FTC’s Interim Pharmacy Benefit Manager Report - Assessing Vigor

Edith Harold: Welcome to this Federalist Society virtual event. My name is Edith Harold and I'm an Assistant Director of Practice Groups with the Federalist Society. Today we're excited to host this webinar on the FTC's Interim Pharmacy Benefit Manager Report featuring Daniel Gilman, Rani Habash, and Professor Mike Shore as speakers and Derek Moore as moderator. Derek is a counsel at Rule Garza Howley where he brings his experience inside and outside the government to advise clients on antitrust, regulatory and consumer perfection matters. He has held numerous positions in the Federal Trade Commission, including attorney advisor to the commissioner, attorney advisor to the Office of Policy Planning and staff attorney in the Technology Enforcement Division of the Bureau of Competition. If you'd like to learn more about today's moderator or speakers, their full bios can be viewed on our website near the end of the program. We'll turn to the audience for questions. If you have a question, you can enter it into the Q&A function at the bottom of your Zoom window, and we'll do our best to answer as many as we can. Finally, I'll note that as always, all expressions of opinion are those of our guest speakers, not the Federalist Society. And with that, Derek, thank you for joining us today and I'll hand things over to you.

Derek W. Moore: Thank you, Edith, for that warm introduction and I'll be brief so we can get right to it and hear from our three esteemed panelists. You can see their full bios on the event webpage, but I'll describe briefly and quickly what they do and where they come from. So Dan Gilman is a senior scholar of competition policy at the International Center for Law and Economics. And prior to that, Dan spent many years as an attorney advisor in the Office of Policy Planning at the FTC, where he specialized in competition and healthcare among various other specialties. And most important for this panel, Dan and I were colleagues for almost 10 years. Rani Habash is a partner at Decker, LLP, where he focuses his practice on antitrust matters before the DOJ and the FTC. Rani has worked on some of the largest deals in the world over the last decade and he helped develop Decker's invaluable DAM tool, the Decker Antitrust Merger Investigation Timing Tracker, which I use on a nearly daily basis.

Mike Shore is a professor of economics at the University of Connecticut with specialties in industrial organization, experimental economics and game theory. And Mike has studied the PBM industries specifically. So all three of our panelists come to you with significant expertise on the subjects that are covered in the FTCs interim report. And we will start with Dan. So Dan being a former staff attorney in the Office of Policy Planning at the FTC, is going to talk about the general process for the FTC using its statutory authority under Section 6 B of the FTC Act and how the FTC writes and issues. Its various reports, some of which are called staff reports, some of which are called commission reports, and this one, which is called an interim report. With that, Dan, take it away.

Daniel J. Gilman: Thanks Derek. Great to be working with you again. So to take a step back and just put the 6 B reports in context, FTC is sort of an interesting agency. Well maybe in a lot of ways, but one way is that from its inception, one of its statutory missions has been a research and policy reporting mission. So it's in the original FTC act and in fact, one of the bills that turned into the FTC Act did not have the FTC as an enforcement agency at all. It was going to be sort of an expert consulting agency, would study the economy, would study different markets, different industries, advise the congress, advise states and so on and so forth. And so in different ways, I suppose to different degrees, FTC has been doing economic and policy research for a long time. Institutionally, Derek and I worked in the Office of Policy Planning, which does a lot of this work and does it in conjunction with the enforcement bureaus like the Bureau of Competition and the Bureau of Economics, which is staffed largely by PhD level economists, most of them, not all of them on the competition side, most not all doing sort of applied industrial organization economics of one sort or another.

So what's Section 6 B? A lot of this sort of research and reporting stuff is done in section six of the FTC Act. Section five is sort of some of the basic prohibitions, unfair methods of competition initially and then unfair or deceptive acts of practices was added later. There's also the process by which the agency adjudicates these things. Section 6, well it's other things, but 6 A has a charge to do various kinds of investigations.

These are not confined to law enforcement investigations. 6 B in a more focused way gives the commission the authority to issue special orders to private parties and firms asking specific questions, asking for information data commission has some leeway in setting the terms for these. And so this can be a pretty useful way to gather information that may not be public or otherwise available to commission staff doing the research. So I guess in context here, we're talking about a study that was initiated with such 6 B orders. They were sent to six the largest PBMs. There are other PBMs, there are smaller, some are regional, and a very substantial list of questions was asked. They asked for a lot of pricing data, cost data, different kinds of contracts and so on. And you can go on the FTC website and see these orders and read all the sorts of contents that were in the orders.

They've done this before. So in this administration we saw some reports on the supply chain. There was sort of one about infant formula that was focused. There was one about supply chain issues more generally where six B orders were issued to sort of three suppliers, three distributors and three big retailers chiefly in grocery and related goods. And a report was issued there. I mean I've written a little bit about this, I won't dwell on it, but it's just another example of an FTC - well there are two. One was called an FTC staff report. One was called the infant formula one was called an FTC report.

