Federal efforts on drug pricing are increasingly focusing on the role of pharmacy benefit manager middlemen. A recently proposed Senate bill seeks to eliminate certain PBM practices, such as spread pricing and unfair claw backs from pharmacies, and require increased disclosure from PBMs in the name of improved transparency. On the enforcement side, the FTC ratcheted up its examination of PBM practices by launching an inquiry to gather information about PBM practices that have increasingly drawn scrutiny. Shortly thereafter, the FTC issued a separate enforcement policy statement outlining potential legal theories for pursuing certain PBM-manufacturer rebate agreements that allegedly foreclose competition from less expensive drugs. These and other actions are the latest signs of growing dissatisfaction at the federal and state level with the perceived effects of certain PBM practices on drug prices. We summarize these developments and provide key insights below.
The Pharmacy Benefit Manager Transparency Act of 2022
Introduced by Senators Chuck Grassley (R-Iowa) and Maria Cantwell (D-Wash), the Pharmacy Benefit Manager Transparency Act of 2022 seeks to prevent "unfair and deceptive acts or practices" as well as the "dissemination of false information" related to PBM services.1 The Act aims to address concerns by prohibiting certain conduct, creating exceptions that incentivize "fair and transparent" PBM practices, requiring specific annual reporting by PBMs, and directing the FTC to report to Congress on its enforcement of the Act.
Ban on spread pricing and unfair claw backs from pharmacies. The Act defines three types of conduct as unfair and deceptive acts and practices under the FTC Act. First, the Act prohibits spread pricing, the PBM practice of charging insurance plans and payers more for prescription drugs than what the PBM pays to pharmacies, with the PBM "retain[ing] the amount of any such difference." Second, the Act prohibits PBMs from "arbitrarily, unfairly, or deceptively" clawing back from pharmacies reimbursement payments. Third, the Act prohibits PBMs from "arbitrarily, unfairly, or deceptively" altering pharmacy reimbursement to "offset reimbursement changes instructed by the Federal Government" for any federally funded health plan. Spread pricing has garnered increased scrutiny from federal and state lawmakers who argue that the practice leads to higher health insurance premiums for consumers, while pharmacy supporters contend that arbitrary PBM claw backs may result in pharmacies dispensing below their acquisition cost.2
Exceptions to encourage rebate pass-through and transparency. The Act includes exceptions to encourage PBMs to pass through manufacturer rebates and disclose to payers and pharmacies information relating to costs and fees. Specifically, a PBM will not be in violation of the Act if it does not engage in spread pricing; that is to say, it "passes along or returns 100% of any price concession to a health plan or payer." Also, a PBM will not be in violation of the Act if it "provides full and complete disclosure" of certain information to payers and pharmacies, including "the cost, price and reimbursement" of the drug, "each fee, markup, and discount charged or imposed" by the PBM, and "the aggregate amount of all remuneration" the PBM receives from drug makers.
Reporting requirements and FTC enforcement. The Act adds reporting requirements in an effort to improve transparency. It requires PBMs to file with the FTC annual disclosures setting forth a range of financial information regarding spread pricing, claw backs, increases in charges affecting consumers, decreases in pharmacy payments, and differences in reimbursements to PBM-affiliated versus non-affiliated pharmacies. For example, the Act directs PBMs that own or control a pharmacy to disclose the "aggregate amount" of the both the "spread" retained by the PBM and any claw backs, as well as "any difference in reimbursement rates . . . between affiliated and non-affiliated pharmacies."3 The FTC, which is authorized (along with state attorneys general) to enforce the bill, would be required to report to Congress annually on enforcement efforts and the effect of certain PBM formulary design and drug placement decisions. The Act also prohibits the submission of false information regarding PBM services to the federal government and provides protections for whistleblowers.
