Federal Trade Commission Report Concludes that PBMs' use of Owned Mail-Order Pharmacies is Cost Effective

The Federal Trade Commission issued its report, "Pharmacy Benefit Managers: Ownership of Mail-Order Pharmacies," on September 6, 2005. The Commission conducted the study of PBMs’ utilization of owned mail-order pharmacies in response to a Congressional mandate in the Medicare Prescription Drug, Improvement and Modernization Act of 2003. Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Pub. L. No. 108-173, tit. I, § 110.

Some of the nations’ nearly 60 Pharmacy Benefit Managers ("PBMs") are vertically integrated because they own retail and/or mail-order pharmacies. Because vertically integrated PBMs may have a greater ability to influence which drugs are dispensed under the prescription drug benefits plan they administer than non-integrated PBMs, some lawmakers were concerned that incentives might exist for integrated PBMs to steer plan sponsors’ members to drugs that are more profitable to the PBM, regardless of costs to the plan sponsor, resulting in higher drug costs for plan sponsors and their members. Such conflicts should be rare, however, if competition among PBMs provides plan sponsors with alternative choices.

The Commission’s study and report addressed the issue whether the use of mail-order pharmacies owned by PBMs that administer the Medicare prescription drug benefit would adversely affect Medicare spending, compared to the use of mail-order pharmacies not owned by a PBM. The study specifically addressed generic drug utilization and substitution, therapeutic interchange, and the pricing and sale of repackaged drugs by vertically integrated PBMs with mail-order pharmacies, which the report frames according to the following six questions:

Question 1 — Assessment of Price Differences in Payment Amounts Incurred by Plans and Their Members for Prescription Drugs Dispensed by Mail-Order Pharmacies Owned by PBMs as Compared to Non-Owned Mail-Order Pharmacies and Retail Pharmacies.

Conclusion — The Commission found that, in general, prescription drug prices were higher at retail pharmacies than at mail-order pharmacies owned by PBMs, even if the PBM also owned retail pharmacies. The Commission attributed these differences in part to PBM contracts with plan sponsors, which often provide larger discounts off the same reference drug price for prescriptions dispensed at mail than at retail.

Question 2 — Whether Plans are Acting in a Manner that Maximizes Competition and Results in Lower Prescription Drug Prices for Enrollees.

Conclusion — The Commission focused largely on how PBMs share payments from pharmaceutical manufacturers (for example for favorable formulary placement or volume sales) with their clients and concluded that PBMs pass these payments on through a complex array of arrangements involving prices, as well as the scope of services the PBM provides. All of these aspects of PBM contracting varied from plan to plan indicating a broad range of competitive alternatives for plan sponsors.

Question 3 — Whether Mail-Order Pharmacies that Are Owned by PBMs (or Entities that Own PBMs) Dispense Fewer Generic Drugs Compared to Single-Source Drugs within the Same Therapeutic Class than Mail-Order Pharmacies that Are Not Owned by PBMs.

Conclusion — The Commission determined that PBMs’ and their clients’ interests are aligned to favor the utilization of generic drugs, which generally are less expensive to the plan and its participants and more profitable to the PBM than brand-name drugs. As a result, the Commission observed that PBM-owned mail-order pharmacies substitute available generics for more expensive brand-name drugs at a slightly higher rate than non-owned mail-order pharmacies and retail pharmacies.

Question 4 — Whether Mail-Order Pharmacies that Are Owned by PBMs (or Entities Owned by PBMs) Switch Patients from Lower Priced Drugs to Higher Priced Drugs (in the Absence of a Clinical Indication) More Frequently than Mail-Order Pharmacies Not Owned by PBMs.

Conclusion — PBMs’ use of any therapeutic interchange between drugs that are not chemically equivalent is extremely rare, accounting for less than one-half of one percent of all prescriptions, and most often results in a reduction in plan sponsors’ costs. The Commission noted that PBMs and plan sponsors use a variety of tools to ensure that any interchange programs benefit the PBMs’ clients.

Question 5 — Whether Mail-Order Pharmacies Owned by PBMs (or Entities that Own PBMs) Sell a Higher Proportion of Repackaged Drugs than Mail Order Pharmacies that Are Not Owned by PBMs, or Sell Repackaged Drugs at Prices Above the Manufacturer’s Average Wholesale Price.

Conclusion — PBMs dispense repackaged drugs for only one in every million prescriptions through their owned mail-order pharmacies, and sell them at prices that vary above and below the manufacturer’s average wholesale price depending on competitive factors.

Question 6 — Whether Competition or Drug Pricing Behavior by PBMs Would Be Affected if PBMs Were to Bear Financial Risk for Drug Spending.

Conclusion — PBMs currently bear some financial risk related to drug prices because PBMs price their services indirectly on the drug pricing terms they the PBMs have with pharmacies and drug manufacturers. Based on the complexity of the PBM business model and competition in the industry, the Commission was unable to reach a conclusion on how bearing additional financial risk would impact competition and drug pricing.

Federal Trade Commission, "Pharmacy Benefit Managers: Ownership of Mail-Order Pharmacies," available at the FTC web site,

For additional information about this Antitrust Development, please contact Toby G. Singer, leader of the Health Care Antitrust Practice.

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