7 Takeaways From the FTC Interim Report on PBMs

The gist and tenor of the interim 73-page report on pharmacy benefit managers (PBMs) released by the Federal Trade Commission (FTC) yesterday is captured in the title: “Pharmacy Benefit Managers: The Powerful Middlemen Inflating Drug Costs and Squeezing Main Street Pharmacies.”

The NationalCommunity Pharmacists Association, the trade association for independent and small chain pharmacies and a longtime critic of the PBM industry, trumpeted the “scathing” findings and urged the FTC to “continue its investigation and pursue the information that the PBMs have so far defiantly withheld.”

Just as predictably, the PBMs’ trade association, Pharmaceutical Care Management Association, slammed the report and said the “FTC leadership has shown that they have predetermined conclusions that they want to advance irrespective of the facts or the data.”

Melissa Holyoak

One of the FTC commissioners, Melissa Holyoak, filed a dissenting statement that criticized the interim report for lacking economic rigor and “failure to offer empirical evidence to support claims about the market power of PBMs.”

So clearly the report is controversial and its findings, disputed. It is far more likely to stoke the ongoing battle between the PBM industry and its critics and opposing interests than to calm the waters and settle matters.

Even so, the FTC has with this report shed some light on an industry that is indisputably complex and to which “opaque” is affixed as an epithet. Despite its interim status, the report may energize the rather meandering Congressional consideration of legislation that would ban some PBM business practices,regulate others and, at the very least, increase reporting and disclosure requirements. The report also has some clues on areas that the FTC will continue to investigate as it works toward a final report and conclusive findings on whether the industry has anticompetitive practices and arrangements.

Here are seven takeaways from the report:

The integration goes in both directions — and the report puts a spotlight on the vertical

The horizontal consolidation of the PBM industry is a well-known fact. FTC report notes, as many others, that the three largest PBMs — CVS Caremark, Express Scripts, and OptumRx manage 80% (to be precise, the report says 79%) — of prescription drug claims for approximately 270 million people. In the healthcare/PBM circles, they are called the Big 3. Add in the next three largest PBMs — Humana Pharmacy Solutions, MedImpact, and Prime — to get the “Big 6,” and that proportion reaches 94% of prescription drug claims, according to the FTC report.

But one of the major themes of the FTC report is vertical integration, which is more difficult to neatly summarize and to quantify.The Big 6 PBMs, the report says, have become vertically integrated within “massive conglomerates that provide a broad range of services across the pharmaceutical supply chain and other segments of the healthcare sector” that includes specialty pharmacies, mail-order pharmacies, health insurers and other entities both “upstream” and “downstream” from the PBM. The first figure in the report is a graphical representation of that vertical integration (see below), and it was also featured in the commission’s press release.

Source: "Pharmacy Benefit Managers: The Powerful Middlemen Inflating Drug Costs and Squeezing Main Street Pharmacies," Federal Trade Commission, July 9, 2024

Formulary decisions are key, and drug formulary committees make them

One of the main functions (and sources of influence) of PBMs is deciding which drugs are on their formularies, the list of drugs that the PBMs cover. Pharmacy and therapeutics (P & T) committees make clinical recommendations, but today’s FTC report says that “formulary development committees,” comprised of PBM employees, determine the placement of drugs on formularies. This is old news to those familiar with the industry, but the FTC report spells it out.The report also says that., based on a review of internal documents, those formulary development committees take into account business considerations and “make formulary determinations to maximize profits (for themselves [PBMs] and their health plan clients.)”

Smaller, ostensibly independent PBMs contract with the larger ones

A number of smaller PBMs have challenged the Big 6 by promising to operate in a more transparent manner. The FTC report says there are about 60 such PBMs but notes that this “long tail of smaller PBMs currently accounts for just 6% of prescription claims managed.” The report also says that the smaller PBMs often contract with the larger ones “which further concentrates market power.”

