Around 2012, powerful middlemen began engaging in a strategy that raised list prices for insulin, increased their own corporate profits — and hiked out-of-pocket costs to a slice of diabetes patients who are among those least able to afford them, the Federal Trade Commission alleged in a lawsuit it filed a little more than a week ago.
An unacceptably high percentage of diabetics say they can’t afford their insulin, the prices of which started inflating rapidly in the years after 2012, the suit says. And too many of them have been forced to ration the life-saving medicine even though not taking it properly can lead to amputations, vision loss, nerve damage and even death.
For their part, the middlemen — known as pharmacy benefit managers, or PBMs — deny the accusations. They say the opposite is the case, that they’ve used their size to force a highly concentrated group of insulin makers to actually bring prices down.
The FTC says the middlemen’s business strategy upends principles of the free market.
“This country’s prescription drug affordability crisis is partly driven by (PBMs’) manipulation of drug price competition for their own gain,” the suit says. “Normally, companies compete by lowering prices. And normally, insurance systems function by the healthy subsidizing the sick.”
It adds that PBMs’ “conduct has turned these basic principles on their head. This case challenges their role in designing, directing, and overseeing a drug reimbursement system, which generates billions of dollars in rebates and fees for them while incentivizing manufacturers to raise (not lower) the sticker price (i.e., list price) of their drugs. As a result, many diabetics and other sick patients are stuck paying significantly more for life-saving medications like insulin.”
The suit is aimed at forcing wholesale changes in how the middlemen negotiate drug prices.
For its part, one of the big PBMs said the FTC suit shows that the agency just doesn’t understand how insulin prices are determined.
“This baseless action demonstrates a profound misunderstanding of how drug pricing works,” OptumRX spokeswoman Elizabeth Hoff said in an email. “For many years, OptumRx has aggressively and successfully negotiated with drug manufacturers and taken additional actions to lower prescription insulin costs for our health plan customers and their members, who now pay an average of less than $18 per month for insulin.”
Convoluted system
PBMs form a link in the drug supply chain that they say functions to bring down prices for lifesaving drugs like insulin.
Three of them — CVS Caremark, OptumRx and Express Scripts — represent about 80% of the insured patients in the United States on behalf of insurers, including major companies that are owned by the same corporation. Each of those health conglomerates is among the 16 largest corporations by revenue in the nation.
They facilitate drug transactions by creating pharmacy networks and determining what to reimburse them for the drugs they dispense. Since each of the big PBMs operates a mail order pharmacy and CVS is also the largest retailer, they determine reimbursements for their competitors and their own corporate siblings. That has prompted critics to say the system is inherently conflicted.
The focus, however, of the FTC report is another function of the PBMs. They negotiate rebates and fees from drugmakers, and they say they use their size to get good deals for insurers and ultimately for patients. CVS spokesman David Whitrap said their size is crucial when it comes to the highly concentrated group of insulin makers.
“Three brand drugmakers control nearly the entire insulin market, and without competitive lower cost generic alternatives, they raised their list prices by as much as 500% in lockstep with one another prior to 2012,” he said in an email. “That’s when CVS Caremark fueled increased competition by creating new formulary options to fight back against these manufacturer price hikes. We negotiated deep discounts on behalf of our clients — American businesses large and small, unions, and local, state, and federal government plans — and helped bring insulin back to affordable levels for their members.”
Exclusion
In its lawsuit, the FTC tells a very different story.
Formularies are lists that say what drugs that are covered by insurance and by how much. They’re typically divided into tiers of preference, with the top tier requiring the smallest copayment and the bottom tier requiring the largest.
The world of drug pricing is notoriously opaque, with the same companies sometimes paying 500 different amounts for the same drug. Perhaps similarly, PBMs also maintain many different formularies, so it can be hard to asses the overall impact of their complex practices.
Prior to 2012, the FTC suit said, the big PBMs put just about all drugs on their formularies and placed them at various levels of preference. But then they started excluding many drugs altogether, meaning that if a patient’s insurance uses such a formulary, he or she would have to pay full price for a drug if it’s excluded.
Since the big PBMs control access to millions of insured patients, drugmakers have a huge incentive to do whatever it takes to get their products on the PBM’s formularies, and with the most preferred status.
According to the federal trade regulator, the PBMs used that as bargaining power to extract ever larger rebates and fees from manufacturers.
“The PBM respondents leveraged their size and the threat of excluding drugs from their formularies — resulting in significant sales losses — to demand higher rebates from insulin manufacturers,” the lawsuit said.
