I promised to follow up on my newsfeed on The Wall Street Journal’s (WSJ) editorial on the Federal Trade Commission’s (FTC) lawsuit against the Big 3 pharmacy benefits managers (PBMs) – CVS Caremark, Cigna’s Express Scripts, and United’s OptumRx. I feel so much is wrong with what the WSJ editorial board is saying about the lawsuit. So here are some additional thoughts on the subject. The editorial is at a link below so you can read as well.
What does the lawsuit charge?
The FTC’s bombshell lawsuit charges that the PBMs have used formulary placement and rebates to rig the system and disadvantage the American public at the point of sale. While the FTC believes the anticompetitive activities permeate the entire system and apply to almost all brand drugs, it is focused in this lawsuit on insulin prices. The FTC says that the PBMs use the formulary and rebate scheme to line their pockets and to attract business, leaving diabetics dependent on insulin with high prices and often an inability to pay.
What WSJ got right
Now, the WSJ did get a few things right.
- Like WSJ, I find it amazing that the FTC is arguing in the lawsuit that this is a PBM problem only. It is hard to fathom. At the root of the issue is the high drug prices in America unilaterally dictated by brand drug makers. This is whether we look at it from a gross (list) or net (post rebate) basis. It seems without such outrageous prices we wouldn’t have the rebate system in the first place. The outrageous pricing of Big Pharma begets these rebate deals, where brand drug makers pay a discount from list to PBMs for placement or favorable placement on drug formularies. To me, you can’t have the supposed conspiracy to dupe the public without the brand drug makers. The rebate system is in part perpetuated by the brand drug makers as it helps them maintain market share. In lieu of truly competing with each other on cost and quality, brand drug makers are content to carve out a piece of a given drug class’ market with high prices.
- The courts will find it odd that the FTC is seeking to effectively ban PBM rebates when the discounts are firmly embedded in both the Medicare and Medicaid systems. Medicaid rebates have been around for decades and the government has invested over the years on driving more and more rebate dollars in the program for the poor. Since there is virtually no cost-sharing on the Medicaid program, the rebate play is solely a cost-reducer than anything else. The rebates have grown so much that we now have federal and state supplemental rebates. In Medicare, former President Donald Trump famously tried to take away the antitrust safe harbor related to rebates to force plans and PBMs to deliver the rebate savings at the point of sale for consumers. There were issues with the proposal, including potential major costs to the Medicare program as rebate dollars are used to offset other costs. The plan was abandoned by both the Centers for Medicare and Medicaid Services (CMS) and Congress. How does the FTC win a lawsuit when the government relies so much on rebates?
- The WSJ also questions whether it is really the PBMs’ problems that so many health plans and employer groups decide not to apply the retrospective rebates at the point of sale to benefit consumers. It also notes that there is a trend toward passing rebates on at the point of sale and out-of-pocket costs are coming down. As well, gross and net prices have come down for insulin. WSJ intimates that maybe this is all being worked out.
- WSJ also argues that FTC admits 90 to 98% of rebates are passed on to plans or employer groups. It does cite, though, another study that says about 13% of PBM profits do come from rebates. That is not immaterial.
Here is where the WSJ is wrong
The WSJ argues the lawsuit could mean higher prices and that the FTC is making a mess of things. But notwithstanding some of the WSJ arguments above, it is hard to be convinced of the newspaper’s position.
- The WSJ seems to feel like the PBMs are operating in a free market. But we know that the drug supply channel is anything but that. The opaqueness of the channel and the lack of transparency makes it hard for anyone to understand it. This includes stakeholders themselves. There is a thriving transparency movement in the PBM world – one that emphasizes clear prices from PBMs and passing through all discounts etc. from brand drug makers. Would this not be a better system and one the WSJ should endorse?