The rise in mail-order pharmacies affiliated with PBMs — and the Mark Cuban end around them

Getting drugs by mail can be more convenient, and some have argued that it helps with adherence. Whatever its virtues, the FTC report says it is part of the trend toward vertical integration and PBM-associated entitles controlling a larger portion of the drug supply chain. The report says the Big 3-affiliated mail-order pharmacies now account for nearly three-quarters of dispensing revenue, the revenue that pharmacies take in by dispensing drugs, and that the Big 6 PBMs all have mail-order pharmacies. The report points to Mark Cuban Cost Plus Drug Company (and Blueberry Pharmacy as mail-order pharmacy businesses that are circumventing the PBMs. Both charge wholesale prices plus a markup.

The PBMs have set up GPOs aka rebate aggregators. But why? 

The FTC report notes that the Big 3 PBM have established group purchasing organizations GPO: Ascent Health Services, affiliated with Express Scripts and Prime, 2019; Zinc Health Services, affiliated with CVS, in 2020; and Emisar Pharma Services, affiliated with Optum Rx, in 2021. The report calls them “so-called” PBM GPOs and refers to them as “rebate aggregators,” the term used by critics of the industry. The PBMs say the rebate aggregators give them greater bargaining power, notes the FTC report, but the report puts more emphasis on several sources that point to other possible motives: avoidance of regulations and audits, the possible safe harbor from antikickback statutes afforded GPOs, additional fees that are not passed on to health plan and employer clients. The report says that the FTC has asked the Big 3 to supply more data and documents about the rebate aggregators, but some have said (according to the report) that they do anticipate supplying it until next year.

The PBMS have created private labels. But why?

The report also discusses the private labels the parent companies of the Big 3 have established as offshore entities; CVS launched Cordavis Limited, headquartered in Ireland, in September 2023; Cigna established Quallent Pharmaceuticals, headquartered in the Cayman Islands, in 2021; and Optum Rx set up NUVAILA, headquartered in Ireland. Cordavis is working with the Sandoz Group to market and distribute Hyrimoz (adalimumab-adaz), a biosimilar to Humira (adalimumab). By removing Humira from its formulary and replacing it with Hyrimoz and two other biosimilars, CVS stands to add an estimated $50 million to $100 million to its adjusted operating income on an annual basis, according to the FTC report. The report also cites a Cigna news release in April 2024 that announced that it would be making a Humira biosimilar, sourced from Quallent, available from its Accredo specialty pharmacy.

The report says that “industry experts” have mentioned several possible reasons for the PBMs creating private labels: increased earnings from biosimilars, lower prices for PBM-affiliated specialty pharmacies, reliable supply and leverage with other biosimilar makers.

Specialty drug classification is in the eye of the PBM and possible steering to PBM-affiliated pharmacies

The glucagon-like peptide 1 (GLP-1) drugs have added a wrinkle, but one of the long-term trends in pharmacy costs has been specialty drugs making up a growing proportion of the money spent on pharmaceuticals. Although they make up a small percentage of the prescriptions, specialty drugs now account for about half of the “drug spend.” The FTC report argues that PBMs have turned the specialty drug category to their advantage. There is no objective or government definition of “specialty drug,” and the FTC report says that its analysis shows that some PBMs are far more likely to classify a drug as a specialty drug than others. Using data supplied by the five of the Big 6, the FTC staff found a wide range in the number of drugs that the PBMs (they aren’t identified by name) classified as specialty drugs, with the PBM with the greatest number of drugs classified as specialty drugs having 50% more drugs in that category than the PBM with the least number of drugs classified that way. The report says that “one potential mechanism that PBMs may use to steer prescriptions to their affiliated pharmacies is to classify drugs as specialty.” It cites public comments about alleged steering practices, including comments from Senior Care Pharmacy Coalition, which represents more than 300 long-term care pharmacies, and the National Association of Specialty Pharmacy. The report also cites an analysis FTC staff that showed that members of commercial health plans managed two of the Big 3 PBMs filled a larger proportion of their specialty prescriptions at PBM-affiliated pharmacies compared with the pharmacies’ overall shares of dispensing revenue. Medicare Part D has any willing pharmacy requirements, and the FTC analysis showed that Part D members were far less likely to get specialty prescriptions filled at affiliated pharmacies.