In PBM fight, FTC sides with pharmacies over consumers
The Federal Trade Commission (FTC), an agency historically concerned with vigorous market competition that leads to more output and lower prices, has of late been seemingly determined to raise prices for consumers.
Under FTC Chair Lina Khan, the commission has shown a deeply political preference for more “mom and pop” stores, outsized worker power, and the virtual eradication of middlemen and intermediaries. However laudable these goals might seem to some, they are at odds with the FTC’s mission of protecting competition for the benefit of consumers.
A case in point is the FTC’s approach to pharmacy benefit managers (PBMs)—intermediaries that sit between health plans (e.g., insurers and self-insured employers) and pharmaceutical companies. PBMs design the formularies that determine which drugs are covered and at what price. Because their business model requires bringing buyer power to bear in negotiating lower prices with drugmakers, PBMs need to be large. And it is that very size and business model at which the FTC has recently taken aim. What is less clear, however, is whom exactly the commission is trying to protect.
In a recent speech on PBMs, Khan hinted at an answer when she noted that PBMs “can determine whether independent pharmacies can compete and thrive.” In keeping with its new “populist” mission, Khan’s FTC is devoting significant resources to undermining PBMs’ effectiveness on the belief that they harm small pharmacies. It is likely true that the lower reimbursement rates PBMs negotiate for drugs purchased through pharmacies will reduce those pharmacies’ profit margins, making it more difficult to operate an inefficient “mom and pop” retail pharmacy. But, in fact, the number of independent pharmacies has actually been increasing steadily since 2011, growing by more than 13% over the last decade.
Meanwhile, PBMs’ negotiating power ensures lower prices for consumers. The notion that you need many small competitors in order to have a competitive market is at the center of the populist canard. In fact, large intermediaries like PBMs often facilitate economies of scope and scale to benefit consumers. Eradicating large intermediaries may make it easier for inefficient, independent rivals to compete, but it does so at consumers’ expense.
Nor, contrary to critics’ claims, are PBMs using their market power to pocket the savings they negotiate with pharmaceutical manufacturers. In fact, PBMs pass on the bulk of these savings to the health plans they represent. In the case of large employer-sponsored plans, in fact, most receive fully 100 percent of PBM-negotiated savings. A recent study by former Council of Economic Advisers Chief Economist and current University of Chicago economist, Casey Mulligan, estimated the value to society of PBM services to be at least $145 billion annually, finding that they add $192 billion of value annually when compared to a hypothetical regime of government price controls on pharmaceuticals.
In more honest days, the FTC itself noted the value that PBMs provide and found no significant competitive concerns in the industry. As the commission wrote in its approval of a 2012 PBM merger: “Our staff’s investigation revealed that competition for [PBM] accounts is intense, has driven down prices, and has resulted in declining PBM profit margins—particularly in the large customer segment.” The market has certainly evolved since then, but it remains competitive.
What undergirds the shift in the FTC’s approach is the populist plan to aggrandize government, hamstring big business, and remake the economy as an imagined pastoral paradise. This is unsurprising when one remembers that Khan wet her feet in progressive advocacy. Later, she was instrumental in devising Sen. Elizabeth Warren’s (D-Mass.) antitrust policy, and served as counsel for the House Judiciary Committee’s Democratic majority staff report on digital competition.
Despite having nominally moved on to a very different role in heading the FTC, Khan clings to her roots, proudly advocating a partisan vision of the government’s role in health care markets and effectively campaigning for legislators who will pursue that same vision.
“It’s vitally important that this remarkable advocacy community remains engaged with this broader group of decisionmakers to educate them about which policies will make our markets work so that we can access affordable medicines and high-quality healthcare, including at pharmacies,” Khan told an event in June organized by the American Economic Liberties Project and the National Community Pharmacists Association. “These decisions and choices will be made regardless—it’s just a question of who is making them and with what goals.”
In targeting PBMs, Khan’s FTC is not seeking to ensure that markets and consumer prices remain competitive. Rather, it is pursuing a transparently partisan effort to replace markets with an imaginary utopia of “atomistic” competitors, all at the expense of consumer welfare. Policymakers dedicated to ensuring that markets work for the benefit of consumers, not favored interests, should stand in staunch opposition to this misguided crusade.
Geoff Manne is president of the International Center for Law and Economics.
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