PBMs Face Increased Scrutiny: The Federal Trade Commission’s Policy Statement and Other Recent Congressional Action

Congress has recently increased its scrutiny of Pharmacy Benefit Managers (“PBMs”), coinciding with a crucial policy shift by the Federal Trade Commission (“FTC”) that appears promising for independent pharmacies and other providers seeking relief from PBM abuses. In March, the House Committee on Oversight and Accountability launched an investigation into PBM abusive tactics, while a recently proposed House bill seeks to ban spread pricing in Medicaid Plans. On March 30, Frier Levitt co-founding Partner Jonathan Levitt and other witnesses testified before the Senate Finance Committee while the Senate Commerce Committee held a hearing on February 16 to discuss these issues in preparation for a committee vote on the bipartisan S. 127, Pharmacy Benefit Manager Transparency Act of 2023. This increased congressional scrutiny follows the FTC’s recent policy shift which may have important implications on enforcement against PBMs going forward.

On November 10, 2022, the FTC – the government agency vested with enforcement authority over Antitrust (in conjunction with the Department of Justice) and Consumer Protection laws – issued a Policy Statement regarding enforcement of Section 5 of the FTC Act. The Policy Statement restores and reaffirms the Agency’s authority to rigorously enforce the federal ban on unfair methods of competition. Read in the context of the Agency’s approval of a “6(b) Study” investigating PBM anti-competitive conduct, it appears the FTC may be targeting the many kinds of PBM abuses pharmacies have raised over the past several years, and on which Congress is now increasingly focused. This Policy Statement should be viewed as another positive step by the federal government to crack down on PBM abuses.

Effects of the Policy Statement

The Policy Statement does two things: (1) expounds upon the FTC’s historic and present legislative mandate to enforce Section 5 of the FTC Act; and (2) describes in detail both precise and general factual circumstances in which the FTC can intervene with a business to enforce Section 5. In other words, the FTC first explains why it has the power to expansively enforce Section 5, and then explains the types of conduct the agency may target going forward. These types of conduct go beyond the conduct the FTC has targeted in recent years, thus providing greater protection against unfair trade practices than it has in recent history.

Section 5 of the FTC Act Prohibits Unfair Methods of Competition

Section 5 of the Federal Trade Commission Act (FTC Act), codified at 15 U.S.C. § 45(a)(1), prohibits “unfair methods of competition in or affecting commerce.” Congress enacted the FTC Act in 1914—thus creating the FTC and vesting the Agency with enforcement powers—to correct some of the deficiencies in the Sherman Antitrust Act. At the time, courts had adopted a nebulous standard for enforcement of antitrust laws, and Congress sought to create a law that would expand beyond those laws’ reach and provide the FTC with flexibility to adapt to changing circumstances. Thus, Congress enacted Section 5 to protect against various types of unfair or oppressive conduct in the marketplace, including methods of competition that tended to undermine “competitive conditions” in the marketplace. The new Policy Statement demonstrates the FTC’s recommitment to the principals Congress employed in passing the FTC Act and establishing the Agency, and the Agency has committed to examining trade practices previously overlooked under Section 5.

The Policy Statement Demonstrates Scrutiny of PBM Unfair Trade Practices

The Agency has identified a multitude of acts that it considers Unfair Trade Practices. Among these are acts that pharmacies can clearly identify as applying to PBM conduct. These include:

• A series of mergers, acquisitions, or joint ventures that tend to bring about the harms that the antitrust laws were designed to prevent, but individually may not have violated the antitrust laws.
  • As Frier Levitt has shown throughout the years in the below chart, PBMs have been steadily merging with Plan Sponsors, Rebate Aggregators, and Specialty and Retail pharmacies to create vertically integrated behemoths designed to undercut independent pharmacies. It appears the FTC may now consider this activity a violation of Section 5.