- The WSJ argues that the FTC lawsuit could lead to higher prices if successful and the newspaper seems to feel that keeping the current system is better. But recent studies show that employer coverage is seeing growth in annual costs that are in the 8% range, up from an even unmanageable 6% a few years ago. Almost all of this is from drug spend, either exorbitant annual price hikes, new expensive drug entries, or major utilization brought on by Big Pharma’s marketing machine. Medicare is seeing similar trends due to GLP-1s and other expensive drug entries such as cancer drugs. How does the Journal feel this is at all sustainable and the status quo good? Something is badly broken and reform is needed. The major growth in costs will compromise the competitiveness of business, which has the already unique burden of carrying the costs of employer-sponsored coverage.
- The WSJ argues that government policy created the massive consolidation in the industry, another driver of the FTC lawsuit. But these trends were occurring throughout healthcare before Obamacare was passed and are by no means the sole cause. Regulating the amount of premium used for medical expenses is also not a socialist idea. It is meant to ensure that consumers see premiums that are fair and reasonable.
- The Journal also gives brand drug makers credit for lowering gross and net insulin prices, as if market forces drove the decision-making. In truth, this came only after a deluge of negative press for Big Pharma, political pressure to do lower prices from lawmakers like the indefatigable Sen. Bernie Sanders, and threats that additional reforms could pass Congress.
- Last, what of the huge disparity between drug prices in other developed countries compared with the United States. The WSJ seems to defend the rebate system as helping bring down costs, which is a fallacy overall. It does not mention that even on a net basis, American drug prices are manyfold greater than they are in other developed nations. As one example, one study found that the initial ten drugs negotiated for Medicare Part D (effective 1/1/2026) still will be 35% to 567% more on a net basis than in certain other developed countries. By and large, most of the ten drugs will be about 100% to 400% higher in America. Roughly 70% of brand drug maker profits come from America. Is that reasonable and fair?
Conclusion
To me, the WSJ failed to live up to its usual free market views and adopted a short, not long, view of the situation. It seems to think that bigger companies are better and means less costs. If it looked at recent history, massive consolidation of health plans, PBMs, hospitals, and provider groups have forced up prices and costs in so many ways.
Teddy Roosevelt famously stood up to monopolies and beat the drum for competition and free markets. There is nothing wrong with that. Government should regulate competition and free and fair markets. Notwithstanding my defense of PBMs generally, the FTC lawsuit begins the hard task of ripping apart the anti-competitive drug market, with all its unseemly permutations — including rebate deals and the gross-net price mess we have. Again, the FTC is clumsily going about this and needs to do much more in so many parts of healthcare. But the WSJ’s defense of the status quo is nonsensical on its face.
I have also been wary of upending the rebate system for the potential fallout on other areas of healthcare and due to the cost. But if you look at the $170 billion (over 10 years) impact Trump’s elimination of rebates would cost Medicare, you begin to come to the conclusion that that may be a small price to pay for better transparency in the drug channel. About $17 billion on a $4 trillion annual healthcare budget is tiny.
Again, brand drug makers hide behind the rebate system to drive costs up and ensure market share. PBMs are willing partners because rebates have served them well also. With no rebates and net prices only, we would begin to see the glimmer of free markets emerging in the drug world, where formularies might begin to include drugs based on comparative effectiveness and cost-effectiveness. PBMs could then get back to doing the good work they do on generic promotion and utilization control. Today, the rebate system is the equivalent of politics’ smoke-filled backroom deals, where party bosses came together to coronate candidates and enrich themselves at the same time. It is not a reasonable free market mechanism as the WSJ would have you believe.
Sources and reading:
https://www.healthaffairs.org/content/forefront/medicare-negotiation-tells-us-drug-pricing-u-s
https://www.managedhealthcareexecutive.com/view/ftc-sues-pbms-for-artificially-hiking-insulin-prices
https://www.modernhealthcare.com/legal/express-scripts-optum-cvs-caremark-ftc-complaint-insulin
#pbms #drugpricing #branddrugmakers #ftc #antitrust #consolidation #manda #mergers #acquisitions
— Marc S. Ryan
