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Pharmacy Benefit Managers and the Federal Trade Commission: A Relationship Gone Sour

On June 7, 2022, the Federal Trade Commission (FTC) announced its decision to launch an inquiry into the business practices of pharmacy benefit managers (PBMs).1 Although it is premature to presume that the investigation will lead to changes in the PBM market, the initiative was nonetheless cheered by the many policy experts that fault PBMs for increasing prescription drug prices.

This is not, however, the first time that the FTC crossed paths with the PBMs. Earlier encounters offer a useful window into the evolving PBM market and the associated policy challenges. This Viewpoint offers a reminder of why PBMs emerged in the first place, why they have amassed such alarming influence, and how they positioned themselves as powerful actors within the prescription drug distribution system.

A Brief History of PBMs and Their FTC Scrutiny

The rise of the PBMs coincided with the introduction of employer-sponsored prescription drug benefit plans and the requisite need in their administration. In principle, PBMs perform the dual roles of constructing sufficient formularies of prescription drugs for patients while prioritizing generic or less costly drug offerings to serve the interests of insureds, employers, insurers, and other payors. As the PBMs grew, fueled in part by the institution of the Medicare Part D prescription drug benefit program, they leveraged their purchasing clout to extract pricing concessions from pharmaceutical manufacturers. Seeking to counter this new purchasing power, the pharmaceutical giant Merck set out to purchase the PBM Medco Health Solutions in 1998. The FTC filed suit to unwind this transaction, marking its first foray into the PBM sector, and argued that Merck would leverage Medco’s market position to advance its own pharmaceutical products.2 The FTC, in turn, was hoping that Medco—and other PBMs—would instead use their purchasing power with manufacturers to reduce the cost of prescription drugs for patients.

As the PBM sector attained further prominence, it entered a series of consolidations that again attracted the attention of the FTC, but the agency was largely unconcerned by the merger wave. From 2000-2015, the FTC approved numerous mergers between PBMs, including the 2004 combination of 2 of the largest PBMs (Caremark and AdvancePCS Inc), the acquisition by CVS of Caremark in 2007 and Omnicare in 2015, and most notably, the $29 billion merger in 2012 of Medco and Express Scripts, 2 of the largest PBMs at that time. The FTC approvals of the mergers were premised on the belief that stand-alone PBMs compete vigorously with other purchasers of prescription drugs as well as with insurers who managed prescription drug benefits. The FTC further maintained that small PBMs offered valuable services that allowed them to compete with large PBMs.3 Fueled by the uninterrupted spate of mergers, the PBM market came to be dominated by the “big 3,” ie, CVS Health, Express Scripts, and OptumRx, which together controlled 80% of all the prescription drug claims in 2021. The big 3 also operate mail-order pharmacies, and CVS, for its part, owns and operates the nation’s largest drugstore chain.

Recent Concerns and a New Reckoning?

Over the last decade, attitudes toward PBMs have changed significantly. One reason for this change was the scope attained by the PBM enterprise. CVS Health, UnitedHealth (owner of the PBM OptumRx), and Cigna (owner of the PBM Express Scripts) have grown to constitute the 4th-, 5th-, and 13th-largest companies, by revenue, in the entire US. Another reason is growing concern over the emerging PBM business model. PBMs assume no financial risk and neither dispense nor take possession of any prescription drugs, yet they nonetheless extract significant profit margins within a complex distribution chain.4

More significantly, in addition to remuneration received by PBMs from insurers and employers for administering prescription drug benefit plans, PBMs also receive volume-based rebates from the manufacturers with whom they negotiate the price of prescription drugs. These manufacturer rebates are the chief object of renewed scrutiny by the FTC and others. They are hidden from public view and remain poorly understood, but they appear to put upward pressure on list prices. It is also unclear whether, or to what degree, revenues from manufacturer rebates are passed on to employers, insurers, and patients.5 And the dollar sums are enormous. The “gross-to-net bubble”—a measure of the total rebates and discounts paid by manufacturers—reached $204 billion for patent-protected brand-name prescription drugs in 2021.6 By another measure, all payors paid $586 billion for pharmaceuticals in 2021, but manufacturers’ net revenue was $407 billion, with the balance ($179 billion, more than 30%) retained by intermediaries.7

Nonetheless, in theory at least, there is reason to sustain the FTC’s original hope that PBMs could use their scale and sophistication to represent the interest of purchasers and thereby benefit the pharmaceutical marketplace. This was the theory that motivated the FTC’s challenge of Merck’s acquisition of Medco, and it also underlay regulators’ acquiescence of a more recent spate of PBMs joining forces with insurers. Motivated by the success of OptumRx, a UnitedHealth-owned PBM, many large PBMs sought to join forces with health insurers: Aetna merged with CVS and Cigna purchased Express Scripts (the Department of Justice led the investigations into these mergers, and approved them, instead of the FTC).

Rebates, however, appear to distort the broader market in ways not fully appreciated.

Although a full understanding of the effects of PBM rebates on the prescription drug market remains elusive, certain developments indicate that rebates harm competition. Recent antitrust lawsuits suggest that pharmaceutical manufacturers have colluded with PBMs to foreclose competition in certain drug classes,8 and scholars speculate that PBM rebates allow manufacturers to exploit monopoly power that standard antitrust analysis misses.9

It is possible that the conventional understanding of how prescription drugs are purchased might be upside down. If rebates to PBMs make PBM activities more profitable than other health insurance business activities, it would appear that the PBMs may not be serving the needs of health insurers. Instead, health insurers appear to supply a captive population that can fuel the hidden profits of the PBMs.10

Broader Lessons and Possibilities for the Current FTC Investigation

Viewed in this historical perspective, the FTC’s investigation of PBMs could be considered a mea culpa on the part of the agency, an admission that an error was committed by allowing PBMs to acquire such size and influence. Alternatively, it could be viewed as a sharp change in enforcement philosophy led by its current chair, Lina Khan. We opt for a more generous interpretation, that scrutinizing prior FTC decisions benefits from hindsight. From their earliest emergence, PBMs have played an unusually convoluted role in a very complicated market, and the consequences of PBM growth were hard to predict.

It is, of course, possible that the FTC investigation will find that the problem might be the market, not the actors within it. This might not be a simple story in which economic giants exploit market power, but instead one in which PBMs are capitalizing on a poorly constructed market that features inattentive purchasers, uninformed patients, and highly complex products. One implication of such a conclusion might be that the antitrust laws may be limited in their capacity to correct market failures in the pharmaceutical sector. Viewed in this light, the Centers for Medicare & Medicaid Services would do well to simplify the Part D program or require prescription drug formularies to reflect well-established value metrics.

What remains remarkable in this saga is that despite decades of evolution of the PBMs, so little is truly known about these commercial giants. The FTC is normally a law enforcement agency, but its PBM inquiry was launched under Section 6(b) of the Federal Trade Commission Act, which authorizes the agency to conduct studies without a specific law enforcement purpose. It just might be that the FTC investigation of the PBMs is but the first foray into a long-term effort to understand these new industrial powers.

Article Information

Corresponding Author: Barak D. Richman, JD, PhD, Duke University School of Law, Duke University, Durham, NC 27708 (

Published Online: January 9, 2023. doi:10.1001/jama.2022.24731

Conflict of Interest Disclosures: None reported.


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