The Federal Trade Commission (FTC) recently issued an interim staff report on its investigation into the business of pharmacy benefit management. The report also assessed entities related to pharmacy benefit managers (PBMs), like specialty pharmacies and health insurers, linked through vertical integration. The report focused on the PBM business model and how these organizations interact with nonaffiliated pharmacies and other constituents. The PBM business model has evolved from an offering focused on claims adjudication to include dispensing network development, health insurance coverage, formulary development, manufacturer rebate negotiation, and other services. Today, the three largest PBMs now manage nearly 80% of all prescriptions filled in the United States. This market concentration, coupled with reforms that may result from transparency initiatives, has implications for nearly all healthcare value chain stakeholders.

Delivery system reforms, including those related to prescription drugs, will likely capture headlines well into 2025, due to presidential, congressional, and gubernatorial elections approaching in November. As a result, pharmaceutical manufacturers have numerous health policy implications on their minds, including those impacting pharmacy benefit management.

1) Specialty pharmacies

Background: When PBMs develop their pharmacy networks, they may stratify dispensing requirements across specialty and non-specialty products. In many instances, patients with commercial health insurance may be required to fill their specialty prescriptions at a PBM-affiliated specialty pharmacy, if elected by their plan sponsor. From 2017 to 2022, 55% of 30-day equivalents for specialty drugs were filled by affiliated specialty pharmacies. The report also noted that, due to the lack of a widely accepted definition of specialty drug, PBMs have broad discretion to classify drugs as specialty drugs, where they are subject to specialty dispensing requirements. In 2021, the number of drugs classified as specialty ranged from nearly 500 to more than 700, depending on the PBM. Specialty pharmacy requirements imposed by plan sponsors may create access navigation challenges for patients and healthcare professional (HCP) office staff and lead manufacturers to design their distribution strategies around PBM-affiliated specialty pharmacies.

Implications: Independent, nonaffiliated specialty pharmacies may have greater opportunity to initiate and retain patients on therapy. The FTC’s interest in specialty drug lists may result in fewer drugs being deemed specialty and, thus, subject to being dispensed through affiliated specialty pharmacies. Furthermore, specialty dispensing networks may evolve, with increased volume flowing through nonaffiliated specialty pharmacies. Finally, regulators will likely continue to focus on affiliated pharmacies and reimbursement differentials. Pharmaceutical manufacturers should ensure that their distribution models account for any potential evolution.

2) Retail pharmacies

Background: The report examined the state of affairs for independent pharmacies not affiliated with a PBM. Non-PBM-affiliated pharmacies secure their position in PBM dispensing networks through participation with a pharmacy administrative services organization (PSAO) or through direct negotiations with PBMs. A key service that PBMs provide to their clients is the development of dispensing networks. In some geographies, a single PBM may command 40% and more of retail pharmacy network management. The commission found that the process for incorporating large pharmacy chains into dispensing networks differed from the process accorded to smaller, independent pharmacies. The geographic concentration may lead a pharmacy that opts not to accept the terms of a contract to lose out on its ability to service a large swath of the local population.

Pharmacy reimbursement consists of ingredient cost, dispensing fees, and PBM incentive payments. The ingredient cost is intended to cover the pharmacy’s product acquisition cost. The ingredient cost is paid using lesser-of logic tied to a variety of metrics, including average wholesale price (AWP), wholesale acquisition cost (WAC), usual and customary (U&C) costs, submitted cost, and/or maximum allowable cost (MAC). MAC lists are proprietary to a PBM and are regularly updated. While the reimbursement landscape for pharmacies has improved in that reimbursement cost is finalized at the point of sale, the use of these metrics can still create an unpredictable reimbursement landscape for pharmacies, where reimbursement can vary week to week.

Implications: This scrutiny and potential reforms may level the playing field for independent pharmacies by equity and transparency to reimbursement, making it important for manufacturers to ensure that their distribution models account for these stakeholders. Reimbursement reforms may be reflected through changes to a PSAO, PBM network development, and pharmacy reimbursement practices. On the whole, reforms may lead commercial dispensing to more closely resemble Part D, where a greater share of prescriptions flows through nonaffiliated pharmacies, thanks to any willing pharmacy requirements.

3) Generics and biosimilars

Background: The PBM business model has further evolved to include private drug labeling operations, with a major focus on generics and biosimilars. This has already had significant impact on the adalimumab biosimilar market, where PBMs have constructed their formularies to include biosimilar products produced by their private labeling divisions, leading to market share uptake for those branded biosimilars. Though these actions have materially increased biosimilar utilization, the report also indicated that PBMs and manufacturers have made agreements where biosimilars encountered formulary restriction and substitution barriers.

Implications: Though biosimilar adoption has increased in some segments, reforms may continue to remove barriers to biosimilar utilization and reduce both systemic and patient costs. The government may contemplate legislative or administrative remedies to discourage or bar contractual arrangements that disadvantage or block use of less expensive competing products, like generics and biosimilars. This may be a priority in the Medicare Part D segment, where biosimilar use can translate to government cost savings.

4) “Rebate aggregators”/GPOs

Background: The FTC report defines “rebate aggregators”—aka “rebate group purchasing organizations” (GPOs)—as organizations that negotiate manufacturer rebates and discounts for drugs on the PBM formularies. These entities also generate revenue through fee structures for data, administrative services, and other offerings. The report indicates that manufacturers paid $7.6 billion in fees to rebate aggregators in 2022.

Implications: Rebate GPOs play an important role in the ecosystem and any transparency obligations could change considerations for manufacturers related to list price considerations, average sales price, rebate strategy, and overall contracting. Some drug classes have greater formulary restriction as a result of contracting instruments consummated through GPOs; the report may drive renewed focus on formulary exclusions and additional oversight by PBM clients (e.g., health plans).

5) PBM-affiliated health insurers

Background: The report examined the reimbursement rates paid by affiliated insurers to PBM-owned specialty pharmacies in both the commercial and Medicare Part D segments via case studies for two specialty generic medications. The commission found that affiliated insurers pay higher-than-average reimbursements to PBM-owned specialty pharmacies. These reimbursements, via internal transfers, have implications for medical loss ratio (MLR) reporting requirements. Where the affiliated health plan is spending money on clinical care, those monies are ultimately retained by the affiliated pharmacy and parent organization.

Implications: Due to the increased scrutiny on payments to affiliated specialty pharmacies owned by an insurer or PBM, and in part due to new entrants, many PBMs have introduced alternate reimbursement models, which will be important for plan sponsors and manufacturers to understand. With the focus on MLR requirements in the report, regulators could conceivably pursue rulemaking designed to drive adherence to the spirit of MLR requirements (clinical care and quality improvement initiatives), which could take the shape of new disease management programs, formulary designs, or other management changes.

Conclusion

Pharmacy benefit management is a key element of the prescription drug value chain. Reforms to the business model could fundamentally alter the strategies that manufacturers employ to create patient access to therapeutics.