In February, the Federal Trade Commission settled with pharmaceutical benefits manager (PBM) Express Scripts. The FTC had sued Express Scripts and two other large PBMs under the long dormant Section 5 of the FTC Act, which targets “unfair methods of competition.” The settlement suggests that the FTC may succeed in addressing the convoluted contracts between PBMs, drug manufacturers, health insurers, and employers that drive up drug prices for Americans. It also opens unchartered territory for antitrust enforcement and the limits of Section 5, argue Fiona Scott Morton and Mariah Smith.
Official live updates on the FTC’s lawsuit against the PBMs can be found here.
In 2024, the Federal Trade Commission filed a lawsuit against the three large pharmaceutical benefit managers (PBMs): Caremark, Express Scripts (ESI), and OptumRx. PBMs serve as intermediaries that negotiate drug prices with drug manufacturers on behalf of health insurers, pharmacies, and employers. In February 2026, the FTC settled with one of these companies, ESI. Notably, the settlement contains an unusual provision: ESI promises not to accept payments pegged to manufacturers’ list price of drugs.
This is not a standard settlement to a standard antitrust case. The case was brought under Section 5 of the FTC Act, which targets “unfair methods of competition” (UMC). It is the first litigation under UMC in four decades and one brought in the waning days of the Biden administration. The Trump administration did not abandon the case, perhaps because PBMs are popular scapegoats, and patients who need insulin are vulnerable and numerous.
Thus far, among the three PBMs, ESI, a subsidiary of Cigna, agreed to a major settlement in early 2026, and Caremark, which is owned by CVS, recently announced it has reached a proposed settlement as well (OptumRx is owned by UnitedHealth Group). The ESI settlement breaks new ground in both healthcare regulation and the FTC’s Section 5 enforcement power.
An unfair system
PBMs are supposed to negotiate with drug manufacturers to acquire the lowest prices for health insurers, pharmacies, and employers. A PBM can extract price concessions from drug makers by placing the drug maker with the lowest price (or best terms) on its formulary with a low out-of-pocket cost. That favorable access and low price generate market share for the winning drug and induce its manufacturer to compete for the PBM’s business against other drugs in that category. In theory, the resulting lower prices reduce plan costs for employers (plan sponsors) and patients (as well as the health insurers). But in practice, PBMs sign contracts with employers that promise the employers a certain total amount of rebate dollars over the course of the plan year. PBMs then choose winning drugs based on the amount of “rebate dollars” they get back from manufacturers, rather than a lower per-member, per-month cost.
Rebate dollars are the difference between a drug’s list price and the (lower) negotiated price paid by a buyer. The trouble is that rebate dollars are easy to create; a manufacturer simply raises its list price and its rebate by the same dollar amount. While this move leaves the net price of the drug unchanged, the PBM earns more rebates from every sale of that drug, some of which it shares with the employer. The employer appears to gain from more rebates, but these come at the expense of a higher post-rebate price and weakened price competition among manufacturers. The PBM gains from the system because it keeps a share of the increased rebate dollars, and the manufacturer gains because it can obtain a place on the PBMs formulary without actually cutting its price. However, employers and patients are harmed because the distorted contracts between PBMs and employers raise the cost of healthcare.
This setup does not permit the robust price competition that Americans want in their pharmaceutical markets, but it is an artificial construction that creates significant incentives for manufacturers to raise list prices. Unfortunately, however, the system has a real impact on real people. An enrollee’s out-of-pocket costs for a drug are often based on the list price, and both uninsured and high-deductible customers’ out-of-pocket costs are increased by inflated list prices. Consider drug X with a list price of $500 and a rebate of $200, and imagine the PBM passes on 100% of the rebates to the employer. This results in a net price of $300 to the employer. An insured consumer with a high deductible will pay $500 out of pocket for the prescription. However, her (self-insured) employer only pays $300 to the manufacturer. The system results in a sick person paying an out-of-pocket cost well above the medication’s market price, while her employer profits. The employer collects $500 from the employee while the employer’s cost to purchase the drug is $300, resulting in a net profit of $200. The contract between the PBM and the employer records that the PBM deliver $200 in rebates.
Competition between different medications is harmed because a rival drug with a lower price and lower rebates is not attractive to the PBM. Imagine drug Z enters with a list price of $400 and a rebate of $150. It’s a cheaper product, but a PBM seeking rebates prefers the more expensive drug X. Every so often, the market and list prices get so far apart that a manufacturer will release a second version of the very same drug with a list price much closer to the transaction price. In our example, the maker of medication X ($500) would release medication Y, the same drug with a different name, at a list price of $300. The $300 drug comes with zero rebates, so it nets out to be the same cost as drug X (500-200). But a drug with zero rebates has an even harder time getting on the formulary than the products offering the PBM $150 or $200 in rebates. Importantly, drug Y is likely cheaper for the employer (unless the PBM gives back 100% of rebates) and is cheaper for any patient with a benefit linked to the list price of the drug.
