FTC report reveals PBMs inflate costs of specialty generic drugs

Specialty generics

The report highlights the increasing role of specialty generic drugs in the revenue streams of pharmacy benefit managers (PBMs). Specialty generics, including treatments for conditions such as cancer, multiple sclerosis and pulmonary hypertension, have become a key profit driver for the "Big 3" PBMs. The FTC found that, from 2020 to 2022, 63% of specialty generic drugs dispensed by PBM-affiliated pharmacies were reimbursed at rates marked up by more than 100% over their estimated acquisition cost. Notably, 22% of these drugs saw markups exceeding 1,000%.

For example, tadalafil (generic Adcirca), a pulmonary hypertension medication, was acquired by PBMs for just $27 per 30-day supply but was reimbursed at an average of $2,106 -- a markup of over 7,700%.

Revenue from markups and dispensing practices

The FTC's analysis revealed that PBM-affiliated pharmacies generated over $7.3 billion in revenue, exceeding the National Average Drug Acquisition Cost (NADAC) for 51 specialty generic drugs over the 2017-2022 period. This revenue has seen substantial growth, with a compound annual growth rate (CAGR) of 42% from 2017 to 2021.

Oncology drugs were the largest contributors, accounting for 44% of the total revenue in excess of NADAC. Drugs for multiple sclerosis accounted for 25%, while treatments for transplant-related conditions and pulmonary hypertension made up another 18%.

The report noted that revenue generated from the dispensing of specialty generic drugs has steadily increased, fueled by higher markups and increased dispensing volumes. This growth underlines the financial significance of these drugs to the PBM industry.

Impact on plan sponsors and patients

The rise in drug prices directly impacts both plan sponsors and patients. Over the study period, the FTC found that patient cost-sharing and plan sponsor payments for specialty generic drugs increased significantly. For commercial claims, cost-sharing grew at a compound annual growth rate of 21%, and for Medicare Part D claims, it increased by 14%-15%.

For Medicare, PBM-affiliated pharmacies alone generated $1.4 billion in revenue above NADAC for specialty generic drugs during the study period, which raises concerns about the increased financial burden on Medicare beneficiaries and taxpayers.

PBMs steering prescriptions to affiliated pharmacies

The FTC also investigated the dispensing patterns of specialty generics. The analysis found that PBM-affiliated pharmacies dispensed a larger share of prescriptions for high-markup drugs. Specifically, for drugs marked up by more than $1,000, PBM-affiliated pharmacies dispensed 72% of prescriptions, compared to 45% for drugs with lower markups. This practice suggests that PBMs may be directing high-profit prescriptions to their own affiliated pharmacies, further consolidating their market power.

This "steering" effect was more pronounced in the commercial health plan market, where PBMs have more control over pharmacy choice. However, the analysis found that Medicare Part D's "any willing pharmacy" rule, which requires Medicare to accept any pharmacy that meets specific criteria, might mitigate PBM influence in Part D.

Spread pricing and financial strategies

The report also revealed that PBMs retained significant income through spread pricing -- a practice in which they charge plan sponsors more for a drug than they reimburse pharmacies. The FTC estimates that the Big 3 PBMs generated approximately $1.4 billion from spread pricing on the analyzed specialty generic drugs. Spread pricing has raised concerns about transparency and fairness in the PBM industry, especially as these profits are not always clearly disclosed to plan sponsors.

Therapeutic areas driving revenue

Therapeutic areas like oncology, multiple sclerosis and HIV accounted for most of the revenue generated from specialty generic drugs. The FTC's analysis identified specific drugs within the following classes as having some of the highest markups:

• Oncology. Drugs such as abiraterone (generic Zytiga) and imatinib (generic Gleevec) saw significant price markups, with some drugs marked up over 1,000%.
• Multiple sclerosis. Drugs like dimethyl fumarate (generic Tecfidera) saw markups in excess of 2,100% in 2022.
• Pulmonary hypertension. Tadalafil (generic Adcirca) exhibited markups of over 7,700% in 2022.

These therapeutic areas, which are critical for patient care, represent a major financial driver for PBMs and their affiliated pharmacies.

Regulatory and industry implications

The findings from the FTC report have prompted discussions about the need for increased transparency and regulation within the PBM industry. The report calls for scrutiny of PBM pricing practices, particularly regarding spread pricing and high markups, and suggests that these practices might need to be addressed through policy reforms.

Industry experts argue that without changes, the continued inflation of drug prices, particularly in high-cost therapeutic areas, could further burden patients and the broader healthcare system. Efforts to improve transparency, regulate pricing and ensure competition among pharmacies might be necessary to curb the rising costs associated with specialty generics.

As the healthcare industry faces mounting pressures to contain costs while ensuring access to critical medications, the role of PBMs and their impact on drug pricing will continue to be a focal point for policymakers and industry stakeholders alike.

Alivia Kaylor is a scientist and the senior site editor of Pharma Life Sciences.