Increased Congressional Interest in PBMs. Introduction of the Act follows several congressional efforts over the past year focusing on the impact of PBM actions on drug pricing. For example, as part of the Senate Committee on Commerce, Science, and Transportation's May 5, 2022 hearing on "Ensuring Fairness and Transparency in the Market for Prescription Drugs," lawmakers expressed concerns about the lack of competition in the PBM market, which, in their view, has led to increased costs for consumers and reduced consumer access to life-saving and life-managing drugs. In July 2021, the Prescription Pricing for the People Act of 2021 voted out of the Senate Judiciary Committee. The bill directs the FTC to study PBMs and submit a report addressing whether PBMs engage in spread pricing and self-preferencing (i.e., steering patients to PBM-owned or affiliated pharmacies).4
Republicans on the House Oversight and Reform Committee directly targeted PBMs as key industry players on drug pricing in a December 10, 2021 Minority Staff Report titled "Role of Pharmacy benefit Managers on Pharmaceutical Markets."5 That Report, issued after Ranking Member James Comer's (R-KY) November 17,, 2021 forum on the role of PBMs, concluded that PBMs drive up drug prices by leveraging their influence over manufacturers to force price concessions for popular prescription drugs. The Minority Report explained that manufacturers in turn must raise prices to pay these growing rebates, which PBMs largely retain rather than pass along to consumers.6 More recently on June 17, 2022, a group of House Republicans sent a letter to the GAO outlining the "central role" of PBMs in the pharmaceutical supply chain and asking the GAO to study the role of PBMs in commercial health plans, including the effect of formularies and rebate agreements on drug spending.7
The FTC Increases Scrutiny of PBMs and Launches Inquiry
Two developments in June 2022 highlight the FTC's increasing focus on PBMs. On June 7, the FTC announced a Section 6(b) inquiry into the PBM industry.8 The study will analyze vertically integrated PBMs and their impact on access to and affordability of prescription drugs. The FTC explained that it will seek information concerning the "competitive impact of the contracting and business practices" of PBMs, including practices that "have drawn scrutiny in recent years," such as the use of claw backs, steering patients to PBM-affiliated pharmacies, administrative restrictions on coverage (e.g., prior authorizations), and the effect of manufacturer rebates on formulary design and drugs costs.9 The FTC identified the six largest PBMs as initial targets for a set of 38 requests seeking a broad array of information and documents concerning each PBM's practices. This 6(b) inquiry follows the FTC's failed February 2022 effort to gain consensus on such a study (the Commission deadlocked 2-2) and subsequent request for public comment on the impact of PBM practices, which received over 23k comments.10
Shortly after announcing the 6(b) study, the FTC stated on June 16 that it will "ramp up enforcement against" certain manufacturer-PBM formulary agreements and issued an enforcement policy statement to put manufacturers and PBMs "on notice" as to what conduct will be in the FTC's crosshairs. The policy statement focuses on rebates and fees paid by manufacturers to PBMs in "exchange for excluding lower-cost drug products."11 According to the FTC, when formulary agreements "favor high-cost drugs that generate large rebates and fees that are not always shared with patients," they create the potential for misaligned incentives, increased costs to consumers, and reduced competition from generic and biosimilar drugs.12 The FTC asserted that formulary agreements that "foreclose competition from less expensive alternatives" may be unlawful restraints of trade (Sherman Act Section 1), unlawful monopolization (Sherman Act Section 2), or exclusive dealing (Clayton Act Section 3).13 Also, the FTC asserted that formulary agreements that exclude less expensive alternatives "in a manner that shifts costs to payer and patients," may be unlawful as an unfair method of competition or unfair act or practice (FTC Act Section 5), as well a violation of the Robinson-Patman Act's commercial bribery provision (Section 2(c)).14 Notably, this policy statement follows the FTC's August 5, 2021 solicitation for public comment on contract terms that may harm competition, which identified exclusive formulary positions by allegedly dominant drugs as an example of problematic conduct to be addressed through rulemaking, and the FTC's May 28, 2021 report on so-called "rebate wall" practices, which some have argued foreclose competition from less expensive drugs.15
These developments represent the latest in the FTC's longstanding effort to address a range of practices in the pharmaceutical system that may delay or suppress competition from competing drugs or otherwise affect the access and affordability of prescription drugs.16
Implications and Insights
These recent developments regarding PBMs are a strong reminder that the continuing efforts by legislators and enforcers to address drug pricing will likely not be limited to manufacturer conduct. Below are some of the key takeaways.
- Increased potential for federal legislation focused on PBM practices. The proposed Pharmacy Benefit Manager Transparency Act of 2022 in the Senate (with sponsors from both parties) and House Minority Report on the role of PBMs suggest that momentum may be building to address the impact that certain PBM practices have on the prices paid by consumers and health plans. The prospect for manufacturer-focused legislation, however, seems to have dipped, with the inability of Democrats to pass the Build Back Better Act or to make meaningful progress with a slimmed down alternative.
