FTC Chairwoman Lina Khan, with her fellow Democratic Commissioners, recently filed a suit against the leading PBMs in an effort to undermine, or even prohibit, their use of rebates to secure savings in the prescription drug supply chain. In a September 25, 2024 editorial, The Wall Street Journal notes that if the FTC is successful, it will result in higher drug costs for American consumers. The Congressional Budget Office (CBO) analysis of a Trump administration proposal to restrict rebates came to the same conclusion.
Study after study has shown that Pharmacy Benefit Managers (PBMs) aggregate the purchasing power of their clients, health insurance plan sponsors, to negotiate lower prescription drug prices for consumers than the plan sponsors can achieve without the PBMs. An important mechanism through which PBMs achieve these costs savings are the rebates the PBMs charge to big pharmaceutical companies on drug sales. These rebates are almost entirely passed on to the health plan sponsors who use them to lower premiums and co-pays for the people on their plans. Yet, the Federal Trade Commission (FTC) is committed to undermining the critical role PBMs play in lowering prescription drug costs.
As the Wall Street Journal editorial pointed out, “The Trump Administration tried to ban rebates in Medicare, but the Congressional Budget Office estimated it would substantially raise senior premiums and increase government spending by $170 billion over 10 years, Congress blocked the rule. Yet now Ms. Khan wants to ban rebates in private insurance.”
A proposal rejected by lawmakers for projected cost-hiking impact on government programs should not be imposed on private markets by unelected bureaucrats.
An October 2024 report conducted by Compass Lexecon under the direction of Dennis Carlton, Ph.D., David McDaniel Keller Professor of Economics Emeritus at the University of Chicago Booth School of Business, discredits the FTC’s allegations against PBMs and validates the cost-saving value of PBMs’ market-based role in the prescription drug supply chain.
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Dr. Carlton found that the three largest PBMs already pass on nearly 100 percent of the rebates they collect from drug manufacturers to their clients, the health plan sponsors enabling plan sponsors to reduce costs for health plan enrollees – their employees and union members. An October 2023 national survey of more than 700 employers from the Coalition for Affordable Prescription Drugs (CAPD) found that 90 percent of employers use rebates to the benefit of employees, including lowering their costs and enhancing coverage.
Dr. Carlton’s findings also conclude that rebates do not drive-up list prices, the prices set by pharmaceutical manufacturers before accounting for any rebates or discounts, for drugs. This is important for the eight percent of Americans without prescription drug insurance plans who sometimes pay the list price and do not receive rebates. Dr. Carlton found that the average list price for rebated brand drugs is less than the average list price of non-rebated drugs. Analysis of the government’s own data underscores rebates are unrelated to list price increases. In a study of the top 250 brand-name drugs in Medicare Part D in 2022, health care consultancy Visante found price increases had no correlation to changes in rebates secured by PBMs.
Critics have aligned themselves in seeking to diminish the role of PBMs in the marketplace because PBMs impose a downward pressure on overall cost, reducing resources that could otherwise flow to the bottom line of the entities they negotiate against on behalf of plan sponsors, and ultimately patients.
This is true of large pharmaceutical companies and the independent pharmacy industry. For Big Pharma the incentives are clear – weakening PBMs’ bargaining power would directly benefit Big Pharma. Every dollar that PBMs are prevented, by legislation or regulation, from securing as rebates and passing on to plan sponsors and consumers, is a dollar that would go to the pharmaceutical companies’ bottom line.
Some Independent pharmacies claim that they are being inadequately reimbursed by the PBMs and pushed out of business. They use these claims to justify government intervention in the marketplace including mandating dispensing fees on prescriptions filled and undermining health plan sponsors’ choice to more affordable pharmacy options in their network. But their claims are not supported by the facts.
The Carlton report found reimbursement rates paid to independent pharmacies are slightly higher than those paid to non-affiliated chain pharmacies like Walgreens and Rite Aid – four percent higher for non-specialty branded drugs and nearly a quarter higher for non-specialty generic drugs. Independent pharmacies are partially able to secure favorable reimbursement rates because they are not small businesses negotiating on their own against large PBMs. The majority of them contract with large pharmacy services administrative organizations (PSAOs) who are able to leverage scale and substantial resources to negotiate with PBMs. The majority of PSAOs are owned by big wholesalers, including companies in the Fortune 50 like Amerisource Bergen, Cardinal Health and McKesson
In addition, the independent pharmacies’ own industry data undermines the notion they are closing. The total number of chain pharmacies declined by more than five percent from 2011 to 2021, while the number of independent pharmacies actually increased by nine percent.
Certainly, some independent pharmacies face challenges, especially many of those located in rural communities experiencing population decline. But population decline exerts pressure on all types of health care providers, not just pharmacies.
The FTC’s support for the claim that PBMs are responsible for shuttering independent pharmacy doors is wrong.
Diminishing the market-based role and negotiating leverage of PBMs are priorities for those who want to increase their own profits and not in the interest of the American public.
As the Journal’s editorial board argues, Chairwoman Khan’s actions “could result in higher healthcare premiums for all Americans.” If the FTC’s case is based on merits, they should lose.
Pat Toomey served as a U.S. Senator from Pennsylvania from 2011 to 2023 and in the U.S. House of Representatives from 1999 to 2005. He serves as an adviser to the Pharmaceutical Care Management Association.
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