Pharmacy Benefit Managers (PBMs) were established in the 1960s to control drug costs but have since morphed into one of the most highly concentrated segments in the health care industry. Despite evidence that PBMs undermine competition and raise prescription prices, the FTC—under the leadership of both Democratic and Republican Chairs—has discouraged states from regulating them and allowed the sector to consolidate further through a series of mergers.

When New York State Assemblyman Richard Gottfried set out to regulate a group of powerful corporate players in his state’s health care system, he was prepared to battle yet another muscular industry lobby. As chair of the Assembly’s Health Committee and a long-time advocate of health care reform, Gottfried has had plenty of fights with big insurers and providers over the years. This time, his enemies were Pharmacy Benefit Managers, or PBMs. PBMs manage prescription drug benefits for health insurers and state Medicaid programs, and Gottfried was seeing them engage in a pattern of price gouging and self-dealing.

What caught Gottfried off guard was the opposition he faced from another quarter: the Federal Trade Commission, created to safeguard Americans from concentrated corporate power, had taken a stance against state legislation like his that sought to rein in the PBMs.

PBMs were established in the 1960s to control drug costs, but they have since morphed into one of the most highly concentrated and least accountable profit centers in the health care industry. Just three PBMs—CVS Health, Express Scripts, and OptumRx— control more than 76 percent of the market. All three operate their own mail order pharmacies and one, CVS, owns the nation’s largest drugstore chain.

PBMs have a documented history of steering patients to their own pharmacies by cutting reimbursements to independent pharmacies, essentially driving them out of business. At the same time, PBMs have been bilking public health plans, especially state Medicaid programs. In Ohio alone, two PBMs were found to have charged the state $224 million more than they reimbursed pharmacies in 2017. PBMs are not required by federal law to disclose rebates they receive from drug makers or the spread between what they’re paid by insurers to fill a prescription and how much they pay out to the pharmacy that does so.

PBMs “operate largely in secret and don’t seem to be under almost any legal obligations,” says Gottfried. Several years ago, he began pushing for legislation to block PBMs’ anticompetitive practices and mandate that they disclose to state regulators and health insurers details of their financial arrangements with drug makers. 

Gottfried initially found that it was hard to persuade some of his colleagues. While he argued that PBMs were undermining competition and raising prescription prices, lawmakers in New York were getting the opposite message from the nation’s top antitrust enforcement agency. For years, the FTC opposed state attempts to regulate PBMs. In letters sent to lawmakers in several states, including to New York officials during an earlier attempt at a PBM bill back in 2009, the FTC insisted that concerns about PBMs’ conflicts of interest were unfounded, that the problems such legislation sought to address “are not widespread,” and that imposing transparency rules on these middlemen could lead to higher drug prices. While the FTC did not issue a letter specifically in response to Gottfried’s bill in 2019, it didn’t need to. PBM lobbyists liberally cited the FTC’s previous statements as they made their rounds, according to Gottfried.

“In letters sent to lawmakers in several states, the FTC insisted that concerns about PBMs’ conflicts of interest were unfounded, that the problems such legislation sought to address “are not widespread,” and that imposing transparency rules on these middlemen could lead to higher drug prices.”

But by 2019, Gottfried says, state lawmakers had stopped giving the FTC’s position much weight as PBM malfeasance became increasingly self-evident. In an unmistakably anticompetitive move, in mid 2018, CVS drastically cut reimbursement rates to pharmacies across the state. Shortly thereafter, it sent many of them letters offering to buy their businesses. “I know what independents are experiencing right now: declining reimbursements, increasing costs, a more complex regulatory environment,” wrote CVS’s regional director of acquisitions, Abiola Folarin.

Then, in January 2019, New York Governor Andrew Cuomo threw his support behind the effort to regulate PBMs, listing the issue as a priority in his annual legislative agenda. Five months later, after an in-depth investigation by a legislative committee, Gottfried’s bill passed unanimously in the Assembly and by a 3-to-1 margin in the Senate.

However, at the end of 2019, just a few days after Christmas, Cuomo quietly vetoed the bill. In his veto statement, Cuomo echoed the FTC’s position that imposing rules on PBMs would harm rather than help competition. He then named the agency directly, writing that the bill’s provisions would “generate scrutiny from the Federal Trade Commission.”

Andrew Cuomo Governor MTA
New York Governor Andrew M. Cuomo. Photo by Marc A. Hermann/MTA New York City Transit via Flickr. [CC BY 2.0]

As policymakers and the public grapple with growing concentration across much of the economy, the FTC has come under scrutiny for its lax enforcement of the nation’s antitrust laws. In recent weeks, advocacy organizations and small business groups have separately called on President Biden to nominate commissioners who favor a more aggressive approach. 

