During the final days of President Joe Biden's administration, the Federal Trade Commission (FTC) issued its Second Interim Staff Report on Pharmacy Benefit Managers (PBMs), titled "Specialty Generic Drugs: A Growing Profit Center for Vertically Integrated Pharmacy Benefit Managers." The report details troubling practices by PBMs that have significantly increased prescription drug costs for employers, employees, and the healthcare system. By leveraging their control over specialty generic drugs, PBMs are generating substantial profits—often at the expense of Plan Sponsors and their members. The report follows the First Interim Staff Report on PBMs, titled "Report on Pharmacy Benefit Managers: The Powerful Middlemen Inflating Drug Costs and Squeezing Main Street Pharmacies." For a breakdown of the First Interim Staff Report, see Buchanan's commentary here. The First Interim Staff Report highlights issues with two specialty generic drugs: (1) generic Zytiga (abiraterone acetate), used to treat prostate cancer; and (2) generic Gleevec (imatinib mesylate), used to treat leukemia. The Second Interim Staff Report represents a significant expansion, using an analytical sample of 51 specialty drugs.
The FTC's reporting is a wake-up call for Plan Sponsors to critically evaluate their relationships with PBMs, ensuring that they are not unwittingly contributing to higher costs through opaque pricing structures, vertical integration, and self-serving practices. This article explores the FTC's findings, explains their implications, and outlines actionable strategies for Plan Sponsors to address these challenges.
Key Findings of the FTC Report
The FTC's Report highlights troubling practices by the Big 3 PBMs—CVS Caremark, Express Scripts, and OptumRx—regarding specialty generic drugs. One of the report's central findings is that PBMs imposed "markups of hundreds and thousands of percent on numerous specialty generic drugs dispensed at their affiliated pharmacies—including drugs used to treat cancer, HIV, and other serious diseases and conditions." Additionally, the report reveals that the Big 3 PBMs reimbursed their affiliated pharmacies at higher rates than unaffiliated pharmacies for nearly every specialty generic drug examined, further raising costs for plan sponsors.
The FTC also found that PBMs' dispensing patterns disproportionately favored their own pharmacies. A larger share of prescriptions for specialty generic drugs marked up more than $1,000 per prescription were filled by PBM-affiliated pharmacies compared to unaffiliated ones. These patterns suggest that PBMs may be steering highly profitable prescriptions to their own pharmacies while diverting patients away from independent or unaffiliated pharmacies, limiting competition and choice.
The financial impact of these practices is substantial. PBM-affiliated pharmacies generated over $7.3 billion in dispensing revenue above their estimated acquisition costs, as measured by the National Average Drug Acquisition Cost (NADAC), between 2017 and 2021. This excess revenue grew at a compound annual rate of 42% during the study period, with the top 10 specialty generic drugs accounting for $6.2 billion, or 85%, of the total.
The report also highlights how PBMs generate additional profits through spread pricing. Over the study period, the Big 3 PBMs earned an estimated $1.4 billion in spread pricing income by charging plan sponsors more than they reimbursed pharmacies for specialty generic drugs. Beyond these direct profits, the report notes that dispensing these drugs significantly contributes to the financial success of the PBMs' parent companies. Operating income from PBM-affiliated pharmacy dispensing accounted for 12% of the aggregated operating income reported by the parent healthcare conglomerates' business segments, which include their PBM and pharmacy operations, in 2021.
The financial burden on plan sponsors and patients has grown significantly as a result of these practices. In 2021 alone, plan sponsors paid $4.8 billion for specialty generic drugs, while patients incurred $297 million in cost-sharing. Between 2017 and 2021, payments by both plan sponsors and patients grew at compound annual rates of 21% for commercial claims and 14%-15% for Medicare Part D claims.
The report also examines how vertically integrated PBMs steer plan members to their own pharmacies, creating a closed-loop system that limits competition and allows them to manipulate pricing. This self-preferencing behavior exacerbates the cost burden on Plan Sponsors while limiting their ability to explore more cost-effective options. The lack of competition in the market for specialty generics also reduces incentives for PBMs to lower prices.
Transparency in PBM pricing practices—or the lack thereof—is another significant issue highlighted in the report. PBMs often inflate the acquisition costs of specialty generics, making it difficult for Plan Sponsors to determine whether they are being charged fair prices. This opacity not only obscures the true cost of drugs but also makes it challenging for Plan Sponsors to hold PBMs accountable. The report estimates that these practices have resulted in an additional $73 billion in costs to employers and consumers over the past decade.