What do these distinctions mean? As someone who worked in the office of policy planning for 16 years, I can tell you definitively that I'm not sure. We worked on projects where sometimes the decision what to call it was made after the document already went to the commission. Sometimes it had to do with whether the Department of Justice was going to co-author or not. Nominally it's a difference and we can maybe surmise that the commission wants to put a stronger stamp on things that calls an FTC report as opposed to an FTC staff report, although I don't know how much to read into it because the commission votes to authorize issuance of all of these things. The commission's kibbitz over all sorts of things as these things are under review and vote by the commission so make of that what you will.

But this is called an interim staff report. It's not the first interim or preliminary report the commission's ever issued. I mean there was famously, I think 2012 there was a privacy report where Commissioner Kovacik voted along with other commissioners to issue the preliminary report, although his concurrence pointed out that he wasn't necessarily agreeing with any of the contents of the report that was being issued. So I guess just to take maybe one or two more minutes to compare and contrast, the commission did issue in 2005 a PBM report. It was a more focused report to my mind, more focused, more limited, a deeper lengthier, more rigorous. There was some real data analysis that went into that Congress had asked specifically in 2003 legislation that FTC do a study. Staff did it, commission voted it out, and they were looking at the core of it was a form of vertical integration, which was PBM ownership of mail order pharmacies was this vertical consolidation being exploited to the detriment of plan sponsors other payers.

And they found on average in aggregate no, that this was saving plan sponsors money. Now, that's not to say it saved every plan sponsor money or that it saved all of the money on every drug product. It's not to say that the commission shouldn't scrutinize PBM acquisitions. Of course the commission has an obligation to scrutinize mergers and acquisitions and nobody's blessing them going forward. Conduct. We have a very complex industry, some very big players. The report discusses six of them. There are other players and there are manufacturers and health plans and patients and all sorts of other businesses being provided services being provided. So is there any mischief in there, any legal violations? I can't really say that report didn't pretend to say one way or the other. The new interim staff report I don't think advances the ball very much. There's a lot of drama about these powerful middlemen as the report terms it.

It's not to say that none of them have any power. There's a lot, there's this business about squeezing pharmacies, but the community pharmacy as has more than 20,000 members. There are lots of them. And what we don't find in the current report is really any analysis of what's happening to drug prices apart from these two extremely limited, I don't want to say cherry picked, but not possibly representative cancer therapy drugs, that they talk about very small patient populations relative to some other drugs. And so is it even in aggregate, in abstract on balance, is this good or bad? Is there a competition problem? Well, there's a lot of intimation of concerns in the interim staff report, but not a lot of concrete numerical findings, which I had hoped to see given all the pricing information that they asked about. So maybe that's my 10 minutes and maybe I should shut up and let other people talk for a little bit. But glad to dive in a little bit more.

Derek W. Moore: Thanks Dan. Before we move on to Rani and Mike, just a couple of follow up questions. Very interesting to hear about the names or the titles that the FTC gives to its various reports. You used the word ask for information in relation to the FTCs special orders and I'm curious if that's the right word, and wanted to sort of distinguish between some topics the FTC writes reports on and the 6 B authority, which I think it's a request, but it's a request where the FTC can take you to court if you don't.

Daniel J. Gilman: Yes, yes, it's absolutely true. So the special orders are akin to, you could think of them as akin to subpoenas. And so it's asking in a certain context and as Derek says, they can go to court to have orders enforced. And the firms know this. Certainly the big firms that they're talking about it know this. And so in that regard, this power is different from lots of other inquiries. In terms of other reports, you can even look at the Bureau of Economics' FTC webpage. You can see that staff in the Bureau of Economics frequently get some time to do their own research. So the bureau knows what they're doing, but they're doing it like professors do their research. And these can be published as be working papers after the bureau sees them. And then a lot of them are published in academic journals. So there's a diverse number of things, but if I were a staffer working on a paper on my own, I could not issue six B orders. There'd be no compulsory process. This is compulsory

Derek W. Moore: Understood, and thanks for that clarification. Dan got couple of questions on some of the separate statements that the two Republican commissioners issued when the interim report was issued, which from my experience is somewhat unusual, tend to see the reports speak for themselves without commissioner statements. And we had a number of commissioner statements here and we both know from our time at the FTC that the public doesn't know a lot, right? And so there might be some things that the public can't know behind the contents of the commissioner statements. And so I guess I'm going to be asking you to spitball a little bit about what we think the commissioners might meet. And so Commissioner Ferguson in particular includes a number of references to the interim reports, reliance on anonymous public comments cited in the footnotes and other publicly available material such as press articles. And I'm just curious, in your experience, are those type of citations deur in a 6 B report or is there something there? Is there something unusual about that in this context?

