On September 20, the Federal Trade Commission (FTC) brought an action under Section 5 of the FTC Act against three of the largest pharmacy benefit managers (PBMs)—Caremark Rx, Express Scripts and OptumRX—and their affiliated group purchasing organizations, alleging that they have engaged in “anticompetitive and unfair” rebating practices that increase insulin prices for patients.
PBMs manage prescription drug plans for health insurance programs and serve as intermediaries among pharmacies, employers, and drug manufacturers. They often negotiate with drug manufacturers over drug rebates—the price a drugmaker pays the PBM in exchange for having its drug included in the PBM’s list of insurance-covered prescription drugs (the “formulary”).
FTC Scrutiny of PBMs
Earlier this year, the agency published an interim report on its multi-year study of PBMs.[1] The interim report described a space with increasing vertical integration and concentration and alleged that PBMs engage in self-preferencing to the detriment of independent pharmacies, impose “unfair, arbitrary and harmful contracting terms,” and engage in “unfair” rebating practices.
The interim report has drawn criticism from within and outside the agency. Commissioner Melissa Holyoak dissented from its issuance, asserting that the interim report lacks rigorous economic analysis, fails to engage with or explain the discrepancy between its findings and those of the FTC’s 2005 report on PBMs, and omits an examination of how PBM practices affect consumer prices. Although Commissioner Andrew Ferguson voted to issue the interim report, his concurring opinion criticized its reliance not on empirical analysis and data but instead on case studies and public comments, many of which were submitted anonymously.
In an unusual move, one subject of the interim report, Express Scripts, filed a lawsuit on September 17 against FTC Chair Lina Khan. The lawsuit alleges that the interim report violated Express Script’s due process rights, that the FTC acted beyond its statutory authority, and that the FTC made defamatory statements against Express Scripts. Express Scripts seeks an order vacating and setting aside the interim report and requiring the FTC to remove the interim report from its website. The lawsuit also seeks an injunction requiring Chair Khan’s recusal from FTC actions pertaining to Express Scripts.
Novel Application of Section 5 of the FTC Act
This challenge is the first standalone contested enforcement action actions brought under the FTC’s Section 5 authority following the FTC’s November 2022 Section 5 Policy Statement,[2] which sought to reinvigorate FTC’s Section 5 enforcement. Section 5 of the FTC Act prohibits “unfair methods of competition,” which Congress did not define when it promulgated the FTC Act in 1914, but historically has been construed to include traditional antitrust law violations along with invitations to collude. The Policy Statement reflected current FTC leadership’s intent to use Section 5 to challenge a far broader range of conduct that it deems to be “unfair”—that is, “coercive, exploitative, collusive, abusive, deceptive, predatory, or involve[s] the use of economic power of a similar nature.”
The FTC’s 45-page administrative complaint alleges that Caremark Rx, Express Scripts, and OptumRX together administer approximately 80 percent of all prescriptions in the United States and therefore possess market power. The complaint further alleges that the PBMs have become “gatekeepers” that are “[p]ositioned at the center of the intricate and opaque pharmaceutical distribution chain” and use their market position to create and maintain a “perverse drug rebate system that prioritizes high rebates from drug manufacturers, leading to artificially inflated insulin list prices.”
The complaint further alleges that the PBM defendants:
- developed practices designed to “increase their leverage—and thus their profits—in negotiations with manufacturers.” The three largest PBMs allegedly have used their “gatekeeper” status to extract favorable terms and increasingly high rebates from insulin manufacturers that require access to PBM formularies to effectively sell insulin. The FTC alleges that insulin manufacturers increased their list prices to offset the increasingly high rebates offered to PBMs.
- exclude lower list price insulins from formularies. Even when lower list price insulins became available, the complaint alleges that the PBMs exclude them from flagship commercial formularies in favor of identical “high price, highly rebated insulins.”
- deliberately allow burdens of inflated insulin prices to fall on certain patient groups. According to the complaint, the defendant PBMs “knowingly engage in, and incentivize conduct that causes certain patients to bear the burden of artificially inflated drug prices.”
The FTC alleges that this conduct has harmed and continues to harm consumers (who are paying higher prices for life-saving medication) and has “flipped healthy price competition on its head” (favoring high rather than low list prices). The complaint requests injunctive relief including prohibiting PBMs from: (i) excluding lower cost versions of higher priced drugs already offered on its formulary, (ii) basing fees and other compensation on a drug’s list price, and (iii) designing benefit plans that base deductibles or coinsurance on drugs’ list prices (as opposed to net cost after rebates). This is the first standalone Section 5 lawsuit likely to be litigated under Section 5, and the FTC’s action is based on untested theories of harm. The ultimate prospects of success in court—and how any remedies if granted, are implemented in practice—remain to be seen.
In a statement on the complaint, Deputy Director for the Bureau of Competition Rahul Rao said the lawsuit is the result of the “wide-ranging investigation into the distortions in the pharmaceutical distribution chain” and warned that “that the Bureau of Competition reserves the right to recommend naming drug manufacturers as defendants in any future enforcement actions over similar conduct.” The FTC’s announcement similarly notes that “PBMs are not the only potentially culpable actors.”
The FTC’s suit is a continuation of the agency’s heightened scrutiny of the life sciences sector with respect to both pricing-related conduct and strategic transactions. We expect this scrutiny to continue in the coming years, given that both enforcers and politicians have signaled a commitment to lower the price of prescription drugs. The lawsuit confirms that antitrust authorities are keeping close watch on all levels of the industry to achieve this goal.
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[1] The Study was launched in June 2022 under Section 6(b) of the FTC Act, to the six largest PBMs—Caremark Rx, LLC; Express Scripts, Inc.; OptumRx, Inc.; Humana Pharmacy Solutions, Inc.; Prime Therapeutics LLC; and MedImpact Healthcare Systems, Inc. In May 2023, the FTC issued additional orders to Zinc Health Services, LLC, Ascent Health Services, LLC, and Emisar Pharma Services LLC, which are each rebate aggregating entities, also known as “group purchasing organizations,” that negotiate drug rebates on behalf of PBMs.
[2] Following the Policy Statement, the FTC has entered into negotiated consents in relation to non-competes under its Section 5 authority.
