Lina Khan, chair of the Federal Trade Commission, has led a two-year long inquiry into the business … [+]
As Lina Khan, chair of the Federal Trade Commission, concludes her term this week, her agency released a second report within six months that criticizes the pharmacy benefit manager (PBM) industry. The FTC specifically accuses PBMs of inflating prices for specialty generic medications well above their acquisition costs, and then directing reimbursements towards their affiliated pharmacies. Khan argues that this practice results in increased pharmaceutical costs and higher out-of-pocket expenses for patients. Additionally, President-elect Trump recently reiterated his criticism of PBMs, referring to them as “rich as hell” and accusing them of driving up prescription drug prices. Despite bipartisan support, the absence of pharmaceutical pricing reforms involving PBMs in the year-end continuing resolution may signal political division among lawmakers in 2025, highlighting the challenges of overcoming the deadlock.
For the average person, the acronym PBM holds little meaning. However, PBMs play a crucial role as intermediaries in the complex and often opaque U.S. pharmaceutical distribution system. The prescription drug benefits of most Americans, which involves pharmaceutical care, are managed by a PBM. In fact, around 275 million Americans have their prescription drug benefits managed by PBMs.
Following a series of recent mergers and acquisitions, the top PBMs are now part of larger healthcare conglomerates that include health insurers, pharmacies, and healthcare provider services. The three largest PBMs, controlling 80% of the U.S. prescription drug market, are OptumRx, Express Scripts, and CVS Caremark. Due to their size and vertical integration, which consolidates various entities in the drug supply chain into one conglomerate, PBMs have significant control over the availability, pricing, and access to prescription drugs for patients.
The FTC’s analysis of 51 specialty generic drugs dispensed through commercial health plans and Medicare’s Part D prescription drug plans, overseen by the top three PBMs, revealed that from 2017 to 2022, PBMs inflated prices well above their acquisition costs, generating over $7.3 billion in revenue. Additionally, PBMs reimbursed their affiliated pharmacies at higher rates than unaffiliated pharmacies.
These high markups were observed in medications for HIV, hepatitis, cancer, multiple sclerosis, and other conditions. Examples of drugs with significant markups include imatinib (Gleevec) for chronic myeloid leukemia and lamivudine (Epivir) for HIV patients.
Furthermore, the three largest PBMs earned an additional $1.4 billion over the study period from spread pricing, a practice where health plans and employers are billed more than what pharmacies are reimbursed for dispensing specialty drugs.
The report was released with a unanimous 5-0 vote by the FTC staff, which includes Andrew Ferguson, Khan’s designated successor appointed by Trump.
These two FTC reports mark the culmination of an inquiry that began in June 2022. In a previous interim report released last summer, the agency highlighted PBMs’ undue influence on independent pharmacies and alleged that the top three PBMs used tactics to steer patients towards more expensive drugs.
A major focus of policy debates has been on the impact of rebates in driving up list prices and subsequent patient cost-sharing. Rebates are payments made by drug manufacturers to PBMs in exchange for increasing market share for preferred products on the formulary. These rebates are not directly passed on to patients at the pharmacy counter, leading to higher out-of-pocket costs for patients based on list prices rather than net prices.
Despite the financial benefits of rebates for PBMs, health plans, and employers, patients do not directly benefit from them. PBMs defend their role as crucial intermediaries working to lower net prescription drug costs for health plans and employers by negotiating with drug manufacturers and managing pharmacy benefits. UnitedHealth’s OptumRx claimed that this approach helped eligible patients save $1.3 billion in out-of-pocket costs.
Moreover, the PBM trade group, the Pharmaceutical Care Management Association, supports PBMs’ use of their specialty pharmacies, arguing that they are more cost-effective than other pharmacies.
Ultimately, PBMs have historically shifted blame to the pharmaceutical industry for high drug costs, emphasizing the essential role PBMs play in the healthcare system.
In response to the FTC report issued in the summer, the PCMA criticized the Commission’s analysis for “falling far short of being a definitive, fact-based assessment of PBMs or the prescription drug market.”
Over the past six years, PBMs have faced ongoing scrutiny from various entities at the federal level, including the executive branch, Congress, the FTC, and the media, regarding their alleged impact on raising patient out-of-pocket costs and affecting independent pharmacies. Despite this intense scrutiny and debate, there has been little concrete action taken to regulate PBMs. Even with President Trump’s criticism of PBMs and executive orders aimed at curbing their practices, there was minimal change in the industry during his first term, as the FTC allowed consolidation to occur in the late 2010s.
There is hope for change now, as bipartisan bills in Congress and statements from Trump indicate potential reform in the future. Legislation introduced in December aims to bar companies that own PBMs and health insurers from also owning pharmacy businesses. However, there has been a pattern of inertia in enacting significant changes. The removal of legislation from the continuing resolution last year that would have implemented immediate PBM reforms highlights a lack of urgency among certain lawmakers to prioritize policy changes. Reforms such as delinking PBM revenue from drug list prices in Medicare, limiting rebate incentives that influence PBM decisions on drug choices, and enforcing transparency requirements for PBMs to report drug pricing to Medicare are still pending approval as standalone bills.
