By: Genevieve Sloan

Last month, the Federal Trade Commission (“FTC”) filed a lawsuit against several pharmacy benefit managers (“PBMs”) in an attempt to crack down on their allegedly unfair business practices.[1] The FTC’s complaint targets the “Big Three” PBMs, Caremark Rx, Express Scripts, and OptumRx, which administer a combined 80% of prescriptions in the United States.[2] The federal government initially installed PBMs to act as the “middlemen between drug manufacturers and insurance providers” to help lower the costs of medication; however, the FTC now asserts that the PBMs’ rebate system has led to unfairly high insulin prices and violates Section 5 of the Federal Trade Commission Act (“FTCA”).[3] The impact of this litigation could force PBMs to revise their business practices in the future and drive down the costs of insulin and other drugs.

Under the FTCA, the FTC prohibits unfair business practices, including unfair methods of competition and deceptive business practices that affect commerce.[4] PBMs create drug formularies, which organize lists of prescription drugs covered by insurance plans into tiers, including generic drugs with lower out-of-pocket prices, preferred brand drugs with higher out-of-pocket prices, and non-preferred drugs with the highest out-of-pocket prices.[5] Drug manufacturers create their drugs’ net prices by taking their listing prices and subtracting their rebates and fees.[6] They typically pay higher rebates to secure a higher preference in the formularies.[7] Notably, the PBMs gain revenue from the drug manufacturers’ rebates and fees.[8] Before 2012, drug manufacturers did not have to worry about their inclusion in the PBMs’ drug formularies.[9] However, the FTC asserts that PBMs began excluding lower-priced drugs from their formularies in 2012 to incentivize drug manufacturers to offer higher rebates to maintain high positioning on the formularies.[10] The FTC alleges that this rebate system leads to “artificially inflated insulin listing prices,” forcing many patients to pay since the PBMs do not provide them with the option of lower-priced insulin.[11]

For the FTC to establish that the PBMs’ rebate system constitutes an unfair business practice, it must show that it causes a substantial injury to consumers, which cannot be easily avoided, and that the injury “is not outweighed by countervailing benefits to consumers or to competition.”[12] Generally, courts give deference to the FTC’s informed judgment when evaluating if a business practice is fair.[13] However, the FTC may face challenges in this litigation due to recent criticism.[14]

Critics argue that the FTC’s lawsuit relies heavily on its July 2024 investigative report, which may reflect a bias against the PBMs because it focuses solely on two drugs among the many for which they negotiate rebates.[15] In fact, on September 17, 2024, Express Scripts filed a lawsuit against the FTC, alleging that its claims in the July report constitute defamation.[16] Further, critics question why the FTC expresses concern with the PBMs’ use of a bargaining leverage strategy when this is a commonly used negotiation tactic for complex contracts.[17] Nonetheless, the FTC posits that the drastic rise in insulin costs harms consumers, alleging that by 2019, one in four patients could not afford their insulin medication.[18] They further claim that the consumers cannot avoid the harm caused by the PBMs’ rebate system because they cannot choose to stop purchasing insulin or easily switch products or health plans.[19]

If the FTC succeeds, PBMs will likely not be allowed to exclude lower-priced drugs from their formularies and must rebuild healthy market competition.[20] Re-introducing healthy competition amongst the drug manufacturers may ultimately drive down pricing and provide consumer patients with more affordable insulin options.[21] Further, the FTC has warned drug manufacturers to “be on notice,” indicating that their role in the rebate system may result in future litigation.[22] Should the FTC win, its impact will significantly affect the pharmaceutical industry.[23] Nonetheless, if the FTC loses, the PBMs may lawfully continue to use the rebate system without the FTC’s scrutiny.

[1] See generally Admin. Compl. 1, Caremark Rx, LLC, No. 9437 (F.T.C. filed Sept. 20, 2024), https://www.ftc.gov/system/files/ftc_gov/pdf/d9437_caremark_rx_zinc_health_services_et_al_part_3_complaint_corrected_public.pdf; Press Release, F.T.C., FTC Sues Prescription Drug Middlemen for Artificially Inflating Insulin Drug Prices, (Sept. 20, 2024) (on file with author), https://www.ftc.gov/news-events/news/press-releases/2024/09/ftc-sues-prescription-drug-middlemen-artificially-inflating-insulin-drug-prices.

[2] See Admin. Compl., supra note 1, at 4-5; Press Release, F.T.C., supra note 1.

[3] NewsNation, FTC sues drug companies over high insulin costs | NewsNation Now, YouTube, (Sept. 23, 2024), https://www.youtube.com/watch?v=GyWJ3rCsvXI; Juliana Kim & Sydney Lupkin, FTC sues middlemen, saying they pocket billions while patients face high costs, NPR, (last updated Sept. 22, 2024, 6:23 PM), https://www.npr.org/2024/09/21/nx-s1-5121886/insulin-ftc-lawsuit-pharmacy-benefit-manager; 15 U.S.C. § 45(a).

[4] 15 U.S.C. § 45(a).

[5] Admin. Compl., supra note 1, at 6-7.

[6] Id. at 7.

[7] Id. at 8.

[8] Press Release, F.T.C., supra note 1.

[9] See Admin. Compl., supra note 1, at 17.

[10] See id.; Josh Sisco & Lauren Gardner, Feds sue pharmacy gatekeepers over high insulin costs, Politico (last updated Sept. 20, 2024, 3:21 PM), https://www.politico.com/news/2024/09/20/feds-sue-pharmacy-insulin-costs-00180240; Press Release, F.T.C., supra note 1.

[11] Press Release, F.T.C., supra note 1 (noting that many patients, including those with deductibles or co-insurance, still must pay the listing price and, therefore, do not reap the benefit of the rebates).

[12] 15 U.S.C. § 45(n); F.T.C. v. Neovi, Inc., 589 F.Supp.2d 1104, 1112 (S.D. Cal. 2008).

[13] Id. at 1113 (citing F.T.C. v. Ind. Fed’n of Dentists, 476 U.S. 447, 454 (2009)).

[14] Jay Ezreilev, FTC’s Report Criticizing Drug Middlemen is Flawed, Law360 (Oct. 3, 2024, 6:37 PM), https://www.law360.com/articles/1884139/ftc-s-report-criticizing-drug-middlemen-is-flawed.

[15] See id.; see generally Off. of Pol’y Plan., U.S. Fed. Trade Comm’n, FTC, Pharmacy Benefit Managers: The Powerful Middlemen Inflating Drug Costs and Squeezing Main Street Pharmacies, Interim Staff Rep., (2024), https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf.

[16] See generally Compl. For Decl. Inj. Relief at 1, Express Scripts v. F.T.C. et al., No. 4:24-cv-01263, 2024 WL 4271878, (E.D. Mo. Sept. 17, 2024); Erica Jones et al., FTC Focus: How Scrutiny Of PBMs And Insulin May Play Out, Law360, (Sept. 30, 2024, 4:48 PM), https://www.law360.com/articles/1882732.

[17] Ezreilev, supra note 11.

[18] Admin. Compl., supra note 1, at 3 (noting that the price of Humalog, a widely used insulin, increased by 1,200% between 1999 and 2017).

[19] Id. at 43.

[20] See Press Release, supra note 1.

[21] See id.

[22] Id.

[23] See Jones, supra note 16 (noting that the FTC selected insulin as a “poster child” due to its recent popularity and controversy in the last few years).