Daniel J. Gilman: I think it's a little unusual, at least in degree, right? So a 6 B study doesn't necessarily only range over the information gathered through the orders. There could be workshops, there could be hearings of one sort or another. And so it's not that there's never any soft information which can be illustrative of something that's found otherwise. Derek and I did workshops and round tables. You can have academics, but also industry people or the public give perspectives and you can report on what stakeholders say. That's not unusual. I think what's unusual, and I think Commissioner Ferguson was right about this is that there's so much attention to this sort of information and really so little information reflecting things the commission was able to gather under the 6 B orders that weren't available to us, not available to me on the outside. Other panelists or the people listening on the outside, no real analysis of whatever data they collected.

I mean I assume some was done maybe in a preliminary fashion, but it seems odd that it's not there. We get some numbers, but they're all sort of big structural numbers sweeping across the industry and nationwide as to focusing on specific services or more narrowly defined markets. And the pricing information, the only deep dive we get is not that deep. It's about these two cancer drugs. One of them, they talk about 182,000 prescriptions on a 30 day prescription basis, which is sort of a common measure to make things commensurate. But that drug, I mean I wasn't familiar with it, but it is generic. I looked it up. Patients take this for up to five years. So 182,000 1 month prescriptions for this thing's taken five years. If you compare it to some of the statins that people take 28 million people taking these every month. I mean it's just very odd that we're just seeing this ad hoc selection of two drugs and no analysis and so much focus on this pharmacist says this patient says that. I don't mean these people's interests are trivial. We all have our interests and they may be indicative of something, but you need the more general analysis and I don't see it.

Derek W. Moore: Thanks for that, Dan. One last question before we move on to Rani. And if I putting my FTC staffer hat on, responding to what you just said, I might say, well, this is an interim report. And so some of that analysis that I think everybody thinks the public would benefit from might be included in a final report once the staff has had a chance to engage with all the material produced pursuant to the 6 B orders. However, there is a sort of cryptic statement in a Commissioner Holyoke's dissenting statement and have to make clear to those watching that it is a dissenting statement. So she voted against issuing the interim report, but the statement includes an observation that the interim report might be the only report issued pursuant to the commission's 6 B inquiry. Now who knows what to make of that, but I'm curious what you think of that. I mean, do we think it's realistic that this is the only report we're going to get related to this inquiry?

Daniel J. Gilman: It is possible. The real answer is I don't know. And I think one of the questions is how much a fuss is going to be made over what's missing from the interim staff report. I recommend to people that they go find Commissioner Holyoke's dissenting statement and Commissioner Ferguson's too, he's focused a little more on process. It's a very good statement, very thorough, and I think sensible. I tried to reread it this morning, but the FTC website was down, but I think there's a lot going on there. And maybe this is the tip of the iceberg. What I'm thinking is she raised a lot of very reasonable concerns about these two very limited, very odd case studies that they talk about the lack of data analysis underlying the report from the data they actually gathered. If there's a lot of push to do more and a lot of haggling over what comes next, well that could delay a final product.

And I don't know if current leadership, how nuanced a report, I can't say what that report's going to say, but how nuanced a report they want. I mean, this is one of several things that's come out that seems to have a very sort of anti subject, anti commercial and kind of suggestive conclusory tone to it. They've been working on this for more than two years. It's a little surprising to me that there isn't some more general analysis and there aren't some preliminary findings. I don't know why they would vote to issue this object if something really serious were forthcoming in the next month or two. So we can read tea leaves there. We can attribute darker light motives to the majority. I don't know. All I know is what's there and very conspicuously what's missing.

Derek W. Moore: Got it. Thanks for that, Dan. And we'll move on to Rani. Rani, given his representations in this area, is going to cover the factual content and the interim report and how that factual content compares to facts on the ground from his perspective. And so with that, I'll hand it over to Rani.

Rani Habash: Yeah, thanks Eric. And I'm speaking for myself, but I have done work for PBMs going back to the Express Scripts Medco transaction in 2011, 2012, and did represent Medco on that transaction. And I think what's most interesting about the PBM industry is that we keep hearing the same exact claims every year, every year, every year. So at that point, what we heard was that the independents were on the brink of extinction and any day now would no longer be around, which had us scratching our heads because you look at the number of independents and there are 25, 26, 27,000 of 'em, whatever the number was, and clearly were growing at that time and were publishing data showing that their margins were steady. And they had been saying the same things I think since the early two thousands that they were nearing extinction. And so you keep checking every year and you keep seeing them around and you compare that to some of the other industries that got wiped out by the Great Recession, got wiped out by covid.

And what you find with the independence is that, well, they're actually more independents today than there were in 2007, which is really incredible just with the growth of Amazon and growth of just e-commerce generally. I mean, a lot of pharmacies are now delivering within 20 miles of their stores. And so that's interesting. And then you always heard that, oh, the PBMs are driving up drug prices and drug prices are skyrocketing. And I think it's important to make a distinction there. I think generic drugs are still very cheap. About 90% of all prescriptions today are generics. So this idea that the PBMs are just driving people to brands, I mean if that were the case, I think you would not see 90% of scripts being filled on generics. But there's that. And then there is for the brand drugs, there are rebated brand drugs, and then there are non rebated brand drugs.

