W Todd Miller Erin Glavich Lucy S Clippinger June 30 2022 More democrats, more action? FTC increases scrutiny of pharmaceutical rebate walls and fees Baker & Miller PLLC | Competition & Antitrust - USA W Todd Miller, Erin Glavich, Lucy S Clippinger Competition & Antitrust IntroductionWhat are PBMs and how do rebate walls work?Policy statementCommentIntroductionAfter more than a year of uncertain or unsuccessful attempts to crackdown on payments and rebates made to pharmacy benefit managers (PBMs) by drug manufacturers, the Federal Trade Commission (FTC) suddenly found its footing in a policy statement issued on 16 June 2022 announcing increased scrutiny of these payments under US competition and consumer protection laws. The policy statement comes during a crescendo in FTC activity in this space following:a hesitant report to congress in May of 2021;a failed attempt to conduct a study of PBMs in February of 2022;a request for information on PBMs issued in February of 2022;a successful launch of a formal PBM study (initiated just two weeks prior to the issuance of the policy statement);a public listening session on the impact of mergers in the healthcare sector; anda two-day public workshop exploring approaches to mergers in the pharmaceutical industry that concluded the day before the policy statement was issued.Despite not having the benefit of the results of the FTC's study of PBMs, the policy statement lays out a framework for the FTC to take action against PBMs, and it includes potential enforcement pathways not mentioned by the FTC in its congressional report in 2021.The policy statement serves as a warning shot for drug makers and PBMs that the FTC, now with three democratic appointees at the helm, will have less patience for rebate and fee schemes that might result in American consumers and businesses paying higher prices for pharmaceuticals.What are PBMs and how do rebate walls work?PBMs are essentially middlemen who are paid by health insurance plans to negotiate with drug manufacturers. The largest PBMs are vertically integrated with insurance companies, such as:CVS Caremark (integrated with CVS Health and Aetna);Express Scripts (integrated with Cigna); andOptumRx (integrated with United Healthcare).PBMs also create drug formularies (lists of prescription drugs to be covered by a particular health insurance plan) and related policies, and they are responsible for reimbursing pharmacies for patients' covered prescriptions.PBMs' role in creating drug formularies is the key to the FTC's concerns about rebates and fees (sometimes referred to as "rebate walls"). While the structure of the rebate programs may differ, the classic formulation consists of a drug manufacturer providing a rebate to a PBM as long as a particular drug stays listed on the PBM's formulary while other similar medications are excluded. While some or all of these savings may be passed on to consumers, the rebates can create perverse incentives. Adding a lower-cost alternative to the formulary creates a high risk for the PBM that it will lose its rebate, costing it more money in the short term if enough patients do not quickly switch to the lower-cost alternative. This may incentivise PBMs to avoid that risk by never making the lower-cost option available to patients.Given the incentives created by rebate walls, the FTC is concerned that rebates and other payments to PBMs may result in patients being steered away from low-cost generics or biosimilars. The worry is that this may effectively insulate higher-cost medications from competing with lower-cost alternatives and improperly shield a manufacturer's market share. The practice may also shift costs to payors and patients with outsized impacts on consumers who do not have insurance.Policy statementThe FTC's policy statement is initially notable for what it is not; the statement does not consist of guidelines or a pronouncement that the FTC will view any specific conduct as illegal. It does not lay out factual scenarios in which the FTC will consider a violation to have occurred or bring an enforcement action. Instead, the policy statement provides a summary of concerns that motivated the FTC to take a closer look at rebates and fees given to PBMs and reviews the legal avenues the FTC has available to it should it determine that any particular conduct does warrant an enforcement action.In describing the FTC's concerns, the policy statement acknowledges that the FTC has received many complaints over the years related to rebates and fees given to PBMs, and in particular that such payments are not always passed along as savings to patients. It uses insulin as an example to demonstrate the harms that may attach to higher drug prices. Consistent with anticipated shifts in FTC policy under the Biden administration (for further details please see "Merger review: FTC attempts to correct 'failed experiment'"), the FTC's policy statement emphasizes both traditional "consumer welfare"-oriented harms, such as consumers paying more for insulin, but also harms caused by loss of consumer choice. For instance, the statement details consumers' decisions not to change jobs or pursue other opportunities due to a fear of losing health insurance that covers their insulin. It also emphasises that the harms of high insulin costs have a greater impact on traditionally marginalised groups.The FTC then details various tools it has at its disposal to investigate