[Senate Hearing 117-836]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 117-836

               ENSURING FAIRNESS AND TRANSPARENCY IN THE 
                    MARKETS OF PRESCRIPTION DRUGS

=======================================================================





                                HEARING

                               before the

                  SUBCOMMITTEE ON CONSUMER PROTECTION, 
                   PRODUCT SAFETY, AND DATA SECURITY 

                                 of the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                    ONE HUNDRED SEVENTEENTH CONGRESS

                             SECOND SESSION

                               __________
 
                              MAY 5, 2022 
                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation 







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                Available online: http://www.govinfo.gov 
                
                
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                    U.S. GOVERNMENT PUBLISHING OFFICE 

54-763 PDF                  WASHINGTON : 2024 










       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                    ONE HUNDRED SEVENTEENTH CONGRESS

                             SECOND SESSION

                   MARIA CANTWELL, Washington, Chair
AMY KLOBUCHAR, Minnesota             ROGER WICKER, Mississippi, Ranking
RICHARD BLUMENTHAL, Connecticut      JOHN THUNE, South Dakota
BRIAN SCHATZ, Hawaii                 ROY BLUNT, Missouri
EDWARD MARKEY, Massachusetts         TED CRUZ, Texas
GARY PETERS, Michigan                DEB FISCHER, Nebraska
TAMMY BALDWIN, Wisconsin             JERRY MORAN, Kansas
TAMMY DUCKWORTH, Illinois            DAN SULLIVAN, Alaska
JON TESTER, Montana                  MARSHA BLACKBURN, Tennessee
KYRSTEN SINEMA, Arizona              TODD YOUNG, Indiana
JACKY ROSEN, Nevada                  MIKE LEE, Utah
BEN RAY LUJAN, New Mexico            RON JOHNSON, Wisconsin
JOHN HICKENLOOPER, Colorado          SHELLEY MOORE CAPITO, West 
RAPHAEL WARNOCK, Georgia                 Virginia
                                     RICK SCOTT, Florida
                                     CYNTHIA LUMMIS, Wyoming
                       Lila Helms, Staff Director
                 Melissa Porter, Deputy Staff Director
       George Greenwell, Policy Coordinator and Security Manager
                 John Keast, Republican Staff Director
            Crystal Tully, Republican Deputy Staff Director
                      Steven Wall, General Counsel
                                 ------                                

         SUBCOMMITTEE ON CONSUMER PROTECTION, PRODUCT SAFETY, 
                           AND DATA SECURITY

RICHARD BLUMENTHAL, Connecticut,     MARSHA BLACKBURN, Tennessee, 
    Chair                                Ranking
AMY KLOBUCHAR, Minnesota             JOHN THUNE, South Dakota
BRIAN SCHATZ, Hawaii                 ROY BLUNT, Missouri
EDWARD MARKEY, Massachusetts         JERRY MORAN, Kansas
TAMMY BALDWIN, Wisconsin             MIKE LEE, Utah
BEN RAY LUJAN, New Mexico            TODD YOUNG, Indiana 














                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on May 5, 2022......................................     1
Statement of Senator Blumenthal..................................     1
Statement of Senator Blackburn...................................     3
Statement of Senator Cantwell....................................    47

                               Witnesses

David A. Balto, Antitrust Attorney, David A. Balto Law Offices...     5
    Prepared statement...........................................     6
Craig L. Garthwaite, Ph.D., Professor of Strategy, Herman Smith 
  Research Professor in Hospital and Health Services Management, 
  Director of Program on Healthcare at Kellogg (HCAK), Kellogg 
  School of Management, Northwestern University..................    16
    Prepared statement...........................................    18
Professor Robin Feldman, Arthur J. Goldberg Distinguished 
  Professor of Law, Albert Abramson '54 Distinguished Professor 
  of Law Chair, Director of the Center for Innovation, University 
  of California Hastings Law.....................................    33
    Prepared statement...........................................    34
Juan Carlos ``JC'' Scott, President and CEO, Pharmaceutical Care 
  Management Association.........................................    36
    Prepared statement...........................................    38

