FTC Escalates Battle Against PBMs With Complaint on Insulin Pricing

Key Takeaways

• The FTC filed an administrative complaint against the “Big Three” pharmacy benefit managers (PBMs) and their affiliated group purchasing organizations (GPOs) after a years-long investigation.
• Although the complaint is primarily focused on insulin pricing, the FTC’s requested relief would apply to PBMs’ practices across the board, not just with respect to a single drug. 
• The FTC’s Deputy Director for the Bureau of Competition also publicly warned drug manufacturers that they too could be subject to enforcement actions related to drug pricing.
• The FTC alleges violations of Section 5 of the FTC Act and the complaint was filed in the agency’s in-house administrative court, signaling weakness in the FTC’s theory and doubts about the case’s ultimate viability. Nevertheless, PBMs remain under heavy scrutiny from legislators, as well as regulators. 

The FTC filed an administrative complaint on September 20, 2024, accusing the three largest pharmacy benefit managers (PBMs) – Caremark Rx, Express Scripts, and OptumRx – and their affiliated group purchasing organizations (GPOs) of artificially inflating insulin prices. According to the FTC, the PBMs “rigg[ed] pharmaceutical supply chain competition in their favor” through a “perverse drug rebate system that prioritizes high rebates from drug manufacturers,” ultimately leading to higher insulin list prices for patients. The complaint was issued after a 3-0 party-line vote by the Commission’s Democrats, with the two Republican Commissioners recused. Overall, the complaint reflects several recent enforcement trends from the agency: (i) an attempt to revive enforcement of Section 5 of the FTC Act, and (ii) a focus, along with the DOJ, on addressing rising costs of core goods and services, like rent, groceries, and prescription drugs. 

As a refresher, PBMs and their affiliated GPOs play the role of middlemen between drug manufacturers and payors (i.e., insurance providers, and ultimately patients). PBMs negotiate the cost of drugs on behalf of the payors, seeking discounts on the list price of drugs (often through rebates), as well as providing other administrative services. PBMs retain a portion of the discounts/rebates that they negotiate for a payor. One of the main ways PBMs can exert leverage with drug manufacturers is through formularies, which are lists of drugs that are covered by a health plan. By excluding (or threatening to exclude) drugs from a formulary, PBMs can significantly reduce how often drugs are prescribed, impacting the manufacturer’s sales.   

According to the FTC, the defendant PBMs, which the FTC refers to as the “Big Three,” incentivized manufacturers to inflate the list price of insulin in order to obtain higher rebates, and also prioritized higher-priced versions of insulin over lower-cost alternatives on their formularies. The FTC further alleges that artificially raising list prices allowed the drug manufacturers to offer higher rebates, which in turn allowed the PBMs to make more money. This, according to the agency, came at the cost of lower-priced insulin options that did not carry the potential for large rebates. The agency alleges these practices harm payors, who have to pay more for their subscribers’ insulin, and patients without insurance or who are underinsured, who are forced to pay the high, non-rebated list prices at the point of sale.

In an accompanying press release, Rahul Rao, the Deputy Director of the FTC’s Bureau of Competition, also took aim at the insulin manufacturers, Eli Lilly, Sanofi, and Novo Nordisk. Mr. Rao stated that although the Commission “exercised its discretion” to only litigate against the PBMs and GPOs for “now,” the FTC’s investigation found the manufacturers “sharply inflated the list prices of their insulin products in response to the PBMs’ demand for higher rebates.” Mr. Rao further stated the Bureau was “deeply troubled by the role drug manufacturers play in driving up prices,” and issued a warning that “all drug manufacturers should be on notice that their participation in the type of conduct challenged here can raise serious concerns” and they could be named in “any future enforcement actions over similar conduct.”

