The FTC’s Incomplete PBM Report Falls Short

President Biden’s appointed leadership at the Federal Trade Commission (FTC) has just released a long-awaited report on pharmacy benefit managers (PBMs). While the topic of PBMs is probably as exciting as a root canal, PBMs play a key role in negotiating and securing prescription drug benefits and rebates on behalf of health insurers and businesses. Given the complexity of the health care industry generally and PBMs specifically, it is indeed critical to understand the role PBMs play in the cost of prescription drugs—as we can all undoubtedly agree, recent inflation across all goods and services, including drugs, has negatively impacted families.

Two-years in the making, the FTC’s report details several concerns with PBMs including greater vertical integration (i.e., doing more things “in-house”) and market concentration. Based on these concerns, the FTC’s leadership asserts that PBMs “can hike the cost of drugs” and “can squeeze independent pharmacies.” Well, given that just about anything “can” happen, it is not clear how much weight should be given to such broad generalities. Ultimately, the problem with the report and associated spin is the lack of analytical rigor and support necessary to reach any conclusion—let alone one that condemns and accuses an entire industry of raising drug prices. We should demand much more from a federal agency given the amount of time, resources, and subpoena power granted to the FTC.

Importantly, in her dissenting statement, Commissioner Melissa Holyoak highlights a litany of problems with the FTC’s report including “process irregularities,” the “politicized nature of the process,” and “concerns over substance.” These objections should catch the attention of everyone who cares about sound, and responsible, government. Specifically, Commissioner Holyoak explains that “today’s report fails to meet that rigorous standard” that the agency has used under prior leadership. Indicative of this, Commissioner Andrew Ferguson, although concurring with the majority, nonetheless highlights the report’s puzzling reliance on anonymous public comments—especially given that the FTC obtained first-hand data and documents from industry participants via its subpoena power.

Further, Commissioner Holyoak points to the elephant in the room: the newly released report reaches a very different conclusion from the FTC’s own 2005 Report, which, among other things, found that vertical integration by PBMs lowered prices. Notably, the 2005 Report explicitly lists the FTC’s Bureau of Economics as contributors and, not surprisingly, the report contains detailed economic analysis—which stands in stark contrast to the relatively spartan 2024 report. The centerpiece of the new report is two “case studies,” which is wholly insufficient for a report at this level—as there is no information on whether these two cases are representative of a larger problem or are merely indicative of an exercise in cherry-picking.

Curiously, a close reading of the new report reveals a concession that PBMs can actually lower costs. For example, the report explains that “PBMs offer…[d]rug utilization management services” which “help payers limit their costs” (p. 12). Additionally, PBMs maintain “beneficiary enrollment information” and generate “periodic drug utilization and spending reports to assist the PBM’s health plan clients with managing drug costs” (p. 13). These findings are consistent with a 2019 Government Accountability Office (GAO) report that found that PBMs secured rebates and price concessions of $29 billion annually for Medicare Part D. Empirical work by University of Chicago economics professor Casey Mulligan similarly finds “PBM services add at least $192 billion annually in value to society compared to a manufacturer price-control regime.”

Troublingly, the new report also wants to have it both ways. Namely, the report simultaneously condemns vertical integration by PBMs and vertical dis-integration. How so? PBMs used to directly negotiate drug prices with pharmaceutical companies. Now, PBMs outsource this role to “rebate aggregators.” Yet, the report casts this development in a negative light: “PBMs may have spun off these rebate aggregators as separate entities for other purposes, such as to retain revenue from incremental fee structures” (p. 22). Thus, according to the FTC’s report, both vertical integration and disintegration are bad for the industry.

Finally, the report acknowledges that “cash-pay pharmacies—such as the Mark Cuban Cost Plus Drug Company and Blueberry Pharmacy—have started offering medications via mail order at wholesale prices plus a markup, circumventing traditional PBM channels” (p. 17). Started in 2022, the Cost Plus Drug Company continues to grow and expand. Thus, the FTC’s own report clearly reveals that PBMs (1) can lower and manage drug costs and (2) are facing competition from innovative business models. Yet, the leadership completely ignores these findings.

The bottom-line is that there is strong evidence that the leadership of the FTC put the cart before the horse. They ignored the agency’s prior report on PBMs (which reached very different conclusions); published a report without the requisite data, analysis, or evidence (despite its subpoena power); condemned both vertical integration and dis-integration; and disregarded parts of the report that indicate PBMs lower costs and are being challenged by new entrants. We should expect more from our government.

John M. Yun is an economist and Associate Professor of Law at the Antonin Scalia Law School, George Mason University. He previously was the Acting Deputy Assistant Director in the Bureau of Economics at the U.S. Federal Trade Commission. The opinions expressed in this article are his own.