• Using market power in one market to gain a competitive advantage in an adjacent market.
  • Due to the vertical integration discussed above, PBMs are positioned to set prices for independent pharmacies that compete with their downstream, affiliate specialty and retail pharmacies.
• Conduct resulting in direct evidence of harm, or likely harm to competition, that does not rely upon market definition.
  • This is a broad topic, but is on point with respect to the kinds of conduct PBMs engage in, including for example:
    • The use of “steering” and “claims hijacking”; practices highlighted by a recent Vermont Department of Financial Regulation Report which cited Frier Levitt’s February 2022 publication, “Pharmacy Benefit Manager Exposé: How PBMs Adversely Impact Cancer Care While Profiting at the Expense of Patients, Providers, Employers, and Taxpayers,” and identified this as an area where Vermont has received consumer complaints;
    • Manufacturer rebates and “rebate aggregators” that result in PBMs capturing profits that should be passed through to plans and beneficiaries;
    • Pharmacy DIR, GER, and other clawbacks that have resulted in pharmacy under-reimbursement and have had catastrophic effects on independent pharmacies, as discussed in a recent Senate Hearing;
    • The coming “New World Order” of drastically lower reimbursement for pharmacies;
    • Other abusive PBM practices that independent pharmacies and dispensing practices have become all too familiar with over recent years, like abusive audits; mandatory white-bagging; and MAC pricing.
• False or deceptive advertising or marketing which tends to create or maintain market power.
  • This often happens in the form of “steering” or “claims hijacking” efforts, in which PBMs may reach out directly to patients to steer them away from their pharmacy of choice to the PBM’s wholly-owned pharmacy.
• Discriminatory refusals to deal, which tend to create or maintain market power.
  • Pharmacies not located in a state with an “Any Willing Provider” law understand the difficulties in participating in commercial pharmacy networks, where a PBM excludes competing pharmacies from its networks.

By highlighting these kinds of practices as requiring more exacting scrutiny, and combined with its ongoing investigation of PBMs, the FTC seems to be signaling a welcome examination of the kinds of abusive practices Frier Levitt has been shedding light on for over the past decade on behalf of independent pharmacies, dispensing practices, and other industry stakeholders.

The FTC Can Enforce Section 5 Through Complaints and Rulemaking

Pursuant to its delegated power under Section 5, the Agency may enforce Section 5 through a Cease and Desist Order. If a Cease and Desist Order stands, and a PBM violates such an Order, it may be subject to civil penalties of up to $10,000 per each day it fails to comply with the Order.

Additionally, the FTC may engage in a more proactive form of enforcement through Rulemaking. Agencies like the FTC have been delegated power by the Congress to issue Rules (also known as Regulations), that businesses under the Agency’s jurisdiction must follow. There is bi-partisan support for FTC action against PBMs, as exemplified by the efforts of Sen. Chuck Grassley (R-IA) and Sen. Maria Cantwell (D-WA) to bring transparency and accountability to PBM activities. While Rulemaking can be a long process, requiring “notice and comment” from the public and stakeholders, such Rules can bring lasting change to the industry.

Combined with increased bipartisan congressional scrutiny, the “one-two punch” of Legislative action and ramped up Executive enforcement are the most promising signs in years that the federal government is prepared to take meaningful steps toward reforming the industry. Independent pharmacies may soon see much-needed relief against the increasingly predatory and abusive tactics employed by PBMs.

How Frier Levitt Can Help

Frier Levitt is at the forefront of federal and state efforts to reign in PBM abuses. Our experienced attorneys were engaged by multiple industry stakeholders to provide comments to the FTC in support of the Agency’s plan to investigate PBM Abusive Practices, and provided much-needed clarity to the Agency in response to its request for comments. Our Government Affairs Group has worked with legislators at both state and federal levels to inform legislation geared toward protecting independent pharmacies, while our PBM Litigation Group is especially experienced in bringing actions in court and arbitration against the PBM abuses discussed here. Contact Frier Levitt to learn more.