Health care update (PBMs) | Meridian Research Group

Recent/upcoming developments… The FTC unanimously approved the release of its second interim report on PBMs. As a reminder, that report (and its predecessor) stem from the agency’s Section 6(b) study into the alleged anticompetitive practices of industry.

* As a reminder, the first interim report offered a broad overview of the PBM industry’s structure and its potential impact on drug accessibility and affordability, emphasizing concerns around the highly concentrated nature of the PBM market and the vertical integration of PBMs with pharmacies.

* In contrast, the second interim report provides a focused analysis of practices by major PBMs that allegedly result in markups on specialty generic drugs. According to the FTC’s research, between 2017 and 2021 the three largest PBMs (CVS Caremark, Express Scripts, OptumRx) applied significant markups on specialty generic drugs (up to 1,000%), with most of these drugs dispensed through pharmacies affiliated with the PBMs. The report finds that these affiliated pharmacies generated >$7b in revenue above the National Average Drug Acquisition Cost (NADAC) for the specialty generics analyzed, while independent pharmacies often received lower reimbursements for the same medications. It also suggests that plan sponsor and patient spending on these drugs increased over time because of spread pricing and efforts by the PBMs to steering patients to affiliated pharmacies.

Our outlook… The approval of the report – including by Commissioner Ferguson, Trump’s nominee to Chair the FTC – suggests the agency is unlikely to let up on its scrutiny of PBMs in 2025+. However, we continue to have doubts as to whether that scrutiny can manifest in enforcement actions that are “winnable” by the FTC. As previously noted, the FTC’s lawsuit regarding PBM practices around insulin has deficiencies and this latest report outlines a variety of conduct that largely – but not entirely – could be characterized as unsavory but lawful. That said, some of the allegations could give rise to future legal action, specifically relating to price discrimination and patient steering (though those also carry their own deficiencies). We believe the difficulties associated with bringing a case are highlighted by the fact that the second report (unlike the first) does not specifically suggest antitrust laws have been broken. Rather, the report’s conclusion encourages Congress to enact new regulations on PBMs, possibly suggesting the FTC views Congress as best positioned to constrain industry. With respect to Congress, we expect the bipartisan push to enact PBM reforms to resume this year and the FTC’s report is likely to increase the visibility of that effort. At this stage, it remains our expectation that the reforms likely to be enacted will primarily focus on public-payer programs (i.e., Medicaid spread pricing ban, Medicare delinking) rather than commercial plans (though there are new indications of interest in the commercial space).

* Much of the conduct outlined in the second interim report appears more geared toward making PBMs look unscrupulous as opposed to anticompetitive. However, there are two specific allegations that could form the basis of an enforcement action. The first is price discrimination, whereby PBMs pay their affiliated pharmacies more for a drug than is paid to unaffiliated/independent pharmacies. This could theoretically give rise to a Robinson-Patman Act (RPA) lawsuit, which bars “pricing” that preferences one purchaser over another. However, there may be deficiencies with such a case, as the long-dormant RPA has generally been used in the context of commodity products, PBMs are technically third-parties reimbursors rather than sellers, and historically the RPA has focused on unlawful discounting. Moreover, while Ferguson has expressed interest in reviving RPA enforcement, he recently voted against bringing such a case (Southern Glazer) on the basis that the FTC failed to show discriminatory pricing led to consumers shifting from one seller to another. The same problem would likely be present in an RPA case against the PBMs given that consumers are largely detached from pharmacy reimbursement matters (and therefore are unlikely to shift from a lower paid pharmacy to a higher paid pharmacy).

* The second possible cause of action outlined in the report relates to patient steering. The report hypothesizes, but does not confirm with evidence, that – with respect to high-dollar specialty prescriptions – PBMs “may be steering these prescriptions to their own aﬃliated pharmacies and away from unaﬃliated pharmacies.” Such an allegation, if backed up with evidence, could give rise to an FTC Act Section 5 “unfair methods of competition” lawsuit. However, as previously noted, dating back to the 1970’s, the FTC has regularly lost its standalone Section 5 cases because courts have (1) shown skepticism toward attempts to extend Section 5 liability under a subjective definition of “unfair,” (2) rejected theories of Section 5 liability that would allow the FTC to enforce non-economic societal or political preferences, and (3) rejected attempts to hold conduct liable under Section 5 that would fail under Sherman Act and Clayton Act caselaw or could not be viewed as incipient violations of either law. And the skepticism of the courts may be even more acute now in the post–Chevron world. It is this skepticism which prompted the FTC to largely abandon standalone Section 5 cases for ~three decades and instead only assert Section 5 charges to the degree the conduct in question also raised concerns under the Sherman or Clayton Acts (i.e., price fixing, tying arrangements, exclusive dealing, invitations to collude, monopolization) – none of which appear present here.

* On the legislative front, lawmakers came close to enacting PBM reforms late last year as part of the FY25 continuing resolution (CR) legislation, though that effort fell apart over unrelated disagreements over the scope of the broader bill. Key lawmakers (i.e., Crapo, Guthrie) have signaled they are working to get such reforms included in the full-year FY25 appropriations legislation which must be enacted by March 14. Our base case is that these reforms will include market-wide transparency requirements, a ban on Medicaid spread pricing, and the delinking of PBM compensation from drug prices in the Medicare program (all of which have strong bipartisan support and have various passed key committees in the Senate and the full House). It has long been the case that lawmakers have been reluctant to impose PBM reforms on the commercial market, however, given pushback from large employers and concerns around the impact on premiums. However, some commercial market reforms (i.e., rebate pass-through) were unexpectedly included in the failed CR, suggesting some degree of interest amongst leadership in more aggressive reforms. At this stage, however, we view that commercial market proposal to be an outlier and potentially the result of political horse-trading as opposed to a signal of broad support.

Watch for these developments… Once Ferguson takes the helm as FTC Chair, we are watching for his statements as to the issues the agency intends to prioritize and whether he believes there is a colorable case against PBMs, as this will clarify the willingness of the FTC under Republican leadership to pursue enforcement action against industry. Comments from key Republicans (i.e., House and Senate Antitrust Subcommittee Chairs Fitzgerald (R-WI) and Lee (R-UT)) supportive of the FTC moving ahead with enforcement will also increase the pressure on the FTC to act. On the legislative front, we are watching for the emergence of debate (particularly amongst Republicans) around whether substantive commercial market reforms (beyond transparency) should be included in the FY25 appropriations bill, as this would suggest there is potentially less concern than has previously been the case regarding the follow-on consequences of enacting reforms in the commercial market.