                                Appendix

    Prepared statement of FMI--the Food Industry Association.....    61
    Prepared statement of Patients for Affordable Drugs Now......    65
Letter dated May 5, 2022 to Hon. Maria Cantwell, Hon. Roger 
  Wicker, Hon. Richard Blumenthal and Hon. Marsha Blackburn from 
  Lina M. Khan, Chair, Federal Trade Commission..................    87
Letter dated May 11, 2022 to Hon. Richard Blumenthal and Hon. 
  Marsha Blackburn from Ted Okon, Executive Director, Community 
  Oncology Alliance..............................................    89
Response to written questions submitted to Robin Feldman by:
    Hon. Marsha Blackburn........................................   114
Response to written questions submitted to Juan Carlos ``JC'' 
  Scott by:
    Hon. Richard Blumenthal......................................   117
    Hon. Marsha Blackburn........................................   117

 
ENSURING FAIRNESS AND TRANSPARENCY IN THE MARKETS OF PRESCRIPTION DRUGS

                              ----------                              


                         THURSDAY, MAY 5, 2022

                               U.S. Senate,
      Subcommittee on Consumer Protection, Product 
                         Safety, and Data Security,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:10 a.m., in 
room SR-253, Russell Senate Office Building, Hon. Richard 
Blumenthal, Chairman of the Subcommittee, presiding.
    Present: Senators Blumenthal [presiding], Cantwell, and 
Blackburn.

