BY Blinn E Combs, Esq. and Michael Alexander, Esq., Brown & Fortunato, P.C.
As we reported here in August, the Federal Trade Commission (“FTC”) recently released a draft report broadly accusing Pharmacy Benefit Managers or “PBMs”—the middlemen who negotiate prescription drug prices—of engaging in an array of tactics to drive up prescription drug costs. The FTC’s long-expected suit was filed on September 20. The complaint accuses PBMs of “manipulation of drug price competition for their own gain.”
The suit takes particular aim at alleged rebate schemes. According to the complaint, the top three PBMs—Caremark, ESI, 
and Optum—process around 80% of all prescription claims in the U.S. This market concentration combined with vertical integration have given PBMs power to “wield significant influence over which drugs patients can access and at what price.” According to the complaint, the PBM’s tool of choice is drug formularies—lists that define which drugs are covered by pharmaceutical insurance.
PBMs engage in complex negotiations with drug manufacturers over which drugs are included on formularies. To avoid exclusion from coverage and the inevitable drop in sales, manufacturers offer steeper rebates to PBMs. To cover the undisclosed cost of rebates while maintaining profitability, manufacturers raise their list prices. Higher rebates mean inclusion and more preferential treatment in the confidential drug formularies. The overall effect, the complaint alleges, is an opaque system of drug distribution and increasingly unaffordable drugs.
Patients’ out-of-pocket costs are often pegged to the high list prices without any rebate until their deductible is reached. Although a historically high percentage of Americans have access to health insurance, a growing percentage of insured Americans are enrolled in high deductible health plans (“HDHPs”). In 2012, 19% of U.S. adults with employer-provided insurance were enrolled in HDHPs. By 2023, that figure had jumped to 29%. According to the Internal Revenue Service, out of pocket costs for HDHPs range from $1,600 to $8,050 for individuals and from $3,200 to $16,100 for families.
The FTC’s suit takes particular aim at insulin pricing. In 1999, the average price of Humalog—a popular brand of insulin—was $21. By 2017, the average price was $274, more than twelve times the earlier cost. Soaring prices place a heavy burden on diabetic consumers. In a 2019 survey, more than a million American diabetics reported having to ration insulin on economic grounds.
The steep increase in cost led to significant public criticism of drug manufacturers, who reacted by offering generic drug alternatives at between 50% and 60% lower list prices—sometimes referred to as WAC, or Wholesale Acquisition Cost—than their related brand products. However, the complaint alleges that “both ESI and Optum kept high WAC Humalog as the only preferred rapid-acting insulin on their flagship formularies, excluding low WAC Humalog entirely.”
PBMs have publicly rejected the allegations in the suit, complaining that the FTC misunderstands the market it is attempting to regulate and is engaging in broadly unconstitutional action. On November 19, the PBM respondents filed a suit for declaratory and injunctive relief in federal court in the Eastern District of Missouri. The maneuver is called a “collateral complaint.” The collateral complaint avoids the substance of the FTC’s allegations, and instead attacks the fairness and constitutionality of the underlying regulatory process used by the Commission.
The PBM’s constitutional challenges walk a well-trodden, but so far largely unsuccessful, path. First, the PBMs object that the FTC is violating Article III’s requirement that disputes involving private rights under contract be decided by a federal court, rather than an executive agency.
Second, the PBMs allege that the FTC is unconstitutionally “insulated from democratic accountability.” This is because although the commissioners go through the usual presidential appointment process, the president must show “inefficiency, neglect of duty, or malfeasance in office” to remove them. Analogously, the FTC’s administrative judges may only be removed for “good cause.” High bars for removal entail that presidential elections may not affect the FTC’s composition.
Third, the PBMs allege that the FTC is unfairly acting in different and conflicting capacities. In effect, the FTC acts simultaneously as an investigative agency, a prosecutor, and a judge in administering its own rules. This results in a biased process which deprives the PBMs of their Fifth Amendment right to due process.
In recent years, similar challenges to the FTC have been launched by Meta (Facebook), Axon Enterprise, Intercontinental Exchange, Amgen, and others. Although none of these attempts has succeeded, the Supreme Court’s increased willingness to overturn longstanding legal precedent underlying administrative agencies—most recently illustrated in the Court’s overturning of the Chevron Doctrine in the Loper Bright case—has likely breathed new life into old challenges. The primary legal precedent underlying the FTC’s power, Humphrey’s Executor, was decided in 1935, at a time when the FTC’s regulatory landscape was quite different. A pair of recently decided Supreme Court cases from 2020 (Seila Law LLC v. CFPB) and 2021 (Collins v. Yellin) may signal a willingness to further limit the power of the FTC and other executive agencies.
Also, although the FTC is required by law to have appointees from both major political parties, both Republican-appointed commissioners have recused themselves from the case against the PBMs. That perceived imbalance could increase the likelihood of eventual Supreme Court intervention.