The rebated brand drugs tend to be the drugs that have competition. The non rebated ones tend to be the ones that don't have competition. And when you look at the data, I think what you find is that the drugs without competition, I mean that's where the prices are going up. You see some of the launch prices, I think the average launch price of a new drug is $300,000. And so that's where I think you see a lot of the growth. And then you see a lot of growth in utilization as well. So especially with the GLP ones today, there's been a lot of growth just in the utilization of drugs, but not necessarily the drug prices. And when you look at the other side of that at the rebated drugs, what you actually see is that the real net price of the rebated drugs has been coming down, which means the PBMs where they do have competition on the pharma manufacturer side are able to drive discounts on those drugs.

And ultimately those are benefiting, benefiting consumers, the plan sponsors and the members as well. And there's independent analysis on this showing that I think for the last six years in a row now, the net price of all drugs has actually come down, even though the list price has written has risen. And of course the list price is just essentially the sticker price on a drug, like on a car lot, which you'd be more concerned about what the actual sale price is of an item and not necessarily what the sticker says out there. And then I think another interesting thing that we've always heard is that there are the big three PBMs and they're all powerful and all that. And at the time when we were doing ESI Medco, the big three or what was considered the big three were Express Scripts, Medco and CBS Caremark.

And there was an interesting dissent from Commissioner Brill back at the time. It was a four one vote to clear that merger, but Commissioner Brill did dissent and she said, well, OptumRx, which is owned by United has big aspirations, but it is an ant to an elephant basically. They're never going to make it and never be able to compete with what we're now the big two. And here we are about 12 years later and we're now putting OptumRx into the big three as one of the big evil PBMs. And it's, it's just interesting to think about the fact that people I think under appreciate the level of competition that goes on in this marketplace. And at the same time, express Scripts, Medco, which were I think in the mid forties, their share was in the mid forties back then, they've actually fallen now to the twenties, which suggests that it is a competitive market.

Accounts are changing hands because of competition. The margins are razor thin as low as they've been, if not lower than what they were in 2012. And so when you look at these two case studies suggesting that the PBMs make a thousand percent on every drug, then you would think their margins should be a thousand percent on an overall basis. And the fact that they're not would suggest that those case studies as they call 'em, I would just call 'em two data points out of thousands, are not representative of what's reality in the world. And it was kind of interesting I think to see that the staff explains that they didn't do a comprehensive analysis, they didn't have the data to do a comprehensive analysis, but then they highlight these two drugs and sort of assert that they are representative when they claim that they don't have the data.

But it doesn't make any sense because when companies produce data, they produce all drugs at once. They don't produce two drugs at a time and then say, sorry, you're on your own for the other thousands of 'em. And so it looks like a clear case of just cherry picking cherry picking information that was not representative to try to draw a particular conclusion or support a particular conclusion. And frankly, that was the only empirical analysis in the whole report. Otherwise it was just citations to I guess media articles, which there's no real value in those when you have literally millions and millions of documents from the companies themselves, you would think that you would be able to cite to those if all those things were true. But you don't see that. And then you see a lot of citations to self-interested parties. So particularly pharmacists and the pharmacies have an interest in getting rid of PBM so that they can raise prices on consumers.

You see citations to some pharma industry participants who on the other side of the coin, I mean they spend tons of money lobbying against the PBMs because without the PBMs there, they would again be able to raise prices. And that's again not good for consumers. And so the PBMs are really the ones that are trying to protect the consumers against all these other parties that would otherwise raise prices in their absence. And when you look at the data on net prices, you actually see that they've done a pretty good job on that. In terms of controlling prices, insulin's been one drug that keeps coming up. I think every article starts with insulin prices are skyrocketing. And when you look at the actual data, I think from , it shows something like 20 to 25 bucks on average for a 30 day script, which the Biden administration has been touting its $35 cap, but that's well above what the average person pays today.

And so there's just a lot of misinformation. I mean, it's a really interesting industry because you think you have a lot of self-interested parties making a lot of noise, and they're getting a lot of traction, putting a lot of lobbying behind it, and it doesn't really hold up to scrutiny when you actually look at the data. And to Dan's point, I mean comparing that 2005 study, it's night and day. I mean it's like a hundred data tables. They don't just pick two drugs. They don't just pick one type of data point. I mean they present every cut of the data so that people can draw their own conclusions and people can study the data. They don't just say, oh, well this result, these two drugs support my conclusion, so I'm going to publish these and then ignore the other thousands that don't support my conclusion.

I mean, that's not a study, that's just a high school research paper where you've come up with a hypothesis and then you go out and find information that helps support it. But without actually doing a comprehensive analysis, which is really what these 6 B studies were intended to be, they weren't supposed to be, "Hey, we don't like this industry and we're going to go out and cite to a bunch of New York Times articles that support our view." I mean, that's essentially what we ended up with here. And so I'll stop there. I've been going for a little while.