The complaint
At the crux of this dispute is the life-saving drug insulin. 8.4 million people in the United States are taking insulin at any given time, and 1.3 million Americans ration insulin to save money, which makes PBM’s practices in this disease category particularly impactful. In 2024, the FTC sued Caremark, ESI, and OptumRx, alleging that they engaged in unfair “chase-the-rebate” practices that defy healthy price competition. The unfair practices included artificially inflating insulin prices by linking PBM payments to list prices, and also impeding patients’ access to lower-list-price drugs through formulary design that included the high-list-price drug (X in our example above) but excluded Y, which would have saved consumers money.
Does the conduct itself constitute an antitrust violation? Without more, a single PBM that creates a contract with employers that depends on the list price of the drug is unlikely to be found in violation of the Sherman Act.
This raises an interesting question: is competition between drugs harmed when the PBM chooses the more expensive medicine with the high rebate? The result of the scheme is that drugs compete on which can offer the biggest rebate, rather than on which offers the best value to the employer. A contract that shifts competition away from the true price of the product to the level of rebates instead likely harms that competition; it also certainly harms employees who buy drugs. Whether the employer is choosing a PBM contract in order to extract money from its sick employees, or the PBM is doing the extracting and the employer is another victim, is hotly contested. The problem is both one of unfairness and exploitation, as well as the undermining of competition.
Cleverly, the FTC brought the case as an “unfair method of competition” under Section 5 of the FTC Act, which is a great match with the problems in the marketplace. In the past, the FTC has used its UMC authority to pursue conduct that also violates other antitrust laws. What is unique about this case is that it is a standalone UMC case—it challenges conduct that is not actionable under other antitrust laws. Appellate courts have asserted that Section 5 reaches conduct which, “although not a violation of the letter of the antitrust laws, is close to a violation or is contrary to their spirit.” Currently, there is a lack of case law for the FTC’s Section 5 authority. When Congress enacted the FTC Act, it intended for the Commission to combat a broader spectrum of anticompetitive conduct than that covered by the Clayton Act and the Sherman Act. Back in 2022, the FTC issued a policy statement stating that “Section 5 reaches beyond the Sherman and Clayton Acts to encompass various types of unfair conduct that tend to negatively affect competitive conditions.” The key distinction here is between “unfair methods of competition” and the traditional “unfair competition” associated with antitrust law. This interpretation of Section 5 was controversial and was immediately rejected by current FTC Chairman Andrew Ferguson. Yet, he did not end the insulin litigation.
The ESI settlement
Recently, ESI entered into a groundbreaking settlement with the FTC, which promises improved contracting and reduced out-of-pocket insulin costs for patients.
Key positive features of the settlement include the following: First, member out-of-pocket costs for each drug are to be no higher than the drug’s real net cost (subtracting 100% of the rebate). This provision means the consumer can once again enjoy insurance; when she gets sick, she does not face contrived high drug prices. Relatedly, out-of-pocket coinsurance can no longer be based on the list price of drugs but must be based on the true net price. Third, ESI cannot receive compensation based on the list price of a drug. These provisions reduce the PBM’s incentive to ask the manufacturer for higher list prices. To close off other channels that create incentives for high list prices, the FTC mandated that ESI must refrain from “spread pricing,” the practice of earning a margin on the drug at the pharmacy. And last, ESI cannot guarantee the employer a predetermined amount of compensation from rebates.
More specifically, the terms of the settlement and their consequences are as follows:
Out-of-pocket costs for covered drugs are no higher than the net unit cost
The net unit cost is defined as the drug’s list price minus rebates and other discounts from the manufacturer, regardless of the type of health plan. This calculation will more closely estimate the drug’s actual cost, which can then be used in contracting between the employer and the PBM or the employer and the employee.
Out-of-pocket costs cannot be based on the list price
Now that ESI cannot calculate member out-of-pocket costs based on insulin’s list price, customers whose insurance is based on the drug’s cost to their employer will pay less out of pocket. In addition, manufacturers will not have the same incentives to raise list prices because PBMs won’t be clamoring for them.
ESI’s compensation cannot be based on the list price
By delinking ESI’s compensation from list price, the company no longer has the perverse incentive to favor the manufacturer selling higher-list-price drugs over lower-list-price drugs. This decoupling will eliminate the pressure on drug manufacturers to raise list prices to yield larger rebates.
ESI cannot employ spread pricing
Spread pricing is a practice in which PBMs can charge insurance companies (such as Medicaid) more than they reimburse pharmacies and then pocket the difference. For example, a PBM may reimburse a pharmacy $40 for insulin, but bill the health plan $50, and keep the $10 “spread.” If a PBM cannot make money on the difference, it may as well charge the employer the $40 and look for another way to extract surplus.