The FTC was designed to be a forward-thinking agency that would use its investigatory and rule-making authority to stamp out unfair methods of competition and protect the less powerful from fraud and abuse. But the FTC has been quick to dismiss concerns about the impact of concentration on small independent businesses. The agency has presided over an increasingly consolidated economy and has repeatedly embraced vertical integration despite evidence that such industry structures invite self-dealing and inflict harm on small businesses and the communities they serve.

In the health sector, the FTC has allowed extensive vertical integration. CVS Health, for example, has combined CVS Pharmacy, the PBM company Caremark, and the health insurer Aetna under one roof. It has approved a raft of horizontal mergers among PBMs and declined to rein in PBM abuses. Instead, holding fast to its view that PBMs are pro-competitive, the FTC has actively discouraged regulatory efforts by many states and another federal agency, even as state officials have confronted mounting examples of market power abuse and even fraud. This position has been bipartisan and endured under both Republican and Democratic chairs. Only a few commissioners have questioned this stance publicly. (The FTC declined to be interviewed for this article.)

There are two main concerns with PBMs. One is that they are driving independent pharmacies out of the market. Independent pharmacies offer significantly lower drug prices than chain pharmacies and spend more time explaining medicines to their patients and answering questions. Despite the enormous value that they provide their patients and communities, these pharmacies are being muscled out by PBMs.

A second concern is that PBMs are overcharging insurers, particularly state Medicaid programs. For the last couple of years, a small team of journalists at the Columbus Dispatch, Ohio’s third-largest daily newspaper, has been publishing an investigative series on PBM abuses in the state. The Dispatch detailed how PBMs had been skimming public funds by billing the state millions of dollars more than they were paying pharmacies to dispense drugs to Medicaid enrollees.

Partly spurred by the Dispatch’s reporting, Ohio’s attorney general Dave Yost filed a lawsuit to claw back $16 million from one of the three big PBMs, OptumRx. The state also canceled its contracts with the other two, CVS-Caremark and Express Scripts. The legislature held hearings and passed an initial reform bill, and policymakers continue to discuss additional steps to regulate PBMs. (Other states have uncovered the same issues. Kentucky, for example, found that PBMs overcharged the state $124 million.)

As the Dispatch has reported on these developments over the last couple of years, one question that has gone unanswered for reporters is why the FTC didn’t take up the issue itself.

“Holding fast to its view that PBMs are pro-competitive, the FTC has actively discouraged regulatory efforts by many states and another federal agency, even as state officials have confronted mounting examples of market power abuse and even fraud.”

In fact, the FTC approved a series of mergers from the mid-aughts to 2015 that consolidated PBMs’ power. In 2004, the agency approved the merger of Caremark and AdvancePCS, then two of the largest PBMs in the country. Just three years later, the FTC allowed CVS to buy Caremark, allowing the pharmacy chain to bring the company reimbursing its competitors in-house. In 2011, five consumer groups wrote to the FTC, begging it to unwind the merger, arguing that “there is strong evidence that the CVS Caremark merger has harmed consumers.” Unmoved by these calls for a break-up, the agency allowed another PBM merger, this time between the PBMs Express Scripts and Medco. Finally, in 2015, the FTC allowed CVS to buy another PBM, Omnicare, further entrenching CVS’s control of the PBM industry.

The FTC has also discouraged state actors from regulating the PBM industry. The agency produced several reports heavily used by the Pharmaceutical Care Management Association (PCMA), the PBMs’ main lobbying organization, to undermine state efforts to mandate PBM transparency. In 2004, the FTC produced a joint report with the Department of Justice that expressed opposition to such policies. The next year, the FTC produced a 240-page report on PBM competition and self-dealing allegations involving PBM-owned mail-order pharmacies. The agency’s report found no evidence of any conflicts-of-interest with PBM ownership of mail-order pharmacies. Following the FTC’s 2012 approval of the Express Scripts-Medco merger, the agency wrote that competition among PBMs was “intense.”

As the FTC waved these mergers through, and produced industry-friendly studies, states were bringing PBMs to court for outright fraud. From 2002 to 2008, then-New York Attorney General Eliot Spitzer investigated and sued Express Scripts for defrauding New York’s public employee health plan. In 2008, the state of Illinois sued Caremark for deceptive trade practices when it switched patient’s drugs without their knowledge to make a greater profit. Twenty-nine state AGs sued Express Scripts for the same conduct—namely, switching drugs for purposes other than saving health plans money—that same year.

As state investigations revealed PBM misconduct, state legislators began to pass bills that required transparency around PBM contracts, including disclosure of rebates, and curbed some of PBMs’ worst abuses. The FTC opposed these efforts. From 2004 to 2011, the agency sent letters to legislators in California, North Dakota, Rhode Island, Virginia, New Jersey, and New York discouraging them from passing legislation that would have mandated PBM transparency, given patients more flexibility, and required PBMs to act in the best interest of health plans.