Derek W. Moore: Thanks, Rani. I appreciate that perspective. I just have a couple of follow up questions about the facts that were a little confusing to me particularly. And so wondering maybe if you can or can't help me resolve some of that confusion. The first is pretty conceptual. So if you look at the interim report, it describes the PBMs as middlemen in a number of places, but there are also a number of claims that say that vertical integration involving PBMs has increased over time. And those two things strike me as loggerheads. If you're vertically integrated, it's sort of hard to be in the middle. And so it strikes me as something that's one or the other. And I'm just wondering if you can make sense of that for me.

Rani Habash: Yeah, the middleman thing is it's really stuck for a long time. It's kind of interesting. I mean, I think practically everyone's a middleman in some way or another. I'm a middleman for companies. They hire me to specialize in antitrust, and I think they find value in my antitrust expertise and learnings from many clients to be able to do that. We look at someone like FedEx, I mean, they go out and they build a whole infrastructure to accept and deliver your packages across the country overnight. And the reason people hire FedEx as a middleman is because it would be expensive to go out and buy your own planes and buy your own vehicles and hire drivers and build a whole logistics network for literally every company or every business in the world to have to do that. I mean, it makes sense that you outsource that to a specialist who's taken on the costs there, has built up the scale and efficiencies to be able to provide that service. And on the PBM side, I mean it's really the same thing.

If every company in the country had to go out, negotiate with 60,000 plus pharmacies, negotiate with hundreds of drug manufacturers, go do clinical research on formularies to on drugs to understand safety and efficacy of different drugs and which drugs need to be covered on formularies, had to build customer service centers to help patients, help pharmacies, help providers, had to build a whole claims adjudication IT system to process all the claims, make sure all the copays are administered correctly. I mean, literally, if every company had to do this, it would be insanely expensive. And that's why they hire PBMs to provide this service. They outsource it to a specialist in this area, so call 'em a middleman, call 'em a service provider or whatever. But ultimately it is clients who decide to hire a PBM, it is clients who decide, do I want to network with 40,000 pharmacies and I can save money?

Do I want to network with 65,000 pharmacies that's maybe more expensive but provides more coverage? And so the client gets to make those trade-offs and the PBMs administer. I think even the FTC report admits that they administer thousands of networks, which they don't just create thousands of networks on their own. I mean, they're a service provider. So when a client says, I want this network, the PBM will build that network for them. And really the same thing for formularies. I mean, the clients are deciding what formulary do they want to use? Do they want a broad formulary with every drug on it, or if they want to save some costs, why don't they limit it down to a formulary where if there are three drugs to compete with each other are clinically interchangeable, you make the manufacturers compete and the way they compete is through rebates that get discounted pass through to the clients and members.

And that's been effective as the data shows. So ultimately the PBM will do whatever a client wants and they will make offers to clients on, if you have a network with our affiliated pharmacies, the price is X. And if it's not affiliated pharmacies, then you have to pay a markup to these third parties. It becomes more expensive, and so it's more expensive to use the non-affiliated pharmacies and the pricing would reflect that. And so one of the benefits there of vertical integration where the PBMs do own the mail order pharmacies or specialty pharmacies is they don't have to pay that markup. And so they're able to price more aggressively for those networks for those narrower networks.

Derek W. Moore: Got it. One last question for you before we move on to Mike. And you mentioned the report discussion of independent pharmacies, and one of the conclusions in the report that stuck out to me was the conclusion that 10% of independent retail pharmacies in rural America closed. And that sort of strikes me as a fairly narrow observation, I think might be more interested in what's happening on a market-wide basis. What do you make of that narrow cutting of the retail pharmacy industry and what do we know about the pharmacy industry writ large? Is output increasing or decreasing in the pharma industry?

Rani Habash: Yeah, so that statement was interesting in particular because it was actually uncited in the report, so I don't even know what the basis was. If you look at the actual charts that show the share of independents that they put in the report, it actually showed that the independents had been remarkably flat, if not up between 2016 and 2023. So I'm not even sure where that statement came from, but I think PBMs wrongly kept blamed for every closure. I mean, if a restaurant goes out of business, people don't say, oh, it was the big food suppliers that put them under. It wasn't the quality of the food or the quality of service or whether there was actually supply and demand to support that restaurant. I mean, no one says that. And you look at other industries, banks have closed and look, I mean it's true mean rural areas have been hit hard, but I think if you look at the data on pharmacies, they actually have been flat in those rural areas if not up and have been remarkably resilient compared to other industries where there are no PBMs present.

And there were actually far more closures going on there. And so when you look at the data too, I mean what you see is a lot of large chains have closed at I think, faster rates than the independents as well, which that's even despite their larger size and suggests that maybe there's another factor driving it, maybe it's Amazon, maybe it's something else driving sort of those trends. But people point to a closure as if it has to be the PBMs fault when there are a million other factors that could be in play there. And the report makes no attempt to actually track causation. It's really just throwing out a number that's not even cited and then blaming it on PBMs without any further analysis when there's plenty of data out there, even from the community pharmacists themselves who say that their gross margins have been flat since 2007 at about 23.