ESI cannot guarantee predetermined compensation from rebates
The prohibition means that ESI and the PBM will have to contract on the basis of some other measure.
Takeaway
The FTC is attempting to fix the broken pharmaceutical system by fundamentally changing how it operates and how firms in the healthcare industry contract, rather than trying to prove liability by one of the market actors. Note, however, that the FTC’s settlement with ESI is much less meaningful than a settlement that would cover all PBMs. Recent reports suggest the FTC is discussing settlements with OptumRx while the case is stayed. Caremark has also offered a proposed settlement. CVS Health’s (Caremark) VP of Communications stated that the firm “want[s] to avoid prolonged litigation” and instead “focus on making prescription drugs more affordable for [its] clients and members.” Given that Caremark and Optum Rx will be able to compete effectively with ESI if they all accept the same terms, settling is likely the best option. And, as described above, the settlement terms are relatively mild—the FTC is focusing on a transformative rather than punitive approach toward the industry giants.
If all three major PBMs decide to settle, a new, more rational norm for the industry might take hold. But can such a substantial change occur if the settlement only applies to insulin?
In summer 2025, Georgia Congressman Earl Carter introduced a bipartisan reform bill, the PBM Reform Act of 2025. If enacted, the bill would end list price-based compensation for all drugs. The PBM Reform Act also includes provisions that mirror ESI’s settlement, including transparency and anti-spread pricing clauses. This, of course, is a much more effective solution because it covers the whole industry and all new drugs going forward.
What if this case goes to trial?
This is a groundbreaking dispute because, if it goes to trial, the FTC will put a court in the position of ruling that the FTC Act Section 5 has teeth. If not, a court will essentially abandon American diabetics to the market power of PBMs and insulin makers—clearly an unattractive result.
In the event of a trial, the FTC has outlined a dual-pronged approach to deciding whether the conduct falls within Section 5. First, the conduct must be a method of competition. Methods of competition are simply actions undertaken by an actor in the marketplace. Second, the conduct must be unfair. Unfair conduct “goes beyond competition on the merits.” The conduct can be coercive, exploitative, or otherwise exclusionary. As discussed above, the conduct in the case exploits patients by charging them above-market prices. It is likewise coercive in the sense that a manufacturer that wants to compete on price or quality cannot and must offer rebates instead. An employer that wants to buy low priced drugs is instead forced to take rebates.
Even in the wake of Loper Bright, which overturned the practice of judiciary deference to federal agencies’ interpretations of ambiguous statutes, it is important to note that courts have consistently affirmed the scope of the Commission’s Section 5 authority. So, the court’s legal conclusions may rest heavily on whether it finds the FTC’s factual determinations true. If it does, the other PBMs will have a difficult time persuading a court that their practices are fair.
Conclusion
Before the FTC’s lawsuit, the status quo was for pharmaceutical companies to compete based on rebates, which distorted PBM decisions and were not fully passed through to employer and consumers. The settlement agreement between the FTC and ESI will restore the practice of contracting and competing on the basis of real prices.
The terms that the FTC outlines are not onerous, and the other two PBMs, Caremark and OptumRx, would be smart to settle on the same terms. Perhaps as a result of these settlements or legislation, smaller PBMs (around 20% of the market) will follow suit, and the industry will be revolutionized. Consumers who rely on insulin to survive will see lower drug prices. The settlement with ESI alone is expected to reduce patients’ out-of-pocket expenses by up to $7 billion over the next decade. Across-the-board insulin settlements would be an unambiguous win for the American consumer. Federal legislation modeled after the FTC’s settlement provisions but covering all drugs would be even better.
Aside from a significant change in the pharmaceutical industry, this case highlights the scope of the Commission’s Section 5 authority. The FTC was able to hold ESI to account for its anticompetitive and harmful conduct that did not rise to the level of an antitrust violation. This PBM litigation is a milestone in enforcing the UMC statute. It will (1) serve as a model for the type of conduct—in this case skewed incentives—that constitutes a standalone Section 5 violation, (2) demonstrate that even industry wide practices can be unfair methods of competition, and (3) set a precedent for other complex markets in which anticompetitive outcomes do not neatly fit into antitrust laws.
Author Disclosure: In the past three years, Fiona Scott Morton has consulted on several healthcare and pharmaceutical cases on behalf of private plaintiffs and defendants as well as for governments. Corporate clients in that window include Regeneron, GM, Pandora, Tapestry, CF Industries, Kroger, and Microsoft. In the past three years, Mariah K. Smith has conducted research for a law firm in its representation of Eli Lilly, the case for which Caremark was a co-plaintiff. You can read our disclosure policy here.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
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