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FTC Probe Into Rx Middlemen May Spark Industry Shakeup

Concerns that pharmaceutical middlemen inflate drug prices and harm patients have led the Federal Trade Commission to launch a probe into the largely unregulated industry, and legal experts say the move could unwind long-settled mergers and open companies up to prosecution.

The FTC said Tuesday that it has launched a probe of so-called pharmacy benefit managers, ordering the six largest companies in the industry — UnitedHealth Group Inc.'s OptumRx, Aetna/CVS Health Corp.'s Caremark, Cigna Corp.'s Express Scripts, Humana Inc., Prime Therapeutics LLC and MedImpact Healthcare Systems Inc. — to hand over business records to help the agency determine their impact on affordability and access to prescription drugs.

Over the last two decades, a wave of mergers and acquisitions has consolidated the number of pharmacy benefit managers, middlemen known as PBMs that negotiate rebates from drugmakers and develop lists of prescription drugs that health insurers will cover. These consolidations have prompted antitrust concerns from regulators, lawmakers, physicians and consumers who worry patients are having to pay more than they should or are unfairly being denied treatments they need.

The FTC probe will be looking at the generally undisclosed and unregulated rebates that drug manufacturers pay PBMs in exchange for having their products put on the list of drugs that an insurer will cover. The FTC will also be looking at the impact of those rebates on the cost of prescription drugs for payers and patients.

The agency has said it will also be investigating additional business practices in the PBM industry, including potential clawbacks charged by PBMs to unaffiliated pharmacies, reports of steering patients to PBM-owned pharmacies, and the PBM industry practice of requiring health care providers to obtain prior authorization for patient treatments.

Experts told Law360 that depending on its findings, the FTC study could precipitate big changes in the industry.

The FTC "certainly could go and unwind mergers that have been consummated," David Balto, a Washington D.C.-based public interest and antitrust lawyer who formerly served as an FTC policy director, told Law360. He noted that there is no statute of limitations for the agency to challenge a merger under Section 7 of the Clayton Act.

If the FTC agrees that drug manufacturer rebates paid to PBMs are indeed driving up prescription drug prices, Balto said the FTC could eliminate the Anti-Kickback Statute's safe harbors, which protect certain business practices from prosecution. Or, Balto said, the agency could create regulations that require rebates to be passed on to consumers.

But before any of that comes to pass, PBMs will first have to show the FTC the cards they have long kept close to the vest.

Harvard economist Leemore S. Dafny, who previously served as the FTC's deputy director for health care and antitrust, said the probe means PBMs should expect substantial data requests from the agency.

Dafny, who has studied the impact of PBM rebates on drug prices, told Law360 that the study will shed light on "how PBMs influence drug utilization and retail distribution, whether and how this differs for vertically integrated medical/pharmacy plans, and what incentives there are or aren't for PBMs to contain drug prices."

Michael A. Carrier, a professor at Rutgers Law School who studies antitrust law and the pharmaceutical industry, told Law360 that more information on whether rebates and other fees are passed on to consumers would be helpful.

PBMs, he said, could also have conflicts of interest if they are steering patients to their in-house pharmacies and away from independent pharmacies.

By gathering more information on these practices, the FTC could help reduce drug prices and protect patients, Carrier said.

PBMs have been a major focus of the FTC, with agency Chair Lina Khan issuing a request for public comment in February on the ways that large, vertically integrated PBMs are affecting drug affordability and access.

Among the 24,000 public comments received by the FTC were some from health care providers describing how a highly consolidated PBM industry is interfering with patient care.

Barrier to Treatment?

Physicians writing to the FTC warned that PBMs' control of the market is forcing them to choose what they deem to be inferior care for their patients.

PBMs "have become the barrier, forcing me to choose treatments that are not in the best interest of the patient," Dr. Grace C. Wright, a rheumatologist based in New York, told the FTC in a comment letter in April.

Wright said in some cases her patients have had to take drugs that could make their condition worse because their PBM did not grant access to the treatment they needed.

Dr. Rebecca M. Shepherd, a rheumatologist based in Pennsylvania, wrote that she has had similar experiences with PBMs. She told the FTC in her April public comment that PBMs have asked her to use "outdated and irrational step therapies" — that require the most cost-effective drug therapy be tried first — even if it could lead to a worse patient outcome.

Shepherd said she recently had a 26-year-old male patient with an autoimmune disease be denied an FDA-approved drug with proven efficacy for his ailment.

Instead, the PBM approved daily injections of two other drugs — one that has a host of significant side effects and another that can cause liver and bone marrow failure, risk of infections and cancer, Shepherd said.

"Despite multiple discussions and appeals, the drug remains denied for this young man," Shepherd said.

