On June 16, 2022, the Federal Trade Commission (FTC) issued an enforcement policy statement alerting Pharmacy Benefit Managers (PBMs) that it was looking into the anti-competitive effect of rebates on the price of prescription medications.
The Federal Trade Commission or the FTC is the federal agency charged with protecting consumers from anti-competitive industry practices. It was created in 1914, when President Woodrow Wilson signed the Federal Trade Commission Act into law. Its mission statement is as follows:
The FTC’s mission is to protect consumers and competition by preventing anticompetitive, deceptive, and unfair business practices through law enforcement, advocacy, and education without unduly burdening legitimate business activity.
In pursuit of its mission, it:
(Its) work to protect consumers and promote competition touches the economic life of every American. (It is) the only federal agency that deals with consumer protection and competition issues in broad sectors of the economy.
A Pharmacy Benefit Manager or PBM is a third-party intermediary between employers that sponsor group health plans that include a prescription drug benefit and retail pharmacies that sell prescription drugs to plan participants. A PBM is either engaged by an insurance company to administer a fully-insured plan’s drug benefits or by a Third-Party Administrator on behalf of an employer sponsoring a self-funded health plan. Often, PBMs are owned by an insurance company.
A PBM determines which drugs an insurance company or self-funded health plan will pay for. It does this by developing what is called a “formulary”. If a drug is not on a plan’s formulary, the plan will not pay for the cost of the medication, even if prescribed by a participant’s doctor. In addition, a PBM determines how much an insurance company or an employer’s self-funded health plan will pay for the drug, as well as a plan participant’s out-of-pocket costs. Often, a PBM will process and pay a plan’s drug claims.
A PBM has a couple of ways to get paid. First, a PBM may be paid an administrative fee by the insurance company or the TPA. This seems fair and aboveboard. After all, the PBM is providing a service to the employer’s group health plan and should get paid for the services that it provides.
Another source of revenue for PBMs, however, may be rebates negotiated by PBMs with drug manufacturers. In other words, drug manufactures often pay PBMs to have their drugs included on a plan’s formulary. In addition, PBMs set the reimbursement rates for the drugs on a plan’s formulary, as well as the plan participant’s out-of-pocket costs. One could be forgiven for thinking that rebates are the consideration for setting a higher reimbursement rate and a lower out-of-pocket expense, which, in combination, increase a particular drug’s usage and profitability. In other circumstances, this might be called a bribe.
And, that is where the FTC enters the picture.
The FTC’s policy statement says that, for many years, it has received complaints about rebates paid by drug manufacturers to PBMs. It further says that these rebates often cause PBMs to favor high-cost drugs that generate higher rebates to PBMs; thereby increasing the profits of the drug manufacturers and the PBMs at the expense of consumers.
These rebates and fees may shift costs and misalign incentives in a way that ultimately increases patients’ costs and stifles competition from lower-cost drugs, especially when generics and biosimilars are excluded or disfavored on formularies.
To illustrate its concern, the FTC discusses the price of insulin. It says that the cost of insulin nearly tripled between 2009 and 2017. This has had a disastrous impact on the health of patients suffering from diabetes. Many patients are forced to ration or forego their medication simply because they cannot afford a full dose. Employers may be scared to offer health benefits to employees out of concern for the runaway cost of insulin. The FTC is concerned that rebates paid to PBMs have incentivized PBMs to include higher cost insulin on their formularies and discouraged the use of lower cost insulin or alternatives, such as biosimilar drugs.
This practice could lead to increased costs for both patients and payers, including increased out-of-pocket costs at the point of sale. It may also insulate more expensive drugs from competing with less expensive alternatives. Nothing prevents drug manufacturers, PBMs, and health plans from negotiating good-faith rebates and fees for legitimate services that increase value to payers and patients. However, when dominant drug manufacturers or intermediaries stifle or foreclose competition from significantly less expensive generic and biosimilar alternatives, the Commission has the legal authority to investigate these practices and take enforcement action against unlawful conduct.
The FTC’s enforcement policy statement does not mean that rebates paid to PBMs by drug manufacturers are suddenly unlawful. It simply means that the FTC has put the industry on notice that it intends to investigate whether rebates violate any laws. And, there are a number of laws at play.
The FTC intends to closely scrutinize the impact of rebates and fees on patients and payers to determine whether any of these provisions have been violated. In addition, the Commission will monitor private litigation and file amicus briefs where it can aid courts in analyzing unlawful conduct that may raise drug prices. The Commission will also continue to study this issue to understand the full range of practices and implications.
The Commission recognizes the life-and-death stakes of this work and is committed to acting expeditiously. As it has done throughout its history, the FTC will bring an interdisciplinary approach, using resources and expertise from throughout the agency to combat unlawful practices in the prescription drug industry.
While there is nothing to report right now, other than the investigation, this is certainly something to keep on our radar.
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