Last month, the Federal Trade Commission (FTC) voted unanimously (5-0) to examine rising list prices of insulin, but also to probe possible anti-competitive practices by pharmacy benefit managers (PBMs) with respect to the use of rebate arrangements. Rebates are payments from drug manufacturers to PBMs in exchange for moving market share towards preferred products on the formulary. The FTC cites instances in which cheaper generics and biosimilars are excluded from PBM formularies, as this may violate competition and consumer protection laws.
Separately, in early June, the FTC opened an investigation into six large PBMs. The FTC also voted unanimously (5-0) to pursue this inquiry that will require that CVS Caremark, Express Scripts, OptumRx, Humana, Prime Therapeutics, and MedImpact Healthcare Systems, produce information regarding their transactions with pharmacies.
The FTC has warned of legal action against PBMs if its inquiries find proof of anti-competitive practices.
Here, in addition to rebates, the FTC will investigate direct and indirect remuneration (DIR) fees and spread pricing. PBMs assess DIR fees on pharmacies that dispense Medicare Part D (outpatient) drugs. Such fees are often charged long after a pharmacy has filled a Medicare prescription. PBMs claim they are clawing back money due to a pharmacy’s performance on certain quality measures. However, observers point to the arbitrary and opaque nature of these quality metrics. Spread pricing constitutes the PBM practice of pocketing the difference between the payment the PBM receives from a health plan and the reimbursement amount it pays to the pharmacy.
There appears to be some overlap between the two inquiries the FTC voted on in June. The FTC announced it will use “every tool at its disposal” to investigate PBMs and drug makers, with an emphasis on the insulin market.
Insulin has been a hot button issue in Washington D.C. for a long time, given the steadily rising out-of-pocket costs for patients. Even insured patients spend on average more than $750 annually on insulin. Uninsured patients spend at least twice as much. Insulin is an essential treatment for approximately 8 million Americans to control diabetes.
The insulin saga epitomizes the challenges facing U.S. healthcare regarding access, equity, pricing, and rebates. For years, constituents have been demanding that legislators and the executive branch make changes that lower their out-of-cost burden, but also establish a more transparent marketplace. Thus far, to no avail.
The FTC has raised the stakes as the agency has included terms like “commercial bribery” in its statements to describe what it perceives as anti-competitive rebates in the insulin market.
The latest FTC inquiry follows a recent investigation by Senators Grassley (R-Iowa) and Wyden (D-Oregon), which blamed rebate schemes for much of what ails the prescription drug market. Furthermore, nearly two years ago, Senator Klobuchar (D-Minnesota) and colleagues commissioned the General Accounting Office (GAO) to examine rebates. The GAO report is due out this fall.
There’s a lot wrong with the rebate system as it currently exists in the U.S. In the conventional rebate system that’s been in operation for decades, PBMs receive rebates from drug manufacturers in exchange for preferred positioning on the formulary, which in turn drives market share. Experts have criticized rebates for the fact that payers often don’t base their decisions to include a drug on comparative cost-effectiveness. Rather, decisions are contingent strictly on financial terms, namely which manufacturer offers a higher rebate payment to the PBM. This applies to insulin as well as numerous other therapeutic categories.
What’s worse is when rebate traps or walls are involved. Branded manufacturers leverage their position as market leaders by offering financial incentives to PBMs and health insurers in the form of “all or nothing” conditional volume-based rebates, in exchange for (virtually) exclusive positioning on the formulary. This can mean keeping competitors off the formulary entirely, or severely limiting formulary access to a competing drug with drug utilization management tools like step edits. Here, a patient must use a preferred drug and fail on it (a so-called “fail-first” policy) before stepping up to a non-preferred drug.
Because the portion of the rebate retained by PBMs is often calculated as a percentage of a drug’s list price, PBMs can have incentives to establish formularies that favor branded drugs with higher list prices and larger rebates over lower priced biosimilars, specialty generics, or even branded competitors. Rival drugs entering the market lack sufficient sales volume to be able to offer the same level of rebates to PBMs that originator firms can provide.
A growing number of states have sought more oversight with respect to PBM transactions. However, the FTC inquiry offers a comprehensive review of PBM practices nationwide. Proof of the establishment of anti-competitive practices could lead to legal action being taken against PBMs.