Senate Commerce Committee Issues Testimony From David A. Balto Law Offices Antitrust Attorney
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I thank you for giving me the opportunity to testify on the concerns and the need for regulation and accountability in the pharmacy benefit manager ("PBM") market. My testimony documents the tremendous competitive and consumer protection problems in the PBM market and need for stronger antitrust enforcement, oversight, regulation, and federal legislation. For years PBMs have existed with scant regulation, and consumers have paid a heavy price in higher costs, less choice and inferior service.
My testimony is based on my 30 years of experience as a public interest antitrust attorney and an antitrust enforcer for both the
I have testified before
My testimony makes the following points:
* PBMs are one of the least regulated sectors of the healthcare system and drug supply chain. There is almost no federal antitrust enforcement, oversight, or regulation. The lack of antitrust enforcement and regulation has created an environment in which PBMs are free to engage in anticompetitive, deceptive, and fraudulent behavior that harms patients, payors, employers, unions, and pharmacists and significantly increases drug costs.1
* Because lax antitrust enforcement allowed the three largest PBMs to become vertically integrated and form a tight oligopoly,2 the PBM market lacks the essential elements for a competitive market: 1) choice, 2) transparency, and 3) a lack of conflicts of interest. PBMs leverage this lack of competition to further their own interests at the expense of patients, employers, and others in the system.
* The PBM rebate system turns competition on its head with PBMs seeking higher, not lower prices to maximize rebates and profits. In the past decade, PBM profits have increased to
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1 How PBMs Make Drug Pricing Problem Worse,
2 Reforming Biopharmaceutical Pricing at Home and Abroad,
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* Because of their market power and vertical integration these middlemen increasingly stifle competition from this country's most accessible and trusted health care professionals - community pharmacies. PBMs create endless schemes to reduce reimbursement, claw back funds, restrict networks, and effectively force pharmacies to provide drugs below cost. In 2020 alone, PBMs took
* The
For the PBM market to function properly for patients, employers, unions, and other stakeholders, we need strong oversight and regulation as well as greater antitrust and consumer protection enforcement. Any conversation on drug pricing reform must include a discussion on how to rein in PBMs.
The PBM Market Is Broken
Ensuring that patients can afford lifesaving and life-managing prescription drugs is critically important to public health because better use of medicines has been shown to help patients live longer and healthier lives. Unreasonably high out-of-pocket costs for prescription drugs at the pharmacy counter threaten patient access to medicines, as some choose to stop or delay treatment because they cannot afford it.7
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3
4
5 Comments of Consumer Action,
6 Medicare Program; Contract Year 2023 Policy and Technical Changes to the Medicare Advantage and Medicare Prescription Drug Benefit Programs; Policy and Regulatory Revisions in Response to the COVID-19 Public Health Emergency; Additional Policy and Regulatory Revisions in Response to the COVID-19 Public Health Emergency, CMS 4192-F, https://public-inspection.federalregister.gov/2022-09375.pdf.
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Undoubtedly, rising prescription drug prices are a serious problem for patients.8 PBMs were supposed to be a solution to this problem, but a lack of competition, transparency and existing conflicts of interest enable PBMs to game the system and put profits before patient welfare.
PBMs represent themselves as "honest brokers" or intermediaries between drug manufacturers, health insurers, plan sponsors, and providers. Although PBMs in principle have great promise in terms of their potential to control prescription drug costs, over time their role has evolved. Now, there is a pattern of self-dealing and anticompetitive behavior. Patients pay higher prices for drugs than they should because PBMs are not fulfilling their cost-control function. Consider that two of the three largest PBMs are in the Fortune 10 and all three in the Fortune 15./9
Let me be clear, the PBM market is broken because it lacks the essential elements for a competitive market, namely: (1) choice, (2) transparency and (3) a lack of conflicts of interest.11
First, there is a lack of choice. The PBM industry is a tight oligopoly, which results in reduced consumer choice. According to the
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7 Press Release,
8
9 Fortune Rankings, https://fortune.com/fortune500/2021/search/.
10
11 "Protecting Consumers and Promoting Health Insurance Competition," Testimony of
12 CEA White Paper, supra note 2. The Top Pharmacy Managers of 2021, the big get even bigger, Drug Channels,
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PBMs establish tremendous roadblocks to prevent payors from knowing the amount of rebates they secure. Even sophisticated buyers are unable to secure specific drug by drug rebate information. PBMs prevent payors from being able to audit rebate information. As the
Legislation requiring transparency or imposing a fiduciary duty might be one solution. Yet PBMs regularly fight against any such legislative proposals. For example, the PBMs fought against a 2014
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13
14 Brownlee A., The Pharmaceutical Supply Chain, 2013-2020,
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16 CEA White Paper supra note 2.