In July 2024, only four of five FTC Commissioners voted to allow staff to issue the First Interim Staff Report. This time, the five Commissioners voted unanimously to allow staff to issue the Second Interim Staff Report. Commissioner Andrew Ferguson, whom President-elect Donald Trump has selected as his choice for Federal Trade Commission chair, issued a concurring statement. Commissioner Ferguson explained: "The Commission still has more work to do on this [study of PBMs]. I remain committed to bringing it to a conclusion, culminating in a final report." Expect the FTC's investigation into PBM practices to continue, and the possibility remains for future enforcement actions by the FTC against PBMs.
The findings in the Staff Report underscore the outsized role PBMs play in driving up costs for specialty generics while reaping significant profits at the expense of plan sponsors and patients alike. The report makes clear the urgent need for greater oversight and accountability in the PBM industry.
Implications for Plan Sponsors
The findings in the FTC report underscore several pressing concerns for Plan Sponsors managing prescription drug benefits. One major issue is the financial impact of inflated drug prices. With specialty drugs already representing a significant portion of healthcare costs, the added burden of inflated prices for specialty generics compounds the financial strain on health plans.
The lack of pricing transparency further complicates matters. When PBMs obscure the true costs of drugs and rebates, Plan Sponsors are left in the dark about whether they are paying reasonable prices or receiving appropriate value. This opacity hinders their ability to negotiate better terms or explore alternative options that could reduce costs.
The vertical integration of PBMs also creates inherent conflicts of interest. By controlling the entire supply chain—from pricing and distribution to dispensing—PBMs have a strong incentive to prioritize their profits over the financial well-being of the plan sponsor or its members. This misalignment of interests makes it difficult for Plan Sponsors to ensure that their health plans are working as intended.
Additionally, the legal and regulatory risks associated with PBM practices cannot be ignored. As the FTC and other regulatory bodies continue to scrutinize PBMs, Plan Sponsors may find themselves under pressure to demonstrate that they are actively managing their relationships with these intermediaries and protecting their members from unnecessary costs.
Strategies for Plan Sponsors to Address PBM Challenges
In light of the FTC's findings, Plan Sponsors must take proactive steps to address the challenges posed by PBM practices. One critical approach is to audit PBM contracts and claims data to uncover potential overcharges, inflated prices, or discrepancies in rebate payments. This process can provide valuable insights into whether PBMs are acting in the plan sponsor's best interest and where adjustments may be needed.
Renegotiating contracts with PBMs is another essential step. By pushing for terms that require greater transparency and accountability, Plan Sponsors can ensure that they have full visibility into pricing structures, rebates, and other financial arrangements. Contract terms should also prohibit practices such as self-preferencing and require PBMs to pass through savings to the health plan.
Fiduciary oversight is another tool that Plan Sponsors can leverage to align PBM practices with their interests. By requiring PBMs to act as fiduciaries, Plan Sponsors can hold them accountable for prioritizing the needs of the health plan and its members. While this may not eliminate all conflicts of interest, it can reduce some of the financial incentives that drive up costs.
Staying informed about trends in specialty drug pricing is equally important. Specialty generics represent a rapidly growing segment of the prescription drug market, and understanding how these trends impact health plan budgets can help Plan Sponsors make better decisions about their benefits design.
Finally, Plan Sponsors should be prepared to adapt to a changing regulatory environment. As policymakers and regulators continue to focus on PBMs, new compliance requirements and oversight measures may emerge. Staying ahead of these developments will be critical to minimizing risks and ensuring that health plans remain compliant with evolving standards.
Regulatory and Industry Developments
The FTC's report is part of a broader effort to address longstanding concerns about PBMs and their impact on the healthcare system. Increasing scrutiny from lawmakers, regulators, and industry stakeholders is likely to result in significant changes to how PBMs operate. These changes could include stricter rules on pricing transparency, enhanced reporting requirements, and potential litigation aimed at curbing unfair practices.
For Plan Sponsors, these developments present both challenges and opportunities. While new regulations may introduce additional compliance obligations, they could also provide leverage for Plan Sponsors to negotiate better terms and demand greater accountability from PBMs.
Conclusion
The FTC's Second Interim Staff Report on PBMs highlights the significant challenges that Plan Sponsors face in managing their prescription drug benefits. From inflated prices for specialty generics to opaque pricing structures and conflicts of interest, PBM practices are driving up costs and undermining transparency in the healthcare system.
For Plan Sponsors, these findings underscore the importance of taking proactive steps to protect their health plans and ensure that they are not being exploited by PBMs. By auditing contracts, renegotiating terms, and demanding greater transparency, Plan Sponsors can reduce costs and create a more equitable healthcare system for their members.
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