Rebates profit PBMs in several ways. For one, they keep a share — nearly 10%, according to a 2022 report by the Texas Department of Insurance that was cited in the lawsuit. For another, PBMs sign up insurance companies by promising big rebates, so they help the PBMs grow their business, said the lawsuit.
That meant drugmakers knew they had to play ball.
“Insulin manufacturers understood that the ‘magnitude of the rebate amount’ was crucial and that they ‘had to compete for both net price and the amount of the rebate in order to win the access that PBMs prioritize,’” the FTC said. A senior vice president for insulin manufacturer Novo “explained, ‘the demands that PBMs have on insulin for rebates and discounts and fees have continued to increase over time.’ Lilly’s then president of diabetes echoed this sentiment, stating that rebates ‘are how you negotiate for formulary access.’”
Sticker shock
To accommodate the rising rebates, drugmakers increased the list prices of their insulin products, according to executives with the big manufacturers who are quoted in the lawsuit.
That seems to be borne out by academic research. A white paper published in 2020 by the University of Southern California’s Schaeffer Center said that every $1 in additional rebates for all drugs resulted in a $1.17 increase in list prices.
Those aren’t the prices paid by insurers, but they matter to many diabetes sufferers who might be struggling financially.
If you don’t have insurance, you have to pay the full list price. If you have a crummy insurance plan that has a high deductible, you often have to pay it until you hit that deductible. If you have a crummy plan with a high level of coinsurance, you often have to pay a significant percentage of the inflated list price.
In some cases, the amounts such patients pay exceed the net prices insurers pay, and the difference accrues to the insurers’ bottom line. That’s what the FTC meant when it said this is a case in which the sick subsidize the healthy, instead of the other way around.
The FTC suit listed rapid increases in list prices for three common insulin products in the years after 2012, when the suit says the PBMs started using exclusionary formularies: Lilly’s Humalog U-100 went up 124% in five years; Novo’s Novolog U-100 went up 136% in six years, and Sanofi’s Lantus U-100 went up 148% in seven years.
Insulin maker Sanofi told the FTC that from 2012 to 2022, average net prices (after rebates) for its most commonly used insulin fell 55%. But average out-of-pocket costs rose 45%.
CVS Caremark told the FTC that something different has happened in more recent years. It said its customers’ average monthly insulin out-of-pocket costs have fallen from $30.10 in 2017 to $23.54 in 2022.
“It’s frustrating that a government agency is ignoring and/or mischaracterizing these facts,” Whitrap, the CVS spokesman, said.
Middlemen to the middlemen
Since at least 2016, there have been calls for more transparency in drug pricing — especially from independent and small-chain pharmacies that say PBM reimbursement practices are driving them out of business. That has prompted numerous state laws and regulatory actions aimed at bringing more clarity to the way PBMs set drug prices.
Seemingly in response, their parent companies in 2018 started creating another layer to the system.
Since then, each of the big three has created its own “group purchasing organization.” Even though their business is in the United States, two are based overseas — in Ireland and Switzerland.
Now, instead of the PBMs negotiating directly with drugmakers over rebates and other fees, the group-purchasing organizations do it on their behalf. Not only does that add another veil behind which drug prices are determined, it also created another revenue stream for their corporate parents.
The FTC suit says that when purchasing organizations negotiate rebates, they also charge administrative fees. Those fees, the suit said, are fixed to the size of the rebate — seemingly another incentive to push rebates as high as possible, and list prices with them.
And unlike rebates, the health conglomerates get to swallow the administrative fees whole.
“A former Optum executive who helped set up Emisar, Optum’s GPO, candidly said, ‘The intention of the GPO is to create a fee structure that can be retained and not passed on to a client,’” the FTC lawsuit says.
As evidence that the real goal of PBMs and their corporate parents is to keep rebates high, the lawsuit cites an incident in June 2018. Lilly executives met with each of the big-three PBMs and proposed lowering list prices and rebates in a way that kept the net price of one of its diabetes drugs the same.
“The three PBMs were not interested in this proposal,” the suit quotes a Lilly executive as saying. “It was that matter of fact.”
The remedies the FTC is demanding in the administrative law proceeding:
- Prohibit PBMs from excluding or disfavoring low-list-price drugs on their formularies, and thus remove the incentive to chase rebates
- Prohibit PBMs from seeking compensation from drugmakers that is based on a product’s list price, thus removing the incentive to push such prices higher, and
- Require benefit plans to base coinsurance and deductibles on the net prices paid for drugs, not the list prices
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