- Uncertainty regarding a number of PBM practices. The FTC's 6(b) inquiry reflects a keen interest at the FTC in understanding the PBM industry in more detail and its often "enormous influence" on the prescribing decisions of doctors, the pharmacies consumers can use, and the costs consumers pay out of pocket costs.17 While the inquiry is not part of a specific enforcement action, the focus on practices that have "drawn scrutiny in recent years" strongly suggests PBMs should evaluate these practices for compliance with existing laws and regulations, and should be prepared to address the FTC's efforts at rulemaking, a pathway the current Commission has been discussing favorably.
- Careful analysis of formulary agreements required. The FTC's enforcement statement puts the industry "on notice" that formulary agreements that foreclose less expensive alternatives may give rise to antitrust concerns. The FTC's claimed legal theories for possible enforcement actions are broad enough to sweep in PBMs as well as manufacturers. PBMs and manufacturers should take steps to review their current practices, identify areas of potential concern under the FTC's new enforcement statement, and develop appropriate compliance strategies to minimize risk.
- Potential uptick in private and state actions. Competitors and private plaintiffs have been increasingly willing to challenge certain formulary agreements (and related conduct) as exclusionary. The FTC's enforcement policy statement may spur the filing of even more private actions.18 State enforcers also may follow the FTC's lead and take a harder look at the need for enforcement actions under state law.
- Continuing increase in complexity underscores importance of compliance efforts. In addition to federal developments, the PBM industry should continue to pay close attention to the expanding set of state laws affecting PBMs in order to manage compliance, minimize risks and government scrutiny, and avoid fines and penalties.19
White & Case's Global Competition/Antitrust Group and the White & Case Pharmaceuticals & Healthcare Industry Group are tracking these developments closely, with a specific focus on potential investigations and litigation.
1 Pharmacy Benefit Manager Transparency Act of 2022. S. 4293, 117 Cong. § 2(a)(1) (2022).
2 FTC Launches Inquiry Into Prescription Drug Middlemen Industry, FED. TRADE COMM'N (June 7, 2022)
3 Pharmacy Benefit Manager Transparency Act of 2022. S. 4293, 117 Cong. § 2(a)(1) (2022).
4 Pricing for the People Act S. 1388, 117 Cong. (2021).
5 A view from Congress: Role of Pharmacy benefit Managers on Pharmaceutical Markets, HOUSE COMM. ON OVERSIGHT AND REFORM MINORITY STAFF (Dec. 10, 2021)
6 Id.; see also Michael Gallagher et al., Drug Pricing Issues to Watch in 2022, WHITE & CASE (Jan. 28, 2022)
7 See Ed Silverman, Lawmakers ask GAO to probe pharmacy benefit managers over their role in drug pricing, STAT+ (June 17, 2022)
8 FTC Matter No. P221200, June 6, 2022; see also FTC Launches Inquiry Into Prescription Drug Middlemen Industry, FED. TRADE COMM'N (June 7, 2022), Section 6(b) of the FTC Act authorizes the FTC to seek documents and data without a specific law enforcement purpose.
9 Id.; FTC Launches Inquiry Into Prescription Drug Middlemen Industry, FED. TRADE COMM'N (June 7, 2022)
10 FTC Launches Inquiry Into Prescription Drug Middlemen Industry, FED. TRADE COMM'N (June 7, 2022)
11 Federal Trade Commission, Policy Statement of the Federal Trade Commission on Rebates and Fees in Exchange for
Excluding Lower-Cost Drug Products at 1 (June 16, 2022).
13 Id. at 5.
15 Solicitation for Public Comment, FED. TRADE COMM'N (Aug. 5, 2021); Report on Rebate Walls, FED. TRADE COMM'N (May 28, 2021)
16 See also, Michael Gallagher et al., Drug Pricing Issues to Watch in 2022, WHITE & CASE (Jan. 28, 2022)
17 FTC Launches Inquiry Into Prescription Drug Middlemen Industry, FED. TRADE COMM'N (June 7, 2022)
18 Michael Gallagher et al., Drug Pricing Issues to Watch in 2022, WHITE & CASE (Jan. 28, 2022)
19 Michael Gallagher & Kevin C. Adam, Growing Web of State Drug Pricing Legislation Increases Challenges for Pharmaceutical Manufacturers and other Industry Participants, WHITE & CASE (May 19, 2020)
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