Plan Sponsor and Manufacturer Alert: FTC Investigating Rebate Arrangements Created by PBMs

Last week, the Federal Trade Commission (“FTC”) fired a warning shot across the bow of PBMs, but Manufacturers and Plan Sponsors must also take note. On June 16, 2022, the FTC announced that it will “ramp up enforcement against any illegal bribes and rebate schemes that block patients’ access to competing lower-cost drugs.”  This announcement comes on the heels of the FTC’s recent announcement to formally conduct a study into the anti-competitive and abusive practices of Pharmacy Benefits Managers (“PBMs”).  The FTC is investigating questionable rebate schemes after receiving complaints for many years about rebates and fees paid by drug manufacturers to PBMs to favor high-cost drugs that generate large rebates not always shared with patients.

According to the FTC, rebates and fees “shift costs and misalign incentives in a way that ultimately increase patients’ cost and stifle competition from lower-cost drugs, especially when generics and biosimilar are excluded or disfavored on formularies.” The FTC indicated that rebate and fee agreements, which are conditioned on the sales volume of specific drugs or the exclusion of competing drug products from the formulary tier, may incentivize PBMs and other intermediaries to steer. By way of example, FTC highlighted that, between 2009 and 2017, the wholesale price of insulin tripled and increased out-of-pocket costs for both insured and uninsured patients – the list price for a year’s supply of insulin has risen to nearly $6,000, with out-of-pocket costs for insulin alone averaging $1,288 for uninsured patients and $613 for insured patients as of 2017.

The FTC explained its enforcement authority by citing its legal authorities. FTC provided that:

  1. Exclusionary rebates that foreclose competition from less expensive alternatives may constitute unreasonable agreements in restraint of trade under Section 1 of the Sherman Act; unlawful monopolization under Section 2 of the Sherman Act; or exclusive dealing under Section 3 of the Clayton Act;
  2. inducing PBMs or other intermediaries to place higher-cost drugs on formularies instead of less expensive alternatives in a manner that shifts costs to payers and patients may violate the prohibition against unfair methods of competition or unfair acts or practices under Section 5 of the FTC Act; and
  3. paying or accepting rebates or fees in exchange for excluding lower-cost drugs may violate Section 2(c) of the Robinson-Patman Act, which prohibits payments to agents, representatives, and intermediaries who represent another party’s interests in connection with the purchase or sale of goods.

The FTC indicated that it will closely scrutinize the impact of rebates and fees on patients and payers to determine whether any of the aforementioned provisions have been violated. The FTC will also monitor private litigation and file amicus briefs where it can aid courts in analyzing unlawful conduct that may raise drug prices. 

Rebate Aggregators

Major PBMs are vertically integrated and own rebate aggregators including Ascent Health Services, LLC (Cigna Corp./Evernorth), Emisar Pharma Services, LLC and Coalition for Advanced Pharmacy Services, LLC (UnitedHealth Group, Inc./Optum), and Zinc Health Services (CVS Health). Rebate aggregators provide services to other PBMs. For example, Humana Pharmacy Solutions and Prime Therapeutics utilize Ascent Health Services for rebate aggregation. Vertically integration and the horizontal partnerships among PBMs deter competition and increase drug prices and out-of-pocket expenses. It is also worth noting that the gross-to-net bubble exceeded $200 billion in the calendar year 2021. The term “gross-to-net bubble” refers to the dollar gap between gross sales at brand-name drug list prices and drug sales at net prices after rebates and other reductions. The gross-to-net bubble expands when manufacturers pay rebates to PBMs. PBMs do not reveal the percentage of drug manufacturer rebates that are retained at the PBM level, instead of being passed through to plans.

Based on the FTC warning, drug manufacturers should carefully review their rebate arrangements with PBMs to evaluate regulatory compliance with these concepts. Plan Sponsors should also review their PBM contracts and assert contractual audit rights to compel PBMs to disclose rebates and fees that were retained by PBMs and their rebate aggregators.

How Frier Levitt Can Help

Frier Levitt’s Plan Sponsor Practice Group provides a panoply of legal services to Plan Sponsors, and manufacturers, including healthcare policy review and analysis, auditing (and where necessary, litigating against) PBMs to verify that Plans have been paid the proper rebates, and ensuring manufacturers are in compliance. If your organization is a plan sponsor or manufacturer, contact us to learn more about your contractual rights and obligations.