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Third, PBMs create and exploit numerous conflicts of interest. PBM rebate schemes create a clear conflict between the PBM and the payor. The payor prefers the lowest cost drug. But to maximize its profits PBMs often prefer the drug with the highest list price. And they often will prevent lower cost drugs such as generics and biosimilars from receiving preferred access on their formularies.
Conflicts of interest also abound because PBMs are vertically integrated with health insurers, mail order operations, specialty pharmacies, and in the case of CVS, the largest retail and specialty pharmacy chain, and the dominant long term care pharmacy. All three PBMs own their own specialty pharmacies, which they favor, discriminating against rival pharmacies. These PBMs steer patients to their own pharmacies as a requirement for patients to access their full prescription benefit. And all three PBMs are owned by or affiliated with the three largest insurance companies - United,
A Broken Market Leads to Escalating Drug Costs and Rapidly Increasing PBM Profits.
The most significant conflict that leads to escalating drug costs involves PBMs' incentives to maximize the rebates paid by manufacturers to get preferred access on their drug formularies. PBMs were formed to act as honest brokers to negotiate with drug manufacturers for lower prices for payors, but when PBMs share in the rebates that they negotiate, it creates an incentive for them to want higher, not lower, list prices. According to a recent Senate Finance Committee Report, "PBMs have an incentive for manufacturers to keep list prices high, since the rebates, discounts, and fees PBMs negotiate are based on a percentage of a drug's list price - and PBMs may retain at least a portion of what they negotiate."18 PBMs have gone so far as to require additional payments in the event of any reduction in manufacturer list prices.19
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17 PCMA Testimony to the
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Second, although there may be a theoretical argument that excessive transparency can lead to collusion, I think that is rather unlikely in this market. It assumes that buyers will disclose the precise amount of rebates to rival manufacturers. I represent payors and based on my experience I doubt that would occur. Moreover, in my 15 years as an antitrust enforcer including working as the FTC Policy Director, I cannot recall a single case where transparency led to the type of collusion the Professor suggests.
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PBMs' Demand for Rebates Results in Patients Not Having Access to the Most Efficacious and Affordable Medicines that they Need.
PBMs base formulary access decisions on the amount of the rebates, which encourages drug manufacturers to focus on offering higher rebates to secure that preferred status. Focusing on rebates gives PBMs incentives to put higher-cost drugs on their formularies, because the rebates are based on a percentage of a drug's list price. In essence, PBMs are making decisions on inclusion of a drug based not on clinical research or evidence-based efficacy and safety, but on which manufacturer offers a higher rebate payment. In pursuit of higher rebates, PBMs routinely deny access to formularies, change drug formularies, or require prior authorization for drugs that may be best for a patient's condition, even in cases where a more affordable medication is available. For example, a PBM often excludes a lower priced generic or biosimilar because the higher priced branded drug offers higher rebates.
As important as cost is the adverse impact on patient health. PBM rebate schemes interfere with doctor-patient relationships, and harm patients' health when they cannot get the drugs they need. PBMs may exclude new innovative drugs that may be less expensive and more effective, in favor of higher rebates.20 On many occasions PBMs may require patients to go through cumbersome and health-threatening step therapy programs in order to secure the more efficacious drug. As
As detailed below, PBMs engage in a long list of egregious, unfair and abusive practices that harm community pharmacies. Community pharmacies simply have no reasonable bargaining power with PBMs who extend contracts on a "take it or leave it" basis. You simply have to look no further than pharmacy direct and indirect remuneration fees. As noted above, the PBMs pulled in over
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18
19 Sagonowsky, E., UnitedHealthcare demands drug rebates even if pharma cuts list prices: analyst,
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21
22 American Patients First: The
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Lax Antitrust Enforcement of the PBM Industry Has Led to Widespread Anticompetitive Conduct
The
As authors from the
The
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23
24 Statement of
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The PBMs did secure the market power that the antitrust laws are meant to protect against. Rather than use that market power to effectively lower drug prices they used it to massively increase rebates and rebate schemes. As the following two charts demonstrate, PBMs have taken a majority of any reductions in pharmaceutical drug costs in the form of rebates and fees over the past five years and they are pocketing an increasing portion in profits.
In other words, drug manufacturers are attempting to lower costs through rebates, but an increasing portion of those rebates are being pocketed by the PBMs. They can do that because of the lack of competition, transparency and the conflicts of interest in the system.