The FTC also defended the industry from regulation at the federal level. In 2014, the Labor Department’s Advisory Council on Employee Welfare and Pension Benefit Plans, established under the provisions of the Employee Retirement Income Security Act (ERISA), deliberated whether PBMs should be required to disclose their fees and rebates to health plan sponsors. After studying the issue, the Advisory Council noted that “some forms of PBM compensation have the potential for creating conflicts of interest” and concluded that disclosure requirements were warranted. The Labor Department, however, did not act on the recommendation.

One voice advocating against action was the FTC. In a letter to the Advisory Council, the directors of the agency’s Bureau of Economics, Bureau of Competition, and Office of Policy Planning argued that efforts to require PBM transparency would lead to higher drug prices and repeated the agency’s 2012 claim that competition among PBMs for clients was “intense.”

One FTC commissioner, Julie Brill, however, so strongly disagreed with the staff’s position that she wrote a separate letter to the Advisory Council. Brill, an Obama appointee, challenged the FTC’s characterization of PBM competition as “intense” and argued that the agency had not “taken into account the significant changes that have occurred in the market since 2005.”

Julie Brill FTC
Julie Brill, a former commissioner at the US Federal Trade Commission, speaks at the High-Level Roundtable on Transatlantic Data Flows hosted by the Lisbon Council and Progressive Policy Institute in Brussels. Photo by Lisbon Council, via Flickr. [CC BY-NC-ND 2.0]

In the last few years, the FTC has been quieter on the issue of PBMs. It held a workshop on drug pricing in 2017, with little other activity in the space.

Meanwhile, concerns about PBM market power abuses have only grown. In 2018, the Council of Economic Advisers, the agency tasked with giving economic advice to the President, released a report that confirmed the problems many states had tried to address and contradicted years of FTC testimony: “Pricing in the pharmaceutical drug market suffers from high market concentration in the pharmaceutical distribution system and a lack of transparency.” Last year, Senator Chuck Grassley (R-IA) told the FTC Chair that the agency had been “criticized by some for missing the mark” on PBMs.

Though the FTC no longer seems to be actively discouraging states from regulating PBMs, its decade-plus record of opposition to such measures is still used as a weapon by the PBM lobby. David Balto, an attorney employed by consumer groups who has testified about PBMs in many statehouses, explained that “the [FTC’s] letters have staying power.” Time and again, the PCMA has cited FTC letters and studies as evidence that the industry should not be regulated. In the PCMA’s 14-page testimony before the DOL’s ERISA council in 2014, the FTC was mentioned 35 times. At a 2017 hearing on a PBM bill in California, the FTC’s view that PBM competition was “robust” was cited by a PCMA representative.

Notwithstanding the defeat of PBM regulation in New York at the hands of Governor Cuomo, there’s reason to think states might become bolder in the coming months. In January, the Supreme Court upheld an Arkansas law that bars PBMs from reimbursing pharmacies at rates below their wholesale costs for a drug. PCMA had challenged the law as overreach of state authority, arguing that it was preempted by federal law (namely ERISA). In Rutledge v. PCMA, however, the Court concluded that federal law does not in fact preempt state regulation of pharmacy benefit managers.

There’s been some movement in Congress too. In 2019, the House Judiciary Committee approved a bill that would direct the FTC to examine whether PBMs are engaged in anti-competitive practices, such as giving less favorable reimbursement rates to competing independent drugstores. If such a measure passed, it would test the FTC’s willingness to take a fresh look at PBMs and evaluate its own track record.

Now the question is whether President Biden will appoint commissioners up for that task. Over the last two decades, the FTC has backed PBMs under the leadership of both Democratic and Republican Chairs. But a few commissioners, including Brill and outgoing Commissioner Rohit Chopra, have questioned that stance. In his first House hearing, Chopra said that “the structure of the pharmacy benefit manager business raises very serious transparency and conflict of interest issues.” His fellow Dem-appointed Commissioner Rebecca Kelly Slaughter, now Acting Chair of the FTC, voiced similar concerns during the same hearing. A strong rebuke by the agency of its past positions would help in the fight against PBMs. It would also be a step toward reviving the FTC. After decades of lax enforcement, conduct like PBMs’ self-dealing is taking place in many sectors of our economy: small, competitive players are muscled out as a handful of giants manipulate markets to their own advantage. People and communities are suffering as a result, experiencing inflated prices, lack of access, and rising inequality. As state lawmakers, attorneys general, and investigative journalists confront these problems, the FTC should be leading the charge, not standing in the way.