Derek W. Moore: Got it. Thanks for that, Rani. And we'll move on to Mike. And Mike being an academic economist who's done research in this area is going to take the economic perspective and thinking about the interim report. And given the time we've got left on our panel, I think I'm just going to jump right into some questions, tee some topics up for you, Mike. So the interim report makes a number of claims about increasing horizontal and vertical integration in the PBM industry. Can you talk a little bit about the economics of horizontal and vertical integration, how they're similar, how they're different, whether they should be analyzed similarly and whether there ought to be concerns about both types of integration in the PBM industry?

Michael Shore:

Sure. Thank you Derek, and thanks for having me. First, lemme just say I share I think Rani's view about this disparaging use of "middlemen." To us in economics, middlemen exist in many industries and I am incredibly grateful whenever I go to the grocery store that the produce aisle is a middleman between me and farmers and saves me all of that horrible effort of having to buy my food from each individual farmer. In terms of consolidation, so for decades, I would say anybody that's looked at antitrust would say that economists treat horizontal and vertical mergers very differently. And so kind of combining them together into the biggest bad vertical horizontal that this report does. So horizontal mergers such as two PBMs are potentially troubling, always have been because they reduce competition unless there are significant offsetting efficiencies, which in the PBM industry is often pointed to the additional bargaining power primarily that A PBM would have representing larger clients from the vertical side such as a PBM and an insurer.

I would say that at least until recently in this FTC, the economic and the policy views has been that vertical should be presumed at least neutral if not pro-competitive. Most of the empirical economic evidence points to the fact that vertical mergers have simple idea of removing multiple kind of bites at the profit apple when firms merge together, as well as eliminating a lot of agency and incentive and efficiencies that might exist between say a health insurer and A PBM until they unite common interests. So in this industry, I would say it would be strange to speak about horizontal mergers without at least some mention of the extra bargaining power that provides with respect to the large pharmaceutical firms with respect to vertical. It's a little weird to me in this report, and I think a lot of the things that people have already raised that while there's lots of talk about things that vertical mergers could lead to in terms of incentives and bad actions, there's not really any dimension of the positives, which in general empirically have trumped those. And really the only way to be able to speak to those is some sort of an analysis of this specific industry that levels that down to consumer prices. And I think Dan and others have already pointed out that that's really missing. So I would say in general, very simply, it is very rare to see an economic analysis, especially that points to vertical consolidation ties that to being something bad without a lot of intervening steps that carefully weigh the potential positives and negatives.

Derek W. Moore: Appreciate that. And one point is vertical integration is occurring throughout the industry, and so different firms at different levels of the distribution chain are deciding to integrate vertically presumably for similar reasons. So it at least raises the question of whether those disparate firms are chasing the similar efficiency gains from vertical integration. One other question I had that you might be able to help with. So the interim report makes a number of references to small or independent pharmacies having concerns or issues with the PBMs and doing any sort of work in a commercial area where bargaining occurs, people always end up unhappy and sometimes the unhappiness is justified, sometimes it's not. Sometimes it's a result of market power, sometimes it's not. My question is what did you see in the interim report, if anything, about how PBM practices affect consumers as opposed to the PBMs trading partners or the entities on the other side of the bargaining table from them?

Michael Shore: Yeah, so I think that's a fantastic question. I mean, the first thing as you say, so a PBM will go to a plan sponsor and say, look, you have a couple of choices. Your customers can go to any pharmacy on earth, but they'll pay higher prices. Or if you let us compete pharmacies against each other so that there's fewer potential options, then we can save you money. And if a plan sponsor says, I'm happier with the narrower pharmacy network, it will substantially lower costs and the PBMs are going to make the pharmacies compete, I don't think it's surprising that pharmacists complain about being forced to compete. In some sense, a PBMs goal is to reduce costs in the health industry. And so having one of those players unhappy about the fact that costs are lower isn't necessarily a bad thing. I think there are two points that are missing in the report.

The first PBMs need independent rural pharmacies. So if there's an independent pharmacy in a major city competing with CVS and other major pharmacy chains, I don't know if they're competitive or not, and if part of just the natural, we see lots of small firms, but if you are a unique pharmacy in a rural area, A PBM can't really offer a health plan in an area unless that pharmacy exists. So I think the report is missing a lot of the economic incentives that PBMs have for needing pharmacies to exist close to the patients where they sell plans. The other is the only empirical data are these two example drugs. What I found ironic is that the report talks about how pharmacies are all losing money, how they don't even get reimbursed the cost of the drugs yet. For the two example drugs that they specifically point out here, they show that affiliated pharmacies make a large markup, but they also show that the unaffiliated pharmacies make a huge markup.

