FTC scrutinizes PBMs, explores conflict-of-interest claims

Drug Store News, April 19, 2004 by James Frederick

WASHINGTON -- With the first phase of a Medicare drug benefit program now in motion, the Federal Trade Commission has intensified its scrutiny of the prescription benefit management industry charged with delivering those benefits to America's seniors.

The FTC revealed details last month of an aggressive new effort to study PBMs and is casting a wide net for a detailed look at the way PBMs and their mail order pharmacy operations do business. The study, called the Pharmacy Benefit Manager Conflict of Interest Study, was required by the Medicare Prescription Drug and Improvement Act passed last fail and now under way with the initial rollout of a Medicare-endorsed drug benefit card.

The FTC is charged by Congress to investigate whether PBMs make decisions in a way that "increases the PBMs' profits while raising the costs of pharmacy benefits for their clients," according to an explanatory statement from the FTC. "These could include decisions on generic substitution, therapeutic interchange and drug repackaging practices."

One concern fueling demand for the new study was a previous research report, released Sept. 9, which "raised questions as to whether there is a conflict of interest," according to the FTC. That study found "evidence suggesting that PBMs use generic substitution and other actions in their mail order pharmacies more often than when prescriptions are dispensed through other channels," the FTC note Those other channels include retail pharmacies and mail order pharmacies not integrated with a PBM.

James Langenfeld and Robert Maness of the third party private consulting group LECG wrote last year's report, called "The Cost of PBM 'Self-Dealing' Under a Medicare Prescription Drug Benefit," which was released as Congress debated Medicare drug benefits. In their findings, the authors concluded, "While PBMs can be excellent plan administrators, problems can arise when a PBM is both the plan administrator and the seller of drugs--through its own mail order pharmacy--to the plan." Langenfeld and Maness estimated that as Medicare drug benefits become a reality, the cost of that conflict of interest to the U.S. government and the Medicare beneficiaries may approach $30 billion in the period 2004 to 2013."

That conclusion got the attention of congressional lawmakers debating Medicare reform. In response, the FTC in its new study has asked approximately 20 companies, including PBMs and retail pharmacy chains, to provide data on their pricing and practices by May 14. "The documents and information obtained ... will help the FTC address whether there exists a conflict of interest between PBMs and the group health plans, to which they provide their services," the FTC noted.

The FTC also warned that "although law enforcement is not the primary purpose of the information and data collection, the information collected could merit law enforcement action."

Among the data the FTC wants from the PBMs it is scrutinizing are co-pay averages for different dispensing channels and "documents that discuss how to maximize pharmaceutical rebates and/or fees paid by the pharmaceutical manufacturer to the PBM." The agency also wants information on total drug spending by each channel, average prices for enrollees and plan sponsors, generic substitution rates by channel and details on how much of their rebates from drug manufacturers PBMs pass through to plan sponsors.

Along those lines, the FTC also is looking for "an accounting of payments ... made to the 10 largest pharmaceutical manufacturers."

Pharmacy retailers and independently operated mail order pharmacies also are being asked for a litany of data on gross sales, average prescription prices, generic switch rates, top PBM or health plan customers, total revenues from rebates and other information.