The Federal Trade Commission in October brought its long-anticipated lawsuit against the nation’s three biggest Pharmaceutical Benefit Managers (PBMs) — Caremark Rx, Express Scripts and OptumRx, which collectively manage 80 percent of all American drug prescriptions. PBMs are intermediaries that determine what drugs are covered under health insurance formularies and negotiate drug purchases with drugmakers and pharmacies on behalf of these plans.
The complaint alleges the three PBMs engaged in an illegal “unfair method of competition” by accepting rebates from drugmakers to cover more expensive branded insulin medications while excluding cheaper substitutes from coverage.
Since rebates to PBMs are typically based on a percentage of a drug’s list price, the agency claims that the PBMs negotiating higher rebates encouraged drugmakers to inflate the list prices of their products to deliver higher rebates and secure favorable placement on insurance formularies, thereby shifting costs to diabetics while discouraging cheaper substitute medications. They blame rebate negotiations for a twelvefold spike in the list price of drugmaker Eli Lilly’s branded insulin product between 1999 and 2017.
The FTC is rightly concerned about vulnerable patients and high drug prices. However, a various factors have drastically driven up insulin prices independent of PBMs. Singling out drug rebates could significantly raise insurance premiums and patients’ costs by curbing rather than upholding competition.
It’s also likely to fail as a matter of antitrust law. Courts have consistently held that the FTC act’s prohibition of “unfair methods of competition” extends only to business conduct that violates the spirit, letter or public policy of the Clayton or Sherman antitrust acts —including unlawful monopolization and unreasonable restraints of trade or conduct that would likely violate those laws if allowed to continue. However, the FTC complaint cites no actual or potential violations of those acts.
Courts also won’t deem something an “unfair method of competition” just because it leads to higher prices for some patients while disadvantaging some drugmakers against others. In order to make its case, the FTC has to prove these negotiations have nothing to do with competing on merit and that they don’t benefit competition and consumers.
They’ll have a hard time there. PBMs’ main goal is to maximize savings for health plans. The combined negotiating power from pooling together patients across multiple insurance plans lets them secure large rebates from drugmakers, offsetting drugs’ list prices and coverage premiums — a clear benefit.
The Congressional Budget Office recently found that forcing PBMs to pass drugmakers’ rebates directly to patients at the point of sale would lower drug discounts and increase costs to taxpayer-funded Medicaid and Medicare programs by $7 billion and $170 billion over a decade. The results could be worse if negotiating rebates for listings was itself proscribed as an “unfair method of competition.” CVS and Express Scripts report that 90 percent of the rebates they negotiate are passed to private plan sponsors, and PBMs servicing the Medicare Part D program passed 99 percent of rebates back to taxpayers.
Competing to secure formulary listings also incentivizes drugmakers to create cures, which typically entail billions in research and development and regulatory approval costs. This is especially pertinent for new insulin variants that are suitable or ideal for different diabetics.
If the FTC was interested in making these drugs more affordable for consumers, it should be scrutinizing the FDA’s high approval costs, which increased from $523 million (in 2019 dollars) per new drug in 1987 to $3.2 billion in 2013. This growth in government regulation has stifled competition without necessarily making patients safer.
Other contributors to the spike in insulin prices include sales restrictions. Unlike Canadians and Singaporeans, American diabetics need a prescription each time they buy many types of insulin. The FDA also prohibits U.S. residents from importing more than a 30-day supply of cheaper foreign insulin. Removing these restrictions would boost competition and lower prices.
Finally, the list prices of patented insulin medications have been inflated by legal restrictions on Medicare and Medicaid’s ability to negotiate lower drug prices. Except for Medicare Part D and unlike other developed nations’ public insurers, Medicare and Medicaid must respectively pay the average and lowest price paid by private insurers and patients for the same patented drugs for each government purchase. This means that drugmakers can inflate the prices they charge to private insurance plans, which reduces revenue from insurance to maximize overall profits through public purchasers. Despite foregoing sales, this approach significantly increases the price of every drug that Medicare and Medicaid purchase, often without these public agencies lowering their purchase volumes. As a result, taxpayers and private plans pay more per drug while increasing plan beneficiaries’ out-of-pocket costs. Ironically, these costs are reduced by the rebates PBMs negotiate for drugs.
Insurance plans began enlisting or integrating with PBMs to negotiate drug prices due to a complex and costly regulatory system that stifles competition and increases costs for taxpayers and patients. Boosting competition and helping vulnerable diabetics means more competition and less government intervention. In targeting drug rebates, the FTC misses the mark on both.