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The Federal Trade Commission (FTC) has filed suit against the three largest pharmacy benefit managers (PBMs)—middlemen that sit in between patients, drug companies, and pharmacies in prescription drug transactions—for practices that it says have spiked the cost of insulin by over 1,200 percent over the past two decades.
The complaint, which was filed in an administrative court, has not yet been made public, as it is undergoing redactions. Agency officials expect it to be made public on Monday.
But we know a few things about the complaint thus far. The three companies in the lawsuit are Caremark Rx, Express Scripts, and Optum Rx. These PBMs are involved in about 80 percent of all drug transactions, and each is tied to a large insurance company (Caremark/CVS Aetna, Express Scripts/Cigna, and Optum Rx/UnitedHealth).
The FTC is alleging that the rebate system used by these three companies and their affiliated group purchasing organizations (GPOs) creates incentives to increase insulin prices, forcing many of the eight million patients who use insulin to pay more. The practices have the effect of increasing list prices for insulin that patients without insurance must pay, as well as increasing costs for those with insurance.
Specifically, PBMs use formularies—lists of drugs that they cover—to provide exclusive or near-exclusive use of certain types of insulins. In doing so, the PBMs are not preferring the lowest-price insulins, but the ones that give them the highest rebates, which is how they profit. This “chase the rebate” strategy leads to artificially inflated list prices, according to the FTC.
“Millions of Americans with diabetes need insulin to survive, yet for many of these vulnerable patients, their insulin drug costs have skyrocketed over the past decade thanks in part to powerful PBMs and their greed,” said Rahul Rao, deputy director of the FTC’s Bureau of Competition, in a statement.
While insulin is specifically cited in the complaint, agency officials in a background briefing acknowledged that similar practices are used across the board by PBMs to chase high rebates. They hope that if these practices are rejected in the insulin case, that the current business model of PBMs will be threatened enough that they will stop favoring high list prices for other medications as well.
But the FTC started with insulin, whose high prices are well known to most Americans. Insulin was invented in the 1920s and its inventors wanted to give it away for free without a patent. Yet the market consolidated to essentially three main distributors—Eli Lilly, Novo Nordisk, and Sanofi. The list price for Eli Lilly’s Humalog was $21 in 1999, but rose to $274 by 2017, more than a 1,200 percent increase.
The FTC was quick to note that drug manufacturers were not blameless, though they are not mentioned in this complaint. “All drug manufacturers should be on notice that their participation in the type of conduct challenged here can raise serious concerns, with a potential for significant consumer harm, and that the Bureau of Competition reserves the right to recommend naming drug manufacturers as defendants in any future enforcement actions over similar conduct,” said Rao.
PBMs make a good bit of their revenue from rebates that are a percentage of the list prices, so it stands to reason that the higher the list price, the higher the potential rebate. PBMs negotiate these rebates with the drug manufacturers. The formularies are used to give drug companies exclusive access to a PBM’s patients, and the companies pay top dollar to secure that access. PBMs do not pass on the entire rebate to payers, making off with hundreds of millions of dollars as a result. But patients must purchase insulin off of those high list prices.
The complaint alleges that PBMs tightened their formularies around 2012, excluding certain drugs to extract higher rebates from the drugs remaining. One Novo Nordisk vice president is quoted in the complaint, according to an FTC press release, saying that the PBMs were “addicted to rebates.”
Lower-priced insulins were blocked from the formularies, ensuring that only high-priced insulins with the potential for higher rebates would be included. A vice president of an unnamed PBM is quoted as saying his company would be able to “drink down the tasty … rebates.”
One out of every four patients in 2019 were unable to afford insulin, according to the complaint. Rationing has become commonplace, leading to unnecessary deaths.
The Biden administration reduced the price of insulin for seniors in Medicare to $35 a month. But that has not yet been extended to all payers, and patients with deductibles and co-insurance often pay the list price while not benefiting from the rebate at all. The out-of-pocket cost sometimes exceeds the net cost of the drug itself. Uninsured patients experience the same problem.
The case alleges unfair methods of competition under Section 5 of the FTC Act. This is the first case under chair Lina Khan where stand-alone Section 5 claims have been brought. All three Democrats on the commission voted to move forward with the case; Republicans Melissa Holyoak and Andrew Ferguson both recused themselves from the vote, for reasons that agency officials declined to explain.
Officials said that they hoped, as a result of the case, that list prices for certain drugs would fall dramatically, to the benefit of patients whose payments are tied to those list prices.
The FTC recently put out preliminary results of a Section 6(b) study into PBMs, which included some elements of the rebate and formulary strategy laid out in the complaint. Express Scripts recently sued the FTC for defamation over the preliminary findings, a brazen attempt to stifle criticism.
The FTC has also been looking into how PBM practices affect independent pharmacies. That was not part of this complaint.
