Federal antitrust regulators issued a report describing the PBM industry as highly concentrated among a handful of companies that use their market power to put pressure on clients and competitors, and called for further investigation of an industry that has fought back against the probe.
The 73-page Federal Trade Commission report, released Tuesday, doesn’t yet call for action such as breaking up pharmacy benefit managers from the insurers and drugstores they’ve merged with in recent years, or for putting limits on their business practices. But it does find that the investigation’s initial conclusions “urgently warrant further scrutiny and potential regulation.”
The PBMs highlighted in the report include CVS Health’s Caremark, Cigna’s Express Scripts, UnitedHealth Group’s Optum Rx, Humana’s Pharmacy Solutions, Prime Therapeutics and MedImpact. Together, they control 94% of all US drug prescriptions, and the FTC says the combined companies are enormous “conglomerates that can exercise vast control over huge swaths of the healthcare sector.”
PBMs are often described as middlemen. And, as lawmakers and regulators have scrutinized the health system, that has meant they are attacked by counterparties from both sides of their business. Drugmakers have said the PBMs use their negotiating power to keep costs high for patients, while pharmacies accuse them of favoring their own networks and driving out smaller players.
Representatives for the PBM industry have said in the past that the companies work to bring down drug prices by negotiating with biotech and pharma companies, which set the initial prices of their products. In a statement, CVS said that any “suggestions from the FTC about policies that limit the use of PBM negotiating tools would instead reward the pharmaceutical industry,” and pointed to a dissent from one of the FTC commissioners who called the report irregular, full of “hyperbolic language,” and said it hadn’t conducted a thorough enough economic review of market conditions.
The Pharmaceutical Care Management Association, a trade group representing PBMs, described the report’s conclusions as “pre-determined,” and based on “self-interested parties.” “PBMs are operating in an extremely competitive market,” PCMA CEO JC Scott said in a statement.
The probe describes an industry that has grown bigger and sits at crucial junctions of power in healthcare by strongly influencing which drugs are covered by insurers and eventually reach patients — and how much those patients pay out of pocket.
The FTC declined to make one of its senior officials available for an interview. But in May, Rahul Rao, deputy director of the FTC’s Bureau of Competition, described the PBM sector as “a dysfunctioning market.”
“We’re seeing prices go up when, in normal competition, prices should go down. We’re seeing access decrease when competition should make access increase. And we’re seeing that happen at a time where PBMs have been playing a more and more outsized role in the drug supply chain,” Rao told Endpoints in an interview at an event in New York. “The fix to that is something that that we’re exploring.”
Two-year investigation into PBMs
The investigation into the industry began in 2022, when the FTC, under Chair Lina Khan, demanded that the companies provide information on their practices. While Khan promised to “use all our tools and authorities to scrutinize dominant players across healthcare markets” in a press release announcing the findings, it’s not clear what would happen to the effort under a potential Trump administration should President Joe Biden lose the election in November.
While there has been a great deal of prior scrutiny over the relationship between PBMs and drug companies and the rebates drugmakers use to gain preferential coverage, the report spends the vast majority of its length on how PBMs wield their power over pharmacies.
“PBMs and their affiliated entities may have the incentive and ability to engage in steering a growing share of prescription revenues to their own pharmacies through specialty drug classification, self-preferential pricing, and pharmacy contracting procedures to target and control the business operations of pharmacies,” the FTC said in the report.
The report does give some mention to how PBMs and drugmakers work together, for example on the use of rebates to keep generic competitors off of formularies. But overall, that relationship — at times symbiotic, at other times contentious — gets limited coverage in the report. The FTC emphasized repeatedly in the report that it struggled to obtain information from uncooperative PBMs, and might go to court to compel them, particularly in the part of the investigation looking into how the companies work with drugmakers.
That includes a relatively new type of corporate entity created by many of the biggest PBMs, known as group purchasing organizations, or GPOs. The report describes how the GPOs were created to manage the relationship with pharma companies, particularly for negotiating rebates on drugs. Those GPOs, according to the FTC, have collected an increasing pool of fees from drugmakers — doubling to $7.6 billion in 2022 from $3.8 billion in 2018.
The FTC also suggests that the GPOs may have been created “to avoid potential regulatory or legislative PBM reform.”
There’s some evidence of that: In the report, the FTC said that it had to send separate information requests more than a year ago to the GPOs, including Ascent Health Services (owned by Cigna, Prime and Kroger), Zinc Health Services (owned by CVS Health) and Emisar Pharma Services (owned by UnitedHealth Group’s OptumRx). The FTC says it’s still in negotiations with the GPOs, and that the companies “currently do not anticipate completing productions until 2025.”
A major focus of the report is how the conglomerates use their vertically-integrated market power. According to the FTC, that includes practices such as a parent insurance company using its own PBM to choose a pharmacy network, then pushing patients to its own pharmacies at the exclusion of competitors. In other cases, PBMs have reclassified drugs as “specialty” prescriptions that have to be filled through their own pharmacies, further disadvantaging non-affiliated drugstores.
“PBMs routinely create narrow and preferred pharmacy networks that can advantage their own pharmacies while excluding rivals,” the FTC said.
Another portion of the report shows how PBMs often use their market power to force smaller pharmacies into unfavorable terms, often updating contractual arrangements in “fax blasts,” in which contract modifications are sent out in a flurry of fax machine messages that small pharmacies have to respond to — by fax — if they want to push back.
“To the extent that the PBMs have engaged in conduct to harm competition in the market, such as by pushing smaller pharmacies out of the market, such conduct could ultimately lead to higher costs and lower quality services for people around the country,” the FTC said in the report.
Editor’s note: This story has been updated with comments from CVS and PCMA.