         OPENING STATEMENT OF HON. RICHARD BLUMENTHAL, 
                 U.S. SENATOR FROM CONNECTICUT

    Senator Blumenthal. The Subcommittee on Consumer 
Protection, Product Safety, and Data Security will come to 
order. Welcome to our very distinguished panel and to the 
Senators who will be joining us. I want to thank particularly 
Senator Blackburn for her collaboration on this topic, and 
welcome all of you to address the anti-consumer and anti-
competitive practices that increase and drive up health care 
costs for the American people.
    Today we are specifically focused on pharmacy benefit 
managers, or PBMs, and how the tactics they use impact drug 
costs and consumer choice. This hearing is really part of a 
more general discussion on how to lower costs and remove 
barriers to care for patients, and we will continue to have 
hearings on that topic. If you ask the average American to tell 
you what a pharmacy benefit manager does or even what it is, 
you are probably met with a blank stare, which is 
understandable.
    PBMs have long operated in relative obscurity with little 
transparency, acting as middlemen between insurer, drug 
companies, and pharmacies. PBMs exist to manage the drug 
prescription benefits for 266 million Americans. So even if you 
have never heard of a PBM, you have almost certainly been 
impacted by one.
    They are hired to hire--they are hired to buy health plans 
to--by managing the health plans' prescription drug benefit, 
lower costs to the health plan by exacting rebates from drug 
companies and managing what drugs will be covered for patients 
and at what cost. Then they act as the intermediary between the 
health plan and the pharmacy, reimbursing the pharmacy for the 
prescription drugs they dispense.
    PBMs stated goal is to lower health care costs for 
consumers through this complex system. The problem is that 
patients rarely see or feel the benefits. Drug prices continue 
to rise. Insurance costs continue to eat into incomes. And more 
and more often, drug--the drugs patients need are not covered 
by their health care plan at all. In this way, PBMs are part of 
a broken drugs supply chain that leads to increasing profits 
for drug companies, increasing profits for PBMs, and increasing 
drug costs for patients.
    PBMs benefit from high prices. They receive rebates and 
administrative fees from drug companies that are often based on 
the initial price. It is called the list price of a drug. This 
means the higher the initial cost of a drug, the higher the 
profits for the PBM. PBMs will argue that these rebates lower 
the cost of your insurance, that they largely pass these 
rebates along to insurers who use them to lower your health 
care costs.
    But truly, we have no idea whether this is accurate, 
because PBMs shroud this information in secrecy. If these 
rebates are lowering the cost of health care, that is news to 
patients. Insurance premiums and deductibles have not gone 
down. Instead, increasingly, they are eating into Americans' 
hard earned dollars and savings. PBMs are a significant part of 
the drug pricing problem, but drug companies shouldn't get a 
pass.
    As Professor Feldman, one of our witnesses here today wrote 
in her aptly entitled article, and I am quoting here, ``driving 
up prices is a win-win for PBMs and drug companies. Drug 
companies can charge more for their products, while PBMs 
increase their slice of the pie.'' The one who loses out is the 
patient, because even though that initial price isn't what 
anyone else in the drug supply chain pays, it oftentimes 
directly impacts what you pay.
    That is because for nearly half of people with commercial 
insurance and nearly all Medicare beneficiaries, out-of-pocket 
payments are based on an initial drug price, not the reduced 
rate. The higher the initial price, the more you pay, and PBMs 
have a financial incentive to keep that initial price high. 
PBMs also limit choice. PBMs are the ones who decide which 
prescription drugs your health plan will cover and which they 
won't. They determine which drugs will be preferred by your 
insurance plan, meaning which drugs will cost you more out of 
pocket and which will cost you less. Increasingly, PBMs have 
taken to excluding drugs entirely from health plans.
    More and more patients who receive a diagnosis are working 
with their doctors to find a prescription drug that works for 
them, only to be denied access to it at the pharmacy counter. 
This happened to April Flowers, a teenager from Texas, whose 
family told their story to Consumer Reports. She had taken the 
same medication for her seizures for years when suddenly her 
family learned at the pharmacy counter that her out-of-pocket 
costs was now $1,700. Her family made frantic calls to figure 
out the problem.
    What they learned was that her drug was suddenly dropped 
with no warning. Her drug was no longer covered. They 
scrambled. They enlisted her doctor. With 2 days of medicine 
left, April got an exception. The stress, the threat to her 
health must have been infuriating. April's situation is 
shockingly common. In fact, in recent years, PBMs' refusal to 
cover certain drugs has skyrocketed.
    Now hundreds of drugs are excluded by the biggest PBMs 
every year. Certain types of insulin, drugs to treat chronic 
conditions, and in recent years, cancer drugs are all fair 
game. A poll cited in the same Consumer Reports article found 
that more than a third of people with prescription drug 
coverage said they or someone in their home had dealt with the 
same issue as April within the last 12 months.
    Let's be clear, PBMs are just part of a broken system. It 
is massively broken. It has left millions of Americans without 
a way to afford lifesaving medicine like insulin. Drug prices 
have skyrocketed, and drug companies have made record profits 
while engaging in anti-competitive tactics that keep cheaper 
drugs off the market. I pushed for reform, so have many of my 
colleagues.
    The biggest and most important priority we have is to lower 
the cost of prescription drugs. And that is a health care 
imperative as people feel the weight of high health care costs. 
We cannot ignore the power of PBMs and their influence in drug 
pricing and eroding patient and provider choice. I hope that 
today's hearing will lead to action. And I turn to the Ranking 
Member.