and take enforcement actions against rebate walls, including:Section 5 of the FTC Act, through which the FTC can challenge unfair methods of competition or unfair acts or practice, and can also enforce section 1 (agreements in restraint of trade) and section 2 (monopolisation or attempted monopolisation) of the Sherman Act;Section 3 of the Clayton Act, which deals with exclusive dealing and tying arrangements significantly lessening competition or tending to create a monopoly; andSection 2 of the Robinson-Patman Act, and in particular section 2(c), which was initially targeted at dummy brokerage fees and prohibits a seller's payments of fees or discounts in lieu of fees to a buyer or a buyer's agents for services not actually rendered.The FTC's references to section 3 of the Clayton Act and the Robinson-Patman Act are particularly notable, as these potential avenues of enforcement were not mentioned in the FTC's 2021 report to congress related to rebate walls and neither statute has been used in decades.(1) However, it was anticipated that Biden's progressive antitrust agenda would lead to agencies branching out to use seldom-tapped competition- and pricing-related statutes, such as the Robinson-Patman Act (for further details please see "Progressive antitrust agenda on pricing: silence before the storm?").The FTC notes that it is not concerned with legitimate rebates for services that are negotiated in good faith and provide added value for patients. Rather, the policy statement relates to drug manufacturers that are using a dominant position to stifle competition from less expensive biosimilars or generics, in which case the FTC asserts it has the authority to act.CommentThe FTC's policy statement, which was issued following a 5-0 vote, comes mere days after the FTC's second, and first successful, attempt to launch a formal study into PBMs (discussed in our previous article, "FTC intensifies healthcare activism"). A likely explanation for the sudden whirlwind of activity is the democratic appointees' newfound majority. The FTC has spent more than seven months with two commissioners appointed by each party, and without the majority it needs to enact the progressive policy agenda that was anticipated based on the appointment of Chair Lina Khan. With Commissioner Alvaro Bedoya confirmed in May of 2022, the Commission may be attempting to strike while the iron is hot, aware that it can revise its policy statement or issue guidelines down the road in response to new information and patterns it uncovers during its formal inquiry into PBMs.Political pressure may also play a role in the FTC's quick action. In late May 2022, Senators Maria Cantwell and Chuck Grassley introduced a bipartisan bill intended to give the FTC more power to go after PBMs and to increase transparency in drug pricing. The bill, which was advanced by the Senate Committee on Commerce to the full Senate on 22 June 2022, details specific conduct that, if engaged in by a PBM, would be considered an unfair or deceptive act or practice in violation of the FTC Act. It also provides for additional civil penalties beyond those set out in the FTC Act. The FTC, which previously issued a lacklustre report on rebate walls to Congress in 2021 focusing on private litigation potentially breaking new ground (rather than the FTC's own plans or actions) and emphasising the FTC's busy docket and lack of resources, may be attempting to show that it is taking the issue of PBMs and rebate walls seriously and is up to the task set out by Senators Cantwell and Grassley's legislation.The FTC's recent uptick in activity around PBMs and rebate walls is likely a sign of increased enforcement to come. The study and policy statement on their own may encourage some reform among PBMs, now aware that their practices are not just under governmental spotlight but are more likely to face enforcement action. The policy statement also suggests that, as more information comes to the FTC through its inquiry, there may be more detailed policy statements or guidelines as well as enforcement activities targeted at specific PBMs. As previewed by the policy statement, the FTC has made clear that it will not shy away from using creative and less-used statutes to pursue what it views as anticompetitive practices or discriminatory pricing among PBMs and drug manufacturers.Companies and investors in the pharmaceutical space should be aware that this is likely just the beginning of the FTC's moves to enact a progressive policy agenda in that arena. Now that democratic appointees are in the majority on the Commission, there is expected to be much more in the pipeline from Chair Khan's FTC.For further information on this topic please contact W Todd Miller, Erin Glavich or Lucy S Clippinger at Baker & Miller PLLC by telephone (+1 202 663 7820) or email ([email protected], [email protected] or [email protected]). The Baker & Miller PLLC website can be accessed at bakerandmiller.com.Endnotes(1) The last litigated federal government Robinson-Patman Act case was Boise Cascade Corp v FTC, 837 F 2d 1127 (DC Cir 1988). (The FTC did settle a Robinson-Patman Act case against McCormick in 2002.) The last government Clayton Act section 3 case was United States v Dentsply Int'l, Inc, 277 F Supp 2d 387 (D Del 2003), which the government lost at trial but had the judgment on the section 2 of the Sherman Act claim reversed on appeal. 399 F 3d 181 (3d Cir 2005).