At a public meeting held on January 15, 2025, the Federal Trade Commission (FTC) summarized the Second Interim Staff Report (Second Report) stemming from its investigation into pharmacy benefit managers (PBMs) and their impacts on competition in the health care marketplace. The Second Report, released following a unanimous vote of the commissioners, expands on a prior interim report and focuses specifically on findings made related to the dispensing of specialty generic drugs. Below, we summarize the major findings from the Second Report, discuss potential next steps by the FTC (and others), and offer some key takeaways.
In the complex world of health insurance, PBMs are intermediaries tasked with processing and administering prescription benefits offered through health plans. PBMs are pivotal parts of the system and, for at least the past decade, the market has become more of a vertical structure. This is because a number of PBMs and independent pharmacies have either been acquired by large health care conglomerates or contracted to become affiliates of those same conglomerates, thereby producing “fully integrated” entities. As noted in the FTC’s First Interim Report, spending on prescription drugs has increased exponentially over the past decade, rising from $393 billion in 2016 to $600 billion in 2023. Of these totals, spending on specialty drugs also grew remarkably, with $113 billion spent in 2016 and $237 billion in 2023. Specialty drugs do not have a standard definition, but the term is commonly used to describe drugs that require special handling and/or are used to treat various ailments such as uncommon cancers, auto-immune diseases, and rheumatological disorders.
The FTC’s First Interim Report found that pharmacies affiliated with the three largest PBMs in the United States received 68 percent of all revenue for dispensing specialty drugs in 2023 (up from 54 percent in 2016) and specialty drugs were the subject of markups in pricing by thousands of percent, which resulted in the affiliated pharmacies receiving revenue far in excess of acquisition costs. In the Second Report, the FTC expanded its analysis parameters to study all specialty generic drugs dispensed between 2017 and 2022 for members of commercial health plans and those who were enrolled in Medicare Part D prescription drug plans. The Second Report included the following major findings:
- Specialty generic drugs dispensed by pharmacies affiliated with the three largest PBMs were marked up by hundreds to thousands of percent, with 63 percent being marked up in excess of 100 percent more than their estimated acquisition cost and 22 percent marked up more than 1,000 percent.
- The larger share of commercial prescriptions for the most profitable specialty generic drugs were dispensed by pharmacies affiliated with the largest three PBMs, potentially suggesting that the most profitable specialty generic prescriptions were steered to affiliated pharmacies.
- Affiliated pharmacies received $7.3 billion in revenue in excess of their estimated acquisition costs during the study period.
- The three largest PBMs generated significant income through the use of “spread pricing,” a practice in which the plan sponsor is billed for an amount in excess of what the PBM reimbursed pharmacies, estimated by the FTC to be $1.4 billion over the study period.
- Dispensing the top specialty drugs accounted for 12 percent of the total operating income for the pharmacies for the health care conglomerates that are the parent companies of the three largest PBMs and their affiliated pharmacies.
- Plan expenditures and patient costs for specialty generic drugs increased at an annual growth rate of 21 percent for commercial plans and between 14 percent and 15 percent for Medicare Part D claims.
These findings prompted the FTC to conclude that specialty generic drugs are growing in financial importance; that significant, widespread markups on these drugs occurred; and that further investigation into the findings of the Second Report is necessary.
As for next steps, the Second Report and remarks made by the commissioners and FTC staff at the public meeting indicate that the FTC’s investigation is far from over. For example, the FTC is still waiting for “rebate aggregators,” entities that work to negotiate better discount terms with drug manufacturers on behalf of PBMs, to complete their document productions. The tone of the Second Report indicates that the FTC will continue expanding the scope of its investigation by issuing new requests for information.
It also appears that the FTC is gearing up enforcement actions under Section 2 of the Robinson-Patman Act (RPA). Passed in 1936, the RPA prohibits price discrimination by sellers between two competing buyers of commodities. Specifically, under Section 2(c) of the RPA, it is unlawful to make so-called dummy payments from a seller that are intended to mask a discount that would be considered discriminatory under the RPA. The analyses and findings in both interim reports, and inquiry into the practices of rebating for specialty drugs, appear focused on uncovering whether PBMs committed unlawful pricing discrimination.
The industry surrounding PBMs is firmly in the spotlight, and investigations on both the state and federal levels should be expected to continue for the foreseeable future. With many states weighing potential legislation intended to regulate PBMs, and with many states having antitrust laws that are far broader than federal laws, the FTC is not the only source of concern for entities operating within the industry.
In light of these developments, here are some key takeaways for pharmacies, PBMs, and pharmaceutical companies:
- Engage counsel if you receive a request for information from the FTC.
- Review and refresh your RPA compliance guidance.
- Evaluate your state and federal antitrust compliance procedures.
- Create or revise document retention protocols for relevant data and documents.
For more information, please contact Robin Crauthers, Kieran Ensor, or the McCarter & English lawyer with whom you normally work.