The FTC’s Complaint Follows Years of Investigation And Seeks Broad Relief

The administrative complaint is the culmination of years of investigation by the agency into PBMs. In June 2022, the FTC launched an inquiry into PBMs, expressing the agency’s concern that PBMs have “enormous influence on which drugs are prescribed to patients, which pharmacies patients can use, and how much patients ultimately pay.” The following year, in July 2023, the FTC announced it was sending subpoenas to the PBMs’ related GPOs. And in July 2024, the agency released an interim staff report on PBMs, concluding that the PBM space is highly concentrated, with the Big Three having a nearly 80% market share. This concentration, according to the FTC, means “the dominant PBMs can often exercise significant control” over the cost and availability of drugs. The PBMs quickly fired back, with the national PBM trade association stating the report “falls far short of being a definitive, fact-based assessment of PBMs or the prescription drug market.” One PBM recently went even further; on September 17, 2024, Express Scripts (owned by Cigna) sued the FTC for defamation and violations of due process in issuing the report, seeking to recuse Chair Lina Khan from further action against the company. 

The FTC’s desire to curtail the PBMs’ power is clear and, while the complaint focuses almost exclusively on alleged conduct in the market for insulin, the Commission’s requested relief is far broader, seeking to regulate PBM activity for all types of drugs. Specifically, the complaint seeks relief including but not limited to prohibiting the PBMs from: (i) disadvantaging lower cost drugs on their formularies, (ii) accepting compensation based on a drug’s list price, and (iii) designing or assisting with designing any benefit plan that bases patients’ deductible or coinsurance on the list price (as opposed to the net cost after rebates). In this way, the agency is using a case about a single drug as a conduit for a broader effort to reform the PBM industry. 

Choice of Venue and Theories of Harm Raise Questions

While the complaint alleges three counts of “unfair methods of competition” under Section 5 of the FTC Act (“Section 5”), it does not allege a violation of the Sherman Act, the primary federal antitrust statute. In doing so, it arguably attempts to push the bounds of Section 5 beyond traditional antitrust principles. This is not unprecedented: decades ago, the FTC expressed the view – and filed cases arguing – that Section 5 reaches beyond the Sherman Act and encompasses a broader set of unfair conduct. But following a string of defeats in the 1980s, the Commission curtailed its Section 5 litigation. Over the past several years, the agency under Chair Khan has made public comments about expanding the interpretation of Section 5 beyond Sherman Act violations and promising to bring more actions under the statute – often to criticism. Indeed, the FTC’s recent effort to ban noncompete agreements nationwide through administrative rulemaking was also done under its Section 5 authority, with the agency stating noncompetes are an “unfair method of competition.” But the ban was recently blocked by a federal district court. The FTC’s choice to bring the PBM complaint under Section 5 may similarly be viewed skeptically by the courts. 

One other notable aspect of the FTC’s complaint is its choice of venue. Instead of filing in federal court, the agency decided to use its in-house administrative court. But the use of such in-house agency courts is under fire. Several months ago, the Supreme Court ruled that the SEC could not use a similar in-house tribunal when seeking civil penalties for claims related to fraud. And Meta has filed a lawsuit against the FTC’s in-house adjudication system, after the agency reopened an enforcement order against the company. Kroger also brought a complaint challenging the FTC’s administrative process as unconstitutional, after the Commission instituted an administrative proceeding to block Kroger’s proposed merger with Albertsons. Both cases are still pending. It is possible the PBMs could mount a similar collateral challenge to the FTC’s in-house adjudication system.

Beyond the FTC’s Complaint, PBMs Face Legislative Reforms That May Be More Likely in the Short Term

PBMs have also been a hot topic in Congress, although there has been little concrete action to-date. In 2023, the Senate held a hearing on PBMs where senators from both parties suggested “blow[ing] up the whole model” and “start[ing] over” given the ongoing “PBM mess.” Both the Senate and House have introduced several pieces of PBM legislation over the past two years, including a bill that passed the House in December (but stalled in the Senate), that would have required PBMs to report significantly more data to health plans on rebates, formulary placement, and acquisition costs (among others). The bill joins other efforts at both the state and federal level to challenge PBMs.

At bottom, the PBM industry remains under siege from all corners. The FTC’s complaint follows years of investigation into and rhetoric regarding the industry by the Commission. But the FTC’s lawsuit may rest on shaky ground due to its choice of venue, extension of Section 5 beyond traditional antitrust claims, and the broad nature of relief sought despite its narrower allegations. Given this and the bipartisan efforts at the federal and state level, PBMs may be more likely to face a legislative reckoning before a legal one from the FTC.

 

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee a similar outcome.