FTC says middlemen appear to be driving up drug prices

The Federal Trade Commission on Tuesday sharply criticized pharmacy benefit managers, saying in a scathing statement: 71 page report that “these powerful middlemen may profit from driving up drug costs and squeezing Main Street pharmacies.”

The regulator’s study signals a significant increase in oversight of benefit managers under the agency’s chair, Lina Khan. It represents a notable turnaround for an agency that has long taken a hands-off approach to policing these firms.

The FTC has so far refrained from bringing a lawsuit or other enforcement action against a benefit manager. But the industry fears the report could lead to a formal investigation into its practices or to lawsuits accusing benefit managers of anticompetitive behavior. The agency’s findings could also fuel legislative efforts in Congress and the states to impose restrictions on the industry.

The three largest benefit managers — CVS Health’s Caremark, Cigna’s Express Scripts and UnitedHealth Group’s Optum Rx — collectively process about 80 percent of prescriptions in the United States. Hired by employers and government health insurance programs such as Medicare, benefit managers are responsible for negotiating prices with drug manufacturers, paying pharmacies, and helping determine which medications are available and at what cost to patients.

Benefit managers are supposed to save everyone money. But in recent years, the industry has consolidated and taken more control over how patients get their drugs, a shift that critics say is contributing to rising drug costs.

In a statement on Tuesday, Ms. Khan said the agency’s investigation had shown “how dominant pharmacy benefit managers can inflate drug costs — including overcharging patients for cancer drugs.” She went on to say the agency had found evidence of “how PBMs can squeeze out independent pharmacies that many Americans — especially those in rural communities — rely on for essential care.”

Benefit managers defend their business practices, saying they save money for employers, governments and patients. They say their size gives them crucial leverage to take on the real culprits of high drug prices: pharmaceutical companies. And they say they’re simply stingy with their clients’ money when they pay outside pharmacies low rates to reimburse them for buying and dispensing drugs.

“In fact, the market for pharmaceutical insurance companies has become dynamic, diverse and only more competitive,” the industry’s main lobby group said in a rack last year.

The FTC report detailed a range of ways that benefit managers appeared to inflate the cost of prescription drugs. For example, it singled out a key industry: the companies’ affiliated pharmacies, which include warehouse-based operations that mail prescriptions to patients. The agency examined two generic cancer drugs and found that benefit managers often paid their own pharmacies far more than it would have cost to buy the drugs from a wholesaler. The practice generated nearly $1.6 billion in revenue for the three largest conglomerates in less than three years, the report said.

The agency also focused on the role of benefit managers in deals designed to block competition in favor of a single product. These are arrangements in which a drugmaker pays a large rebate, which is handled by the benefit manager and returned to the employer, in exchange for restrictions that push the drug company’s product to patients while discouraging similar and potentially cheaper products. The report suggested that the practice may be illegal because it stifles competition.

The FTC has historically given benefit managers the benefit of the doubt, seeing their mission to lower drug prices as good for consumers. The agency has waved through a series of mergers, saying in 2012 that there was strong competition.

The benefit managers have “done a very skillful job of circumventing regulation,” said David Balto, an antitrust lawyer in Washington who served on the commission during the Clinton administration and has been a sharp critic of the middlemen.

Over the past decade, the top three benefit managers have steadily gained market share. By late 2018, they had all become part of the same company as a giant insurer. Critics said the corporate structure created an uneven playing field that squeezed smaller competitors out of the market. The Trump and Biden administrations both grew more skeptical about whether they benefited patients.

Under Ms. Khan, who became chair in 2021, the FTC made clear it was keeping a close eye on benefit managers and other large companies.

With a broader view of anticompetitive harm than her predecessors, Ms Khan has been aggressive in targeting big companies in sectors such as technology, supermarkets and pharmaceuticals. Her attempts to block corporate mergers have had mixed results and criticism that she is overstepping her powers.

In a Speech 2022Ms Khan said the benefits managers “exerted extraordinary influence that could have life-or-death consequences” while also being “extraordinarily opaque and complex”. That, she said, “is a combination that is always worth investigating”.