The FTC Goes Evidence-Free

Through three years of Lina Khan’s leadership, the Federal Trade Commission has suffered an unprecedented streak of high-profile court defeats. That’s because the agency regularly makes decisions based on weak evidence, without demonstrating consumer harm and by relying on unproven legal theories. To this tally of shoddy work in pursuit of antitrust overreach, Ms. Khan has now added another entry: issuing an evidence-free interim report, which she has threatened could form the basis of future prosecutions.

In this report, which addresses pharmacy benefit managers, the FTC argues that “amidst increasing vertical integration and concentration,” PBMs “may be profiting by inflating drug costs and squeezing Main Street pharmacies.” The qualifier “may” appears throughout the report, signaling a lack of empirical evidence and analysis to support its conclusions about PBMs. In fact, many studies, including several by the FTC itself, contradict those conclusions.

PBMs are private businesses that manage prescription drug benefits on behalf of insurance-plan sponsors. They negotiate with drug manufacturers and pharmacies. Manufacturers trade lower prices for formulary access and more sales. Pharmacies trade discounts and increased retailing requirements for favorable placement in plan networks and more customers. This selective contracting allows PBMs to obtain rebates and discounts that lower drug costs. It also allows them to encourage the use of drugs that are cheaper (such as generics), more effective, or both. While plan sponsors aren’t required to contract with PBMs, most do, suggesting they value PBMs’ services.

My own study for the Competitive Enterprise Institute, as well as studies by University of Chicago economist Casey Mulligan, found that PBMs foster competition that lowers drug costs. Mr. Mulligan estimates that PBMs produce at least $145 billion in annual value to society beyond their resource costs.

PBMs pass nearly all rebates back to plan sponsors, which lowers premiums and improves benefits for patient enrollees. The Congressional Budget Office estimated in 2019 that eliminating rebates in Medicare Part D drug insurance would increase plan premiums and, because the federal government subsidizes 75% of Part D premiums, increase government spending by $170 billion over 10 years.

The FTC concluded unanimously in a 2005 report that PBMs generate cost savings for consumers. The agency found that vertically integrated PBMs, which own mail-order pharmacies, dispensed cheaper generics at rates comparable to pharmacies not owned by PBMs. Further, in 2014, FTC economists wrote that PBMs’ selective contracting on behalf of health networks is “an important tool to enhance competition and lower costs in markets for health care goods and services. Both economic principles and empirical evidence support that view.”

The new FTC report doesn’t explain what changed from earlier FTC findings or provide research supporting its new conclusions. As FTC Commissioner Melissa Holyoak writes in a dissenting statement, the agency’s new report fails to examine the basic question of “how PBM practices affect consumer prices.”

Instead, the report states simplistically that the three largest PBMs control 80% of all prescriptions dispensed and that the top six control more than 90% of the market. But concentration alone doesn’t prove harm.

There are at least 66 PBM companies. Smaller PBMs differentiate themselves through better technology, customer service and pricing transparency. Moreover, PBMs negotiate in a concentrated market where manufacturers are the sole providers of new brand-name drugs and sometimes older generic drugs. The top three wholesalers make up more than 80% of the market, and the top three pharmacies more than 50%.

Instead of citing economic and empirical analysis, the FTC’s report relies on case studies of two specialty oncology drugs. It makes no effort to demonstrate that these are representative of the entire market.

In addition, FTC Commissioner Andrew Ferguson observes in a concurring statement that the report “relies heavily” on 1,200 public comments, 160 of which were anonymous and unverifiable. Many of the others, Mr. Ferguson writes, were “submitted by entities who contract with PBMs,” who may have “an incentive to instigate regulatory action against PBMs to improve their bargaining position.”

The report assails PBMs as “powerful middlemen.” Yet middlemen are ubiquitous in our economy because they provide value to buyers, sellers and the public. Middlemen compete with other middlemen, so their earnings aren’t excessive. A 2017 study of profits across the drug distribution system by the University of Southern California’s Schaeffer Center found that PBMs’ net profit margins are 2%—less than those of other participants such as manufacturers (26%), pharmacies (4%) and insurers (3%). They exceed only the net margins of wholesalers (0.5%). PBMs’ net margins are also lower than those of similar industries.

Read full story on The Wall Street Journal