So either the problem that they claim exists doesn't exist because their only data in the report shows these pharmacies making an enormous markup affiliated or not, or these are somewhat cherry picked. But your question was on consumers and the report, I think as Dan pointed out as well, it doesn't actually analyze how much is being paid by the ultimate consumers. When I go and I want a drug, what is my copay? What is happening? But it also completely ignores another customer of PBMs, which are the plan sponsors. So the plan sponsors here are all choosing to contract with PBMs. They all ultimately could choose not to. And it doesn't point out, I think what the impact on the plan sponsors is, except for the observation that almost every plan sponsor chooses to use PBMs for at least some role, if not multiple roles in offering their prescription drug plan.

Derek W. Moore: Thanks for that. One last question before we open up some questions to the group. So you've done some of your own research on rebates in the pharmaceutical industry, rebates that flow from drug manufacturers to PBMs and then to pharmacies, and then presumably to patients in the form of lower premiums. I'm curious if you can talk a little bit about what the interim report says about these rebates and how the interim reports discussion of rebates compares to your understanding of how the industry operates.

Michael Shore: A year ago, Luke Froeb, a co-author of mine, and I wrote a report kind of carefully analyzing the competitive nature of PBMs and rebates in particular, given a lot of the changes that have occurred in the last 20 years. What we basically found is that the industry is still quite competitive and that rebates are greatly misunderstood. I was a little surprised to see the same misunderstanding survive into an FTC report. So first of all, if I'm a grocery store and I'm looking to carry bananas, I'm going to go to different banana manufacturers and suppliers and say, who's going to offer me a good price? And whoever offers me the best price is probably the brand of bananas I'm going to carry. That's a really simple idea. And beyond all the smoke screens, that's what rebates are. Rebates are basically pharmaceutical companies trying to reduce the price of their drugs in order to gain favor among PBMs to carry their product rather than therapeutically similar or identical alternatives.

So the lower the price that pharmaceutical companies offer, the more likely you are to carry those drugs. And if somebody offers me really cheap bananas, I'm going to not carry other brands. I mean, there's a lot of complexity in this industry, but in the simplest that's what's happening. And in fact, what I found ironic is that what that implies then is that if somebody offers me rebates to make their drug cheaper, which by the way they only do if they have competitors, and because they have competitors, they realize that I can choose not to carry their drug, but a cheaper rival is if they lower prices enough, I will carry theirs. The report in discussing rebates says, but wait, if you give me rebates, I might choose not to carry other drugs. Correct? If you give me a lower price than rivals, I might choose to go with a lower price drug.

They even acknowledge in the report that when they claim that some generics are pushed off a formulary, it's because the non-generic manufacturer has reduced price so much that they're actually potentially cheaper than the generic alternative. So this fits with the nature of competition as we would expect it to work, that when a pharmaceutical manufacturer offers you a significant discount, you're likely to go with them. Now, one quick note, again, a plan sponsor could say, I don't want to exclude any other drugs. I want them all covered. And in fact, a number of formularies do this and a number of plan sponsors do, but understanding that then I can't force competition and they're going to pay higher prices. So I always think of this as I can go to the grocery store where I have everything, or I can go to Costco. And Costco doesn't carry lots of brands.

In fact, they usually carry only one or two brands of a particular item, but the way they do that is they go to everybody and say, we're going to only carry one brand. And so they compete aggressively to be the one brand that Costco carries. And so formularies basically are PBMs ways of going to a plan sponsor and say, do you want to be the Costco for your patients or do you want to be the grocery store that carries everything? And if you choose to be the Costco, then we will have the cheapest drug available and not potentially alternatives that are therapeutically identical.

Derek W. Moore: Got it. Dan, did you have something that you wanted to say?

Daniel J. Gilman: Yeah, this is maybe just a weird little inside baseball thing, but Mike mentioned his co-author, Luke Froeb, we know him. Maybe not everybody on the other side of the webcast does. I mean, Luke is one of the, I mean Luke is a professor and an economist at Vanderbilt University, and we're familiar with his work and he's one of a very small number of people who has served both as the Director of the FTC's Bureau of Economics and as the chief economist at the Department of Justice and I trust division. So Mike, read the paper, by all means, see what they do. Luke's a serious person who's worked for the enforcement agencies and has a lot of background in the area.

Derek W. Moore: So thanks for that, Dan. And yeah, I think those of us inside baseball all know Luke's reputation quite well. So I think we've got five minutes left before our panel concludes, and I'll have just one question to throw out. I'm curious what all of you think. And so this question relates to a lot of the back and forth among the commissioners in their separate statements releasing the report. I'll set the stage quickly. Commissioner Holyoke and her dissent echoes a bit of what Dan said earlier, that the interim report doesn't really engage with the 2005 report, the contents of the 2005 report and some of the other commissioners who voted to release the report responded by saying, well, market conditions have changed so much between 2005 and the present that engaging with that report isn't quite so important because the world has changed. That's at least plaus, a plausibly reasonable statement. And so the question for all of you is what has changed since 2005? And then if you could sort of weave in what you would like a final report or a non-term report to address related to that question. So perhaps the final report might engage with the 2005 report and explain why the changes in the industry since then matter so much. And we'll just go in the same order that we did the presentations. Dan will go first, then Rani, then Mike, and then we will probably be over time when that happens.

