Drug companies have become very adept at manipulating and regulations and gaming the system in order to preserve monopolies and increase drug costs. This has resulted in increasingly unaffordable medicines, and many Americans are now forced to ration their pills, choose between basic necessities and the drugs they need, or even cut their pills in half. One way that drug companies are increasing prices is the practice of rebate walls, where they "bundle" rebates for many different drugs together to prevent other drugs that compete with them from getting on the market. In a call with experts today, Federal Trade Commissioner Rohit Chopra told participants that rebate walls were anticompetitive and needed to be closely watched. He also stated that antitrust authorities were looking carefully at PBMs and practices that increase drug prices by artificially stifling competition and raising barriers to entry.
A rebate wall works like this: a drug manufacturer with a very profitable drug gives its payors (PBMs, health insurers, and healthcare providers) conditional rebates and discounts off of the list price for a multi-product bundle of prescription drugs. The manufacturer uses this "bundled' rebate to protect its already established position and stifle competition. The PBMs and other payors take some of the rebates for themselves, and the drug companies make it clear that if the payors purchase a competing drug, they will lose all of the rebates that have been bundled together.
More and more policymakers are recognizing that this practice is anticompetitive and contributes to rising drug prices. During today's call, Commissioner Chopra bluntly told folks that "our system is not working." The healthcare industry makes about $50 billion in profits per quarter, and 63% of that goes to the drug companies even though they only collect 23% of the revenue. And the pace of innovation has slowed; many drugs are not that helpful. And the current situation, where patients are struggling to afford medicines and even rationing their pills, is appalling. He emphasized that the FTC is very concerned about drug company behavior that raises entry barriers and stifles competition.
Chopra also said that the FTC will investigate PBMs and their role in the drug supply chain. Over the past fifteen years the PBM has become increasingly consolidated, and three PBMs now control 75 to 85% of the market. The FTC held a workship and found that PBMs have a 42% return on profit, compared to 15% for drug companies. The FTC is also closely watching HHS's implementation of the rule removing safe harbor protection for most PBM rebates. Theoretically, PBMs are supposed to lower drug costs, but Chopra doubts that rebates are passed on to consumers, and thinks there are substantial conflicts of interest. A report by the Government Accountability Office found that many PBM contracts with insurers contain non-negotiable clauses. There is evidence that the rebates paid by drug companies to PBMs in order to get on PBM formularies are increasing prices.
Chopra concluded with a few observations: First, the structure of rebates might be blocking entry of more affordable and more effective drugs. Second, it is important that the FTC ask whether dominant drug manufacturers are offering lucrative incentives to PBMs in exchange for blocking competitors from entering the market. And third, when a dominant firm uses bundling pricing to impose entry barriers, antitrust enforcers have to pay attention.
For far too long, the Federal Trade Commission has not used its powers to promote competition and stop anticompetitive behavior by drug companies and PBMs. Commissioner Chopra's remarks are a hopeful sign that this is changing.