In a scathing 71-page report Tuesday, the Federal Trade Commission sharply criticized pharmacy benefit managers, saying “these powerful middlemen may be profiting by inflating drug costs and squeezing Main Street pharmacies.”
The regulator's investigation signals a significant increase in scrutiny of benefit managers under Chair Lina Khan, marking a surprising about-face for an agency that has long been apathetic about oversight of these companies.
The FTC has not yet filed lawsuits or other enforcement actions against benefit managers, but the industry is concerned that the report could lead to formal investigations into benefit manager practices and lawsuits accusing benefit managers of anticompetitive conduct. The FTC's findings could also spur legislative efforts in Congress and states to impose restrictions on the industry.
The three biggest benefit managers — CVS Health's Caremark, Cigna's Express Scripts and UnitedHealth Group's OptumRx — collectively fill roughly 80% of prescriptions in the U.S. Benefit managers, employed by employers or government health insurance programs such as Medicare, are responsible for negotiating prices with drug companies, making payments to pharmacies and helping determine which drugs are available to patients and how much they cost.
Benefit managers are supposed to save everyone money, but in recent years the industry has become more consolidated and given more control over how patients get their drugs, which critics say has led to higher drug costs.
Khan said in a statement Tuesday that the agency's investigation revealed “how large PBMs are able to inflate drug prices, particularly by overcharging patients for cancer drugs.” He also said the agency found evidence of “how PBMs can squeeze the independent pharmacies that many Americans, particularly those in rural areas, rely on for essential health care.”
Benefits managers defend their business practices, saying they save employers, governments and patients money. They argue that their size gives them crucial leverage to take on the real culprits of high drug prices: pharmaceutical companies. They also argue that by reimbursing outside pharmacies for the cost of purchasing and dispensing drugs at lower rates, they are simply saving customers money.
“The reality is that the market for pharmacy benefit companies is dynamic, diverse and increasingly competitive,” the industry's main lobbying group said in a statement last year.
The FTC report detailed various ways in which benefit managers appear to inflate the cost of prescription drugs. For example, it pointed to the companies' affiliated pharmacies, including warehouse-based operations that mail prescriptions to patients, as a significant line of business. The FTC investigated two generic cancer drugs and found that benefit managers often paid their own pharmacies much more than they would have paid to buy those drugs from wholesalers. The practice boosted the Big Three conglomerates' revenues by nearly $1.6 billion in less than three years, according to the report.
The Bureau also focused on the role of benefits managers in deals designed to stifle competition in favor of a single product. These are arrangements in which pharmaceutical companies pay large discounts that benefits managers process and pass on to employers, and in return, place restrictions that push the drug company's products onto patients and block similar, cheaper products. This practice may be illegal because it stifles competition, the report suggests.
The FTC has historically dismissed benefit managers' mission to lower drug prices as a good thing for consumers, and has given them leeway when it was unsure: In 2012, the agency cleared a string of mergers it said were stimulating competition.
Benefits administrators “have done a very sophisticated job of avoiding regulation,” said David Barto, a Washington antitrust lawyer who served on the committee during the Clinton administration and is a fierce critic of intermediaries.
Over the past decade, the top three benefit managers have steadily increased their market share. By the end of 2018, they were all part of the same corporation as the insurer giants. Critics said the corporate structure created an uneven playing field and squeezed out smaller competitors. The Trump and Biden administrations, respectively, have grown skeptical about whether patients are getting benefits.
Under Khan's leadership, since he became chairman in 2021, the FTC has made clear it is increasing its scrutiny of employee benefits managers and other large companies.
Mr. Khan has a broader view of anticompetitive harm than his predecessor and has aggressively taken on large companies in a variety of industries, including technology, supermarkets and pharmaceuticals. His efforts to block mergers have had mixed results and sparked criticism that he has overstepped his authority.
Speaking in 2022, Khan said benefits managers “wield life-or-death influence” but are also “highly opaque and complex.” “That's a combination that's always worth scrutinizing,” she said.