Shepherd and Wright are among the physicians who say PBMs' preference for highly rebated drugs limits health care providers' ability to choose the optimal drug therapy for their patients.

Industry Pushback

But PBMs say they are not the problem and that they actually play a key role in lowering prescription drug costs and helping keep patients safe.

The Pharmaceutical Care Management Association, or PCMA, a national pharmacy benefit manager trade group, told Law360 that it is "confident the FTC will ultimately conclude that drug manufacturer price setting is the root cause of high drug costs," not PBMs.

"PBMs are holding drug companies accountable by relentlessly negotiating the lowest possible drug costs on behalf of patients, and driving and delivering competition that patients are demanding," the trade group told Law360.

PCMA — whose board includes executives from PBMs Express Scripts, OptumRx, CVS Caremark and the insurer Humana, which has its own in-house PBM — insists that over the next decade PBMs will prevent an estimated 1 billion medication errors by reviewing newly prescribed drugs and checking for possible negative drug interactions on behalf of 266 million patients.

But PCMA President and CEO JC Scott acknowledged the reality of the rebate system in his testimony at a Senate Commerce Committee hearing in May on PBMs' role in drug pricing. "For many brand drugs, PBMs negotiate directly with drug manufacturers who compete for formulary placement by offering a type of discount called rebates," he said.

PCMA told Law360 that "it is clear that rebates negotiated by PBMs with drug manufacturers are overwhelmingly passed to health plan sponsors to reduce patient costs. Assertions that rebates increase drug costs are not supported by the facts."

The trade group also maintains that PBMs promote the use of biosimilar drugs — drugs that are very close in structure and function to another drug.

But Balto, the former FTC policy director, said that is not what happens in practice.

Major PBMs are giving preferential treatment to brand-name drugs that offer them rebates, while excluding lower priced biosimilars and making it difficult for patients to get reimbursed for generics, Balto said.

'Perverse Incentives'

Balto noted that over the past decade, the PBM industry's profits have more than doubled from $11 billion to $28 billion annually and that at the same time, drug prices have risen.

"There is clearly a market failure here," he told Law360.

Balto argued that PBMs have seen such profits, in part, due to a lack of transparency into their practices, especially regarding the rebates they receive from drugmakers.

He said rebates are causing drug prices to soar out of control, likening them to gasoline on a fire.

The drug rebates "just makes things phenomenally worse," Balto told Law360.

He has told Congress much the same. Testifying at the Senate Commerce Committee hearing in May, Balto said PBMs have "perverse incentives" to seek higher drug prices in order to maximize rebates and, in turn, their profits.

Balto told senators that the PBM industry has no incentive to reduce drug prices. The industry remains "cloaked in secrecy" and is one of the least regulated sectors of the health care system and drug supply chain, lacking nearly any federal antitrust enforcement, oversight or regulation, he said.

Regulating PBMs

But the FTC's probe signifies that PBMs aren't going to be able to hide in the shadows much longer.

The probe comes less than a year after President Joe Biden signed an executive order seeking to invigorate competition across the American economy, especially with regard to prescription drugs. The order called on the U.S. attorney general and the FTC chair to review and consider revising the horizontal and vertical merger guidelines to address the consolidation of industry in markets across the economy.

Balto said the FTC, under the Biden administration, appears to be paying more attention to practices that are harming vulnerable populations, including the loss of neighborhood pharmacies and the rising cost of medicine.

He argued that the FTC study could usher in transparency in a market in which anti-competitive conduct has been allowed to thrive.

Alicia J. Batts, a partner at Faegre Drinker Biddle & Reath LLP, said the FTC increased its focus on pharmaceuticals and PBMs as a result of the president's executive order. "Now that there is a full commission, the pharmaceutical industry should anticipate more FTC scrutiny," she told Law360.

This spring, in response to the FTC's request for comments on vertically integrated PBMs, U.S. Sens. Chuck Grassley, R-Iowa, Ron Wyden, D-Ore., and Mike Braun, R-Ind., were among those urging the agency to launch a rigorous review of the impact that PBMs' business practices have on drug prices.

Of particular concern to the senators were insulin prices, which have skyrocketed since the 1990s.

The Senate Finance Committee, led by Wyden and Grassley, spent two years investigating the rising cost of insulin. In January, the panel issued its findings: that PBMs spur drugmakers to hike insulin list prices in order to secure prime formulary placement while providing PBMs with larger rebates.

Balto thinks the FTC will conclude, like the Senate Finance Committee, that PBMs' practice of "jacking up the price of insulin so they could secure higher rebates" is just the tip of the iceberg and that the PBM industry is causing drug prices across the marketplace to rise.

"PBMs face a perfect storm before the FTC," he said.

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