ANALYSIS: FTC Joins States to Curb Drug Middlemen Power

The Federal Trade Commission’s lawsuit against three of the top pharmacy benefit managers (PBMs) on Sept. 20 is the first important step the federal government has taken to try to curb the power of PBMs. With little federal action, almost half the states have enacted legislation this year to try and combat high consumer drug costs, high PBM control in pricing negotiations, and high profits for PBMs.

Congress has failed to pass legislation to rein in PBMs, and with the upcoming election, it’s unclear how newly elected legislators would prioritize taking action against PBMs. So it’s likely that state legislation will continue to rise through the end of the year and into 2025.

Additional state PBM legislation would add to the existing patchwork system of laws, and PBMs and impacted entities may struggle to comply, especially those that operate in more than one state.

Lack of Federal Legislative Action

PBMs are entities that act on behalf of health insurance plans to negotiate with pharmacies and drug manufacturers to create formularies and to determine drug prices. Six PBMs, including CVS Caremark, Express Scripts, and OptumRx, currently have control over 95% of prescriptions in the US.

For their services, PBMs generally keep part of what an insurance plan pays for a prescription. The PBM payment usually comes in the form of an administrative fee or the difference between the amount the insurance plan pays for a drug and the amount paid to a pharmacy. Often, PBMs make a high amount from these transactions—resulting in criticism that these payments hike up drug costs for consumers.

Congress has made bipartisan efforts in recent years to pass legislation taking aim at changing how PBMs operate, but none have significantly progressed. In December 2023, the House passed the Lower Costs, More Transparency Act, which consolidated provisions and ideas from previously proposed bills. It has yet to pass in the Senate, and PBM provisions weren’t included in 2024 federal government spending bills.

State Legislative Action

With little federal action, many states have taken it upon themselves to curb the power of PBMs within their own borders. Of the 22 states that have passed laws regulating PBMs since the start of the year, 17 have more than one such law.

Laws Targeting Money From Pharmacies

Vermont is one example of how states curb the amount of money PBMs receive through pharmaceutical transactions. For example, Vermont’s law, effective July 1, 2024, prohibits a PBM from requiring a pharmacy to pass through any portion of a co-payment to the PBM or from penalizing a pharmacy for providing an insured party with the total cost of pharmacist services for a prescription drug.

Michigan’s PBM law also targets the money PBMs get from pharmacies but in contrast to Vermont, Michigan goes after the preferential treatment a PBM could give to an affiliated pharmacy. Large PBMs often have ownership in affiliated pharmacies, and Michigan’s law prohibits practices that would influence covered persons to pick affiliated pharmacies over others. For example, PBMs in Michigan are prohibited from imposing limitations on access to prescription drugs based on ownership interests in the pharmacy or from financially inducing a prescriber to use an affiliated pharmacy.

Transparency Laws

Michigan —as well as Minnesota—have enacted PBM transparency reporting provisions requiring PBMs to share with the state financial information including the amount of rebates received. Transparency can be an important tool for states to more closely monitor PBM financial and business operations while also providing this information to consumers. Minnesota specifically has transparency provisions for public interest reporting that require PBMs to share prescription drug pricing and reimbursement information with the state commissioner.

New auditing provisions also bolster greater transparency in PBM practices. Vermont and Texas have enacted legislation authorizing governments to audit PBMs for compliance with state law.

Pursuit of PBMs

Why are states deciding to take legislative action now? One reason is certainly the lack of federal action—but there are deeper problems with the US health-care system that are influencing this trend.

The overarching reason is that prescription drug prices in the US are high—and are only getting higher. Americans pay more for prescription drugs than any other country, and state and federal governments are searching for ways to bring costs down for consumers.

For example, the Inflation Reduction Act (IRA) enables Medicare to directly negotiate drug prices with manufacturers for the first time in an attempt to help bring down the price of high-cost and widely used drugs for beneficiaries. How effective the IRA’s drug-pricing provision will be remains to be seen, as implementation is still in the early stages. Direct government negotiating power is limited, however, and only impacts a portion of prescription drug consumers so the effect may be minimal.

PBMs are involved in the majority of insurance health plans, both public and private, and are central to the drug industry. Legislators are targeting them both because of the scale of their impact and the unique power they have over drug pricing. The FTC has found that PBMs likely pay more to their affiliated pharmacies—something that states like Michigan are attempting to address through legislation. Market domination by large PBMs, most of which have affiliated pharmacies, fuels the control they have over drug prices for consumers.

If the money fueling the majority of those transactions is under the control of six entities, those entities have an oversized influence over the price and over who is getting the profit. It’s clear from recent legislation that state governments are aiming to curb PBMs’ power and to give more control back to consumers.

Future for States and PBMs

Despite the current lack of action at the federal level regarding PBMs, there still are important federal developments to watch. In July, Republican and Democratic representatives introduced the Pharmacists Fight Back Act.

Beyond legislative action, the FTC has been investigating the largest six PBMs since 2022, and has found PBM reimbursement rates may drive up drug costs for consumers. The FTC’s Sept. 20 lawsuit against CVS, Cigna, and UnitedHealth alleges that prescription rebates have allegedly driven up the cost of insulin.

The 2024 election will have an impact on what legislation could look like on both a federal and state level, depending on changes in leadership and the priorities and agendas of incoming elected officials. As rising drug costs are a major bipartisan issue, it’s likely that they will remain an important issue, but bills and legislation currently in development could fall through the cracks with leadership changes after November’s election.

State-level action to curb PBM power will likely continue to rise even if the federal government takes more action in the near future. It’s thus possible that PBMs will have to grapple with both state and federal legal requirements. Compliance with such a framework would necessarily become a top priority and focus for PBMs, particularly those that operate in multiple jurisdictions. To comply, many PBMs would have to consider restructuring and refocusing their business practices and operations.

The full report is available here for Bloomberg Law subscribers. Nonsubscribers can download a free copy of the report here. The individually published analysis pieces can be found here.

Bloomberg Law subscribers can find related content on our In Focus: Drug Pricing page.

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