slated to “exacerbate ideological schisms and further degrade the legitimacy of the Commission.” And “most importantly, the Report leaves us without a better understanding of the competition concerns surrounding PBMs or how consumers are impacted by PBM practices.” The Majority statement responds to Commissioner Holyoak’s dissent disagreeing with her “conclusion that the analysis in the Report is not worth sharing with the public” because the Interim Report includes important information for the public, including, two case studies that show that “PBMs are marking up” case study cancer drugs “by up to 4,000 percent the average acquisition cost.”

What Happens Next?

Despite the FTC’s characterization of the Interim Report findings as conclusions, the FTC intends to continue its investigation into the PBM industry and seek complete responses from the PBM respondents to the 6(b) orders. According to the FTC, “[i]f, however, any of the companies fail to fully comply with the 6(b) orders or engage in further delay tactics, the FTC can take them to district court to compel compliance.”¹⁰ Given the uncertainty as to when that compliance will occur, it is difficult to predict when the FTC will release a final report. Nonetheless, it appears that the FTC may pursue an enforcement action against several of the PBMs prior to issuing that final report. On July 10, 2024, the press reported that the FTC is preparing to sue UnitedHealth Group’s OptumRx, Cigna Group’s Express Scripts, and CVS Health’s Caremark — the three largest PBMs — over their tactics for negotiating prices for drugs including insulin. Further, given the direct message of the Majority’s statement, the FTC may also use the Interim Report to seek congressional action to remedy the ills it sees in the PBM services industry, though the prospect for legislative fixes is highly uncertain. As a result, it appears that the PBM services industry will remain under a microscope for the foreseeable future.

© Arnold & Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.