Federal Trade Commission Sues Big Three Pharmaceutical Benefits Managers

A commentary in My Forbes published yesterday highlighted a July 2024 interim staff report from the Federal Trade Commission that was critical of pharmaceutical benefit managers, “middleman” companies that specialize in negotiating with drugmakers for discounts on drug list prices . I explained that the interim report’s analysis was inconsistent with economic research that identified significant economic benefits to the PBM system.

This commentary focuses on an assessment of the FTC’s September 2024 lawsuit against three major PBMs. The lawsuit is weak and economically problematic.

Background On The Suit

In a September 20 press release, the FTC announced a legal challenge to the practices of the “Big Three” PBMs:

“Today, the Federal Trade Commission filed suit against three of the largest prescription drug benefit managers (PBMs) – Caremark Rx, Express Scripts (ESI), and OptumRx – and their related group purchasing organizations (GPOs) for engaging in anticompetitive and unfair “discount practices that artificially inflated list prices of insulin drugs, made it difficult for patients to access products with lower list prices, and passed on the costs of high list prices of insulin to vulnerable patients.”

In a nutshell, the FTC found that discounting practices by the “Big Three” PBMs caused the price of Humalog, Eli Lilly’s brand new insulin drug, to increase by 1,200% between 1999 and 2017. These activities allegedly constituted illegal “unfair methods of competition” (an antitrust concern) and “unfair acts or practices” (a consumer protection concern) that violated Section 5 of the FTC Act.

The FTC’s legal complaint in this case will be heard by an internal FTC administrative law judge, whose preliminary findings may be reviewed by the FTC. If history is any indication, the FTC’s decision will almost certainly uphold the legal challenge. The FTC’s actions are subject to, and most likely will be, appealed to the U.S. federal Court of Appeals.

The FTC’s case is weak from a legal perspective

The Sherman and Clayton Antitrust Acts, which prohibit monopolization and anticompetitive agreements between companies, do not apply. No big PBM (Big 3). Together has 80% of the PBM market) is a monopoly, and the FTC does not accuse large PBMs of any anti-competitive agreements.

To its credit, the courts have found that Section 5 of the FTC Act’s prohibition on “unfair methods of competition” goes somewhat beyond the Sherman and Clayton Acts. Nevertheless, it is questionable whether simply favoring higher-priced formulary drugs over cheaper ones – which is at the heart of the PBM issue – would be seen as a form of problematic competition under the control of federal judges. (There are no federal court findings to support this result.)

The FTC also accuses PBMs of committing “unfair acts or practices” in violation of Section 5 by withdrawing cheaper insulin drugs from their formularies and targeting those consumers who face high, no-discount list prices for certain insulin products.

However, section 5(a) n) of the FTC Act provides that the prohibition on “unfair conduct” applies only when the harm to consumers is not outweighed by offsetting benefits to consumers or competition. PBM members would have a strong argument that the procompetitive benefits of the formulary system, summarized in yesterday’s commentary, actually outweigh the harms to some insulin consumers.

The FTC’s remedy is economically harmful

Finally, the FTC’s proposed remedies for the violations it alleges strike at the heart of the PBM rebate system. Specifically, the FTC would prevent large PBMs from accepting rebates based on a specific price benchmark. This would allow PBMs to micromanage decisions about drugs placed on prescriptions. It would also prevent PBMs from basing patient deductibles or coinsurance on a drug’s list price rather than its net cost after rebates.

The FTC’s solution would replace government regulation with PBM decision-making. Doing so would wreak havoc on a system that has provided enormous benefits to the American economy. The long-term losers would likely be both consumers and businesses.

The FTC should drop the PBM lawsuit

The FTC should vote to withdraw its complaint against major PBMs from administrative proceedings. This complaint is vitiated by serious legal flaws. Most importantly, it poses a threat to the economically beneficial PBM model.

Admittedly, there are legitimate concerns about the excessive costs of the U.S. health care system, especially high drug prices for consumers. However, the government should seek to address this problem through economically effective measures that do not distort markets.

A good step forward would be comprehensive, pro-competitive regulatory reform of the US healthcare system. Furthermore, specific countermeasures, such as targeted payments to poorer drug consumers, may need to be considered.

However, a bureaucratically-led legal attack on welfare-enhancing PBMs must be avoided at all costs.