              STATEMENT OF HON. MARSHA BLACKBURN, 
                  U.S. SENATOR FROM TENNESSEE

    Senator Blackburn. Thank you, Mr. Chairman. And good 
morning and welcome to all and to our witnesses that are 
joining us remotely today. We welcome them also. And Chairman 
Blumenthal, I am so pleased that we are doing this hearing 
about the issue of the PBMs and the impact that these 
arrangements have on our consumers.
    And when you look at the fact that the PBMs are the 
middleman and over the past few decades, they have grown, 
really escalated with Medicare Part D. And initially the 
purpose was, save money for the employers and the insurance 
companies, try to keep the costs down. But in those 20 years 
since the Medicare Part D has been with us, it seems that the 
role of the PBM has become really quite complicated.
    Three PBM middlemen accounted for nearly 80 percent of all 
the prescription claims in 2020, and that is not lost on us. 
And one of the reasons we are wanting to look at the market, 
the size of the market, the inefficiencies that are there--
maybe there are ways to create efficiencies and save money for 
the system and for consumers who seem to be paying an ever 
higher cost.
    We understand and appreciate rebates are a part of this 
system and are really a part of the payments that are made by 
the pharmaceutical companies to the--to keep certain drugs in a 
formulary. And we know that the PBM has a lot of control over 
what pharmaceutical can actually reach the consumer that is on 
a specific plan. And we know and are curious about some of the 
other rebates that are recouped from pharmacists by the PBMs.
    And pharmacists tell me that this is done without 
transparency or accountability by the PBMs. Distorted 
incentives within the pharmaceutical supply chain have created 
a dynamic where middlemen involved in distributing and paying 
for prescription medicines benefit from higher list prices and 
higher rebates, and the consumer pays more.
    Senators Grassley and Wyden published a two-year 
investigation into the cost of insulin. I know that each of you 
are familiar with this. And what they noted was how the PBMs 
really stood in the way of a lot of transparency in this 
process. They concluded that the PBMs have an ``incentive for 
manufacturers to keep list prices high.'' And that is a direct 
quote from them. Now, this is really a 180 from what the 
purpose of a PBM was to be initially. In recent years, 40 
states, including Tennessee, have enacted legislation to curb 
some PBM practices.
    The bill recently passed by the Tennessee General Assembly 
includes reimbursement transparency and protects patients from 
being steered to PBM-affiliated pharmacies. This shows you how 
you have gotten away from a core mission with the PBM when the 
states jump in and say we are going to protect our citizens.
    That is why we need to look at this. You have got onerous 
audits, claw back provisions, and patients steering into anti-
competitive behaviors by PBMs that have caused small pharmacy 
businesses to struggle to survive. While CMS recently proposed 
rule to end retroactive DIR fees, which harm independent 
pharmacies and raise costs for seniors, they unfortunately 
delayed implementation until 2024.
    That is unacceptable. This delay gives PBMs another year to 
play games that cause seniors to pay higher cost sharing and 
pharmacies to face huge claw backs. As they say, sunlight is 
the best disinfectant, and it is time for more transparency 
about the impact of potentially anti-competitive PBM practices 
on patients, small pharmacy businesses, and taxpayers.
    To this end, I have introduced S. 298, the Pharmacy Benefit 
Managers Accountability Act. I have done that along with 
Senator Braun. The bill would require GAO to submit a report to 
HHS and Congress on PBMs and their role in the pharmaceutical 
supply chain. I encourage my colleagues to take a look at it 
and consider co-sponsoring that legislation. I would note that 
a few months ago the FTC asked for public input on PBMs and 
their impact on patients, physicians, and businesses.
    I am not opposed to this line of inquiry. Last year, I 
sponsored a bipartisan bill with Senator Blumenthal and Chair 
Cantwell and others that directed the FTC to report to Congress 
on anti-competitive practices. But I want to emphasize that 
this is not a blank check for the FTC. It is not for them to 
move forward with any type of rulemaking that they want to 
pursue without the direction of us in Congress, especially 
given the need for more information and the important role of 
HHS and the states in this area.
    So these are all issues for our discussion today. We look 
forward to hearing you. Thank you, Mr. Chairman.
    Senator Blumenthal. Thanks so much, Senator Blackburn. We 
have a great panel. Welcome to all of you. I will introduce you 
and then ask for your statements. David Balto, who is a 
Principal in the law offices of David Balto. He is an expert on 
health care competition and regulation, and an antitrust 
attorney with over 25 years of experience in both the private 
and public sectors.
    Mr. Balto served as a trial attorney in the Department of 
Justice's Antitrust Division and in several senior level 
positions at the FTC during the Clinton Administration, 
including as Policy Director for the Bureau of Competition. 
Craig Garthwaite, who joins us personally, is the Herman Smith 
Research Professor and Hospital and Health Services Management, 
Professor of Strategy and Director of the Program on Health 
Care at Northwestern University's Kellogg School of Management.
    He has a Ph.D. in economics from the University of Maryland 
and is an expert in health care policy and the 
biopharmaceutical sector, and I understand is a native of 
Stanford, or at least has a connection there. Robin Feldman is 
the Arthur J. Goldberg Distinguished Professor of Law, Albert 
Abramson Distinguