Federal regulator’s oversight of the drug supply chain blasted — by one of the regulators

Prescription drugs sit on a pharmacist's counter. Photo by John Moore/Getty Images.

One of two federal agencies tasked with policing anticompetitive behavior among corporations last week said it has a lot more work to do when it comes to the prescription-drug supply chain.

One of the members of the Federal Trade Commission went even further. He suggested the agency has abdicated its responsibility as drug prices have risen, taking an ever-larger bite out of family budgets even as generic drugs flood the marketplace.

“Drug prices are out of control, and too many players in the pharmaceutical industry have failed to follow the law. There is a growing consensus that the Federal Trade Commission’s approach to overseeing the pharmaceutical industry is not working,” Commissioner Rohit Chopra said in a May 28 statement.  

“For example, I am unable to identify an instance where the FTC has filed a lawsuit in federal court to block a merger of pharmaceutical companies,” he added. “In addition, the FTC largely stood by as the pharmacy benefits manager (PBM) industry consolidated to three main giants and even took steps to undermine state legislation.”

That last sentence is significant. 

The letter accompanied a six-page report requested by Congress that discussed the system of rebates drug manufacturers give drug middlemen, or PBMs, in exchange for PBMs covering brand-name medicines and giving them preferred treatment. But the report focused almost exclusively on ways drugmakers might use rebates to shut down competition with other drugmakers.

Referring to one, it described how a drugmaker might threaten to stop paying rebates to a PBM if a cheaper rival is placed on a PBM’s “formulary,” its list of drugs that it will cover. That could force up drug prices in a number of ways, the report said.

It seems only logical to assume that when a drug is absurdly expensive, the company that makes it is to blame. But that ignores the complexity of the drug-supply chain — and possibly the relative bargaining power of the players in it.

Drugmakers need PBMs and insurance companies just as insurers and middlemen need manufacturers. The insurers and middlemen contract to handle millions of “covered lives” and if the maker of a patented drug wants access to them through a PBM’s formulary, it often has to offer rebates.

Supply chain analyst Adam Fein has shown for many patented drugs, net prices have been falling while list prices have been rising to accommodate those ever-bigger rebates.

PBMs insist they force down drug prices. But Chopra, the FTC commissioner, referred to possible downsides of non-transparent rebates in his letter.

Drug “manufacturers may pay for the rebate by increasing list prices of their drugs,” he wrote. “This raises the question of whether PBMs are incentivized to select higher list price drugs instead of lower list price drugs for their formularies in order to collect a higher rebate.”

The relative size of the corporations that make drugs might also suggest something about who has the upper hand when they negotiate with PBMs and insurers.

The three largest PBMs — CVS caremark, OptumRx and Express Scripts — control more than 70% of the marketplace. And since 2014, each has bought or been acquired by a company that also owns a major insurer: Aetna, UnitedHealth and Cigna, respectively.

Each of the resulting corporations are now much larger than the biggest drugmaker. 

CVS Health and UnitedHealth are respectively the fourth and fifth largest corporations in the United States by revenue, according to Fortune. Cigna is 13th.

The three largest drug wholesalers — McKesson, AmerisourceBergen  and Cardinal Health — are also in the top 20. But for the largest drug manufacturer, you have to look all the way down to the 36th slot to find Johnson & Johnson, followed by Merck at 65th.

FTC Chairwoman Rebecca Kelly Slaughter said her agency will redouble its efforts to root out anticompetitive practices in such a highly concentrated supply chain.

She wrote that “secretive rebates—which are sometimes quite large and represent a significant source of revenue for drug middlemen—favor larger competitors who can offer or demand bigger rebates and incumbents because of the challenges with switching patients to different drugs. This is not the way competition is supposed to work.”

She added that the poor and sick tend to be big losers.

The “system is particularly, and disproportionately, punishing for patients on high deductible health plans or without insurance at all — they pay the list price for some or all of their prescriptions, without receiving any benefit from rebates.”

The commissioners appear to be following the will of Congress. A bipartisan group of Senators is pushing legislation that would require the agency to investigate whether the corporations that own the big PBMs are rigging the market.

But the agency staffers who wrote last week’s report said they need help.

“Investigations and any resultant litigation are extremely resource intensive, and it is worth noting that the Commission’s competition resources are already stretched extremely thin by a high level of merger filings and our very active litigation docket,” they wrote in a footnote. “Congress has increased the FTC’s funding in the past two fiscal years and the agency is profoundly grateful. But these increases have not been enough to keep pace with the demands on the agency.”

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