Contrast the
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The insurance companies presented many of the same arguments as ESI-Medco - there were lots of competitors, there was little risk of monopsony power because healthcare providers could protect themselves, and the mergers were needed to lower healthcare costs. But the
The lack of
One of the reasons the
The lack of enforcement has harmed pharmacies, and this has a direct impact on consumers. I know as a consumer advocate that consumers place tremendous value on their access to community pharmacies. Community pharmacists are consistently ranked as our most trusted health care professionals. And community pharmacies are often the most accessible form of health care services in underserved rural or inner-city markets. Community pharmacies provide essential advice and health care monitoring especially for patients taking specialty drugs. Yet despite receiving hundreds of complaints from community pharmacies for the egregious and deceptive actions by PBMs, the
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25 Unfortunately, the
26 FTC Press Release,
27 See Commissioner Brill's Letter to the
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Just one example of egregious non-enforcement involves the numerous allegations that large PBMs are engaging in predatory pricing activities through the use of retrospective Direct and Indirect Remuneration ("DIR") and related fees. In practice, these fees depress reimbursement rates to pharmacies. In some cases, PBMs "claw back" more than the pharmacy initially received for the prescription, resulting in a net loss to the pharmacy.28 In fact, PBM claw backs of pharmacy revenue has been increasing each year, causing significant financial strain on these small businesses.29 The
Moreover, PBMs have engaged in a variety of practices that fundamentally can be defined as theft from the pharmacies, ultimately to the detriment of patients. For example, in 2018, the Ohio State Auditor audited its Medicaid Prescription Drug Program and found that the difference between what independent pharmacies are paid and what PBMs report back to the plans, commonly referred to as the "spread," had been growing. However, this growth in savings failed to translate into lower costs for the state.30 The Auditor further described that the spreads, which resulted in reimbursement cuts to local providers, actually turned into PBM profits.31
And, because antitrust agencies have allowed PBMs to vertically integrate with insurers, mail order operations, and pharmacies, PBMs have financial incentives, and the necessary market power, to steer patients to their affiliated services.33 Since PBMs have their own pharmacies (indeed the largest pharmacy chain CVS owns the second largest PBM) PBMs frequently access rival pharmacy patient data and provide it to their pharmacy affiliate in an effort to steer patients away from rivals. Patients may be forced into PBM-owned mail order or 1-800 specialty pharmacy operations that provide an inferior level of service to competing community pharmacies and specialized pharmacies like
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28
29 Id.
30 See Pharmacy Middlemen Made
31 Id.
32
33 Vertical Integration Isn't Great for Health Care Consumers or Purchasers, PURCHASER BUSINESS GROUP ON HEALTH (
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PBMs "offer" independent pharmacies "take it or leave it" contracts, where a pharmacy must choose between accepting unfavorable reimbursement terms, or exclusion from the PBM's network (and patient population). In some cases, pharmacies are coerced into agreeing to below- cost reimbursement. This unsustainable choice has forced many pharmacies to close their doors.35 This has caused what has been characterized as "pharmacy deserts" and has disproportionately harmed rural and urban
And, when state legislatures try to pass basic reform laws to protect independent pharmacies and consumers from predatory practices of PBMs, the PBMs, without fail, bring lawsuits to challenge such statutes based on ERISA (the Employee Retirement Income Security Act of 1974) pre-emption. Recently, such PBM reform passed by the
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34
35
36 Id.,
37 See,
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Legislative Action to Prevent PBM Abuse
We are at a crucial turning point on PBMs. It is increasingly evident that these middlemen are significantly increasing drug costs and reducing access because of clear market failures and a lack of meaningful regulation. We can ill afford middlemen that extract
This Committee should consider amending the FTC Act to specify certain practices that harm consumers and competition as "unfair or deceptive acts or practices" and "unfair methods of competition."
* Failing to pass on all rebates and clawbacks to payors and patients;
* Basing PBM compensation on the price of a drug;
* Schemes that prevent lower priced drugs from being included on a formulary or being placed in a disadvantageous position;
* Discrimination in reimbursement to pharmacies;
* Forcing pharmacies to dispense below acquisition cost;
* Failing to disclose DIR and other associated fees; and
* Discriminatory practices against community pharmacies.
The
Concluding Thoughts
The dominant PBMs play a significant role in driving up prescription drug prices, reducing patient choice of medicines that they need, and lessening competition among pharmacies. Patients care deeply about rising healthcare costs, including out-of-pocket costs for prescription drugs, as well as ensuring they can access the medicines that they need. If PBMs continue to evade
Fraud, deception, anticompetitive conduct, higher prices, and reduced choice harms payors, including the government and taxpayers, and, most importantly, patients, who rely on access to lifesaving and life-managing prescription drugs.
I look forward to answering any questions.
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