Federal PBM probe culminates decades of M&A

The federal investigation into pharmacy benefit managers' dealings comes at a time when the industry is more consolidated than ever.

The Federal Trade Commission inquiry could lead to more restrictive policies and to sanctions against PBMs, along with other players in the pharmaceutical marketplace, legal experts predicted. But the industry has tools at its disposal to delay or weaken the probe.

Combined, UnitedHealth Group's OptumRx, Cigna's Express Scripts and CVS Health's Caremark control nearly 80% of the prescription drug market and heavily influence the prices for and access to medications.

Through decades of mergers and acquisitions, the three PBMs are part of of vertically integrated behemoths with significant presences in sectors such as health insurance, pharmacy and providers. In recent years, they have sought greater control over prescription drugs by launching offshore group purchasing organizations, which serve as rebate aggregators for other PBMs.

These new ventures add another layer of complexity and further limit competition, said Antonio Ciaccia, CEO of drug pricing research firm 46brooklyn Research and president of 3 Axis Advisors.

"Even ones that on paper might look like competitors, they're often using some of the services that the large PBMs provide," Ciaccia said. "We look at PBMs as if they're only PBMs, and they're just not."

The FTC will require CVS Health, UnitedHealth Group, Cigna, Humana, Blue Cross and Blue Shield-affiliated Prime Therapeutics and MedImpact Healthcare Systems to disclose information about their business practices, the agency announced last week.

Prime Therapeutics said it intends to cooperate with the FTC. OptumRx and CVS Caremark referred questions to the Pharmaceutical Care Management Organization, a trade group. The trade group did not make anyone available for an interview, but is confident the FTC's inquiry will validate that PBMs reduce consumer drug costs and blames high prescription prices on drug manufacturers, a spokesperson wrote in an email. Cigna declined to comment. Humana and MedImpact Healthcare Systems didn't respond to interview requests.

The evidence on whether PBMs help patients and providers is mixed. Researchers at the University of Southern California linked the larger rebates that PBMs often demand to rising drug prices. But Centers for Medicare and Medicaid Services actuaries reported that rebates constrain drug spending growth.

The FTC's inquiry didn't surprise those who follow the pharmacy benefit manager industry, said Margaux Hall, a partner at law firm Ropes & Gray. "We've seen whispers of that for quite some time."

A history of M&A

The pharmacy benefit manager model originated as a way to aggregate pharmaceutical buyers into purchasing groups that would have greater leverage with drug manufacturers. The drug company Merck saw owning a PBM as a means of getting its medications on health insurance formularies and purchased MedCo Containment Services for $6 billion in 1993.

The deal inspired other drugmakers to follow suit. In 1998, the FTC forced Merck to have an independent group monitor its formulary decisions because officials were concerned Merck would favor its own products.

"Part of the reason that federal officials went nuts about it is it's an inappropriate and unethical relationship when the PBM—which is ultimately able to determine which drugs are covered and which ones aren't—can be swayed by the conflict that exists with the drugmaker wanting more and more of their drugs to be sold," Ciaccia said.

"How is that any different from our current system of rebating?" Ciaccia said.

The way PBMs and pharmaceutical companies use rebates poses similar conflicts of interest and allows drugmakers to pay PBMs to prioritize their medicines on formularies, he said.

The next landmark PBM acquisition came in 2006, when CVS announced it would buy Caremark Rx for $21 billion. That vertical integration enabled the PBM to prioritize CVS pharmacies over other drugstores and increase CVS' market share, said Linda Cahn, an attorney who audits PBM contracts and who filed the first federal lawsuit challenging drug manufacturer ownership of PBMs in 1995.

CVS Health's 2018 acquisition of insurer Aetna mirrored the evolution of Cigna and UnitedHealth Group, which comprise insurance and pharmacy benefit management divisions.

Regulatory landscape

PBMs have enjoyed scant federal oversight since their inception. A 2004 FTC report concluded that "vigorous competition" was more likely than regulation to promote transparency in the PBM industry.

The drug rebates PBMs negotiate are exempt from anti-kickback and Stark laws, which essentially forbid companies from making or receiving payments or other incentives as part of purchasing deals. The Health and Human Services Department finalized a rule to end PBMs' anti-kickback safe harbors in 2019, but a federal court's order required HHS to delay the rule until 2023 after the Pharmaceutical Care Management Organization sued.

"PBMs kind of fly under the radar because they're neither an insurance company nor a healthcare provider," said Lucas Morgan, an associate at law firm Frier Levitt. "There was a belief that there was sufficient regulation of the appropriate entities, combined with not completely understanding the role that PBMs played."

The Affordable Care Act requires PBMs to disclose to the federal government and health insurance companies information about rebates, compensation and how many prescriptions they dispense. CMS also indirectly regulates PBMs through their Medicare Part D plan sponsors.

In the absence of stronger federal oversight, states have taken action.

In 2020, the Supreme Court ruled that federal law didn't prevent Arkansas from regulating how PBMs pay pharmacies, which empowered more states to implement laws and rules governing the companies. In 2021, more than 20 states introduced PBM-related legislation or regulations, according to law firm Mintz.

Over the past few years, states have targeted OptumRx, Express Scripts and CVS Caremark with lawsuits alleging they overcharge public programs.

Closer scrutiny

Momentum at the state level appears to be spreading to the federal government. The FTC will give the six companies 90 days to report information that includes minutes of board meetings, participation restrictions for pharmacy networks and lists of specialty drugs on their formularies.

The PBMs have 14 days from when they receive the FTC's orders to raise concerns about the information they are instructed to collect and submit. The companies will likely use that time to push back on which information they must release to the FTC, Morgan said.

The PBMs may initiate legal challenges that could limit what the FTC is able to gather, Morgan said. "I think we're going to end up seeing not just a request for an extension of time, but some agreement between the FTC and the PBMs that is going to allow for far longer extensions with the agreed upon, mutual goal of getting as much information as possible," he said.

If the FTC's probe stands up to potential legal challenges and uncovers evidence of anticompetitive behavior, the agency could fine PBMs or restrict certain business practices, Morgan said. The agency also could take more extreme measures, such as unwinding past mergers.

PBMs may consider proactively altering their business practices to reduce the pressure, Morgan said. "If I were thinking smartly about this, I would think, 'Are there any immediate steps we can take that might take the spotlight off us a little bit?'" he said.

Depending on what the investigation reveals, other companies in the pharmaceutical supply chain may also attract federal attention. The FTC study could provide insights into other aspects of PBMs' diversified businesses, or shed light on contracts with pharmacies, for example.

That would be appropriate, said Anne Winter, senior managing director at FTI Consulting who formerly was a senior director at CVS Caremark. "You can't look at one segment of the supply chain without really understanding that there are so many moving parts to it. You can't just find fault with one piece of it."

Investors seem unconcerned about the FTC investigation so far. Share prices for UnitedHealth Group, Cigna and CVS Health have remained in line with broader market trends since regulators announced the investigation.