PBMs Under Intensifying Scrutiny from Regulatory Agencies and Legislative Bodies

On July 9, 2024, the Federal Trade Commission (FTC) Office of Policy Planning released an Interim Staff Report titled Pharmacy Benefit Managers: The Powerful Middlemen Inflating Drug Costs and Squeezing Main Street Pharmacies (the Interim Report). The Interim Report stems from the FTC’s inquiry announced in June 2022, pursuant to Section 6(b) of the Federal Trade Commission Act, to investigate the PBM industry and market – specifically the six largest PBMs. The Interim Report focuses primarily on concerns related to vertical integration and reimbursement rates.

The FTC has identified vertical consolidation within the healthcare industry as a driving factor for anti-competitive pricing, access, and incentives, and it claims that the top three PBMs processed nearly 80 percent of the approximately 6.6 billion prescriptions dispensed by U.S. pharmacies in 2023. Pharmacies affiliated with the three largest PBMs now account for nearly 70 percent of all specialty drug revenue. The Interim Report asserts that the market power acquired through this vertical integration allows PBMs to steer customers toward PBM-associated pharmacies, allegedly causing damage to local businesses and consumers generally.

With respect to reimbursement rates, the Interim Report explains that PBMs exert substantial power over the pharmacy supply market, and that power is leveraged to create lopsided contracts with pharmacies to the benefit of PBM-affiliated heath care systems. The FTC further claims that PBM-affiliated pharmacies receive higher reimbursement rates from insurers compared to unaffiliated pharmacies. The agency asserts that this disparity results in substantial revenue to the PBM-affiliated pharmacies while patients experience higher out-of-pocket costs. The FTC highlighted rebate arrangements between PBMs and generic manufacturers as an anti-competitive concern. The Interim Report alleges inflated prices for insulin and cancer treatments.

Commissioner Melissa Holyoak dissented to the Interim Report, stating that the report lacks sufficient empirical evidence to support its claims regarding the market power of PBMs, and that the FTC needs to present more thorough economic analyses before making its claims.

Beyond federal regulation, state legislatures are also preparing bills that may significantly impact PBMs. The Pennsylvania legislature passed a bill regulating PBMs almost unanimously, with Gov. Josh Shapiro signing it into law on July 17, 2024. The legislation, inter alia, limits PBM patient steering, prohibits financial penalties for use of local pharmacies, orders a comprehensive study of PBM business practices, and establishes definitions for specialty drugs. Beyond Pennsylvania, members of the Arkansas legislature and the Arkansas Attorney General have publicly commented that PBMs are slowing prescription filling and inflating prices. New Jersey’s legislature issued a joint statement announcing investigation and legislation targeting PBMs, stating in part, “[r]egulating PBMs and their impact is an important initiative of the New Jersey Legislature.” California’s legislature is currently streamlining a bill targeting PBMs and to specifically prohibit “spread pricing.” Spread pricing is a tactic claimed to be used by PBMs to drive down the cost for medication that they pay to pharmacies but charging insured patients more than the PBM pays the pharmacy, resulting in pure profit. Massachusetts also has a pending bill meant to eliminate spread pricing.

Moving forward, the pharmaceutical industry should look for:

1. Regulators to increase focus and continue investigating methods used by PBMs to steer patients and prescriptions to pharmacies affiliated with PBMs.
2. Efforts to curtail spread pricing. A key bipartisan issue prompting investigation and regulation of PBMs is the amount of profits received by PBMs and their associated entities at the expense of patients. Spread pricing and similar pricing tactics will be a major point of focus for present and future developments.
3. Potential implementation of conflict-of-interest rules. To address vertical integration, regulators may impose conflict-of-interest rules to prohibit favoritism for PBM-affiliated pharmacies. Alternatively, regulators may create equal treatment requirements for supply contracts, particularly concerning the supply of generics.  
4. Potential additional state Attorney General actions. For example, Ohio Attorney General Dave Yost sued a group of PBMs in March 2023 for alleged price inflation of insulin products. That case is currently pending in the United States Court of Appeals for the Sixth Circuit. States may forego new legislation in favor of legal actions under existing antitrust consumer protection frameworks.

Two events will likely shape the future review and critique of PBMs. First, on July 23, 2024, PBM executives from CVS Caremark, Express Scripts, Inc., and OptumRx, Inc. will testify before the Congressional House Oversight Committee. Second, the FTC plans to file a civil lawsuit against at least CVS Caremark, Express Scripts, Inc., OptumRx, Inc., for PBM activity akin to that described in the Interim Report as applied to insulin products.

The recent attention on PBM regulation is comprehensive and widespread, with both federal and state policymakers making substantive progress on adjusting the existing framework. Buchanan’s experienced teams will continue to monitor these developments and provide informed guidance.