Daniel J. Gilman: So what's changed? Well, things do change. 19 years is a long time, but one thing, according not to the PBM industry, according to rand, according to the Congressional budget office in 2022, since about 2005, yeah, some drugs are very expensive, but CBO reports that spending on prescription pharmaceuticals as a share of healthcare spending overall has declined since 2005 as a couple other people mentioned report about 90% are generics. Some of the players are the same, including some of the big players. And I think two little things. One is they said market conditions have changed and they sort of stickered with warnings. The 2005 report, long before they had any preliminary results on this, they were saying things have changed. This isn't useful. Well, maybe they found something new but they haven't shared it. And I would like to know just some of the cost and price findings of the 2005 report are things of very general interest. I know they have more data than they're showing us because CMS has data from Medicare Part D spending and Medicaid spending. There's academic reports that seem to have access to data. The interim staff reports sites to industry data. So I think yes, there have been changes. Good. Describe the changes to us. Describe them systematically and who's paying what, that's what people care about. Let's see, some systematic industry-wide reports, or at least market-wide reports on certain services, classes of drugs, not two fringe examples. I think they need to do this.

Derek W. Moore: Thanks, Dan. Rani, any thoughts about changes in what you'd like to see in the final report, if there is one?

Rani Habash: Yeah, I mean the biggest thing for me is the problem with an interim report is they can put it out and say, "Look, here are two examples, therefore everything else must be this way." And they can sort of cherry pick information and then hide behind the fact that it's interim to say, "Oh, well that wasn't the full report". And so look, I think what everyone wants to see is just an objective report that puts the data out there for everything, not just "Here are exactly two drugs and we're going to do this convoluted analysis of reimbursement to pharmacies, which doesn't even actually tell you anything about what the plan sponsors or the members paid." That's all. I mean, I think it should be objective, it should look at everything, not just two drugs. And then it should consider all of the different players in the supply chain. I think right now it's looking at PBMs as if there's no one else in the whole industry that has any role. The PBMs are the start and end of all drug prices, and I don't think you'll see anything about the role of pharma. I don't think you'll see anything about the role of pharmacies and you wouldn't know it from reading the report that there were many other players in the supply chain. And that ultimately the overall trend of prices has actually been down. It's really just utilization going up.

Derek W. Moore: Thanks, Rani. Mike, closing thoughts on those questions?

Michael Shore: So one thing that hasn't changed is economic logic, but a number of facts have. So we reviewed in our paper last year quite a number of changes in how they impact some of the conclusions, formulary structures have evolved. They're now very highly four tier, that wasn't the case. Then the rise of specialty drugs, the consolidation that we talked about, large changes in contracting and reating practices, for example. A lot of the concerns about rebate that have been raised for 20 years, but the percentage of rebates that's retained by PBMs has significantly decreased. Where a lot of plan sponsor PBM deals now have entire pass through of rebates, which changes a lot of the concerns about PBMs. So quite a number of things have changed that I think are worthy, as everybody has said, of kind of a new economic analysis of using the logic that we have to the new facts. The one thing I'll say just briefly is the biggest difference from the old report is the old report does what I think what we were all trained as economists to do presents strong evidence and very qualified conclusions. This report kind of surprised me because not only did it have very qualified evidence, but it had very strong conclusions. So I'm hoping the interim report is a little bit more respectful of what you can and can't say given the data that you are presenting.

Rani Habash: If there's one last thing I can add in too, I mean ultimately it's the plan sponsors choosing these formularies and choosing these networks, and they have the option to put everyone in or no one in or however they want to do it. And there's a reason that they're choosing the designs that they choose. I mean, they have budgets, they have costs, and they see an opportunity to make trade-offs between making sure that drugs are affordable for their members, but also providing sufficient coverage for their members as well. And I mean, that's something that each plan has to decide on their own. It's not something that the PBM decides and the PBMs not in a position to decide what's best for the members. It's really these plans that need to make that decision. And so people need to keep that in mind. And I think from reading the report, you would think that the PBM just tells everyone that you have to use exactly this pharmacy and you have no other choice, which is just completely a false claim from the staff.

Derek W. Moore: Thanks for that, Rani, and thanks also to Dan and Mike for this very illuminating hour. I learned a lot, and I hope the audience did as well. And I will turn it back over to Edith to conclude our time,

Edith Harold: On behalf of the Federalist Society, thank you so much to Daniel, Rani, and Mike for speaking, and Derek for moderating. We appreciate your time and expertise today. And thank you also to our audience for joining us. You can stay up to date with announcements and upcoming webinars on our website, fedsoc.org or on all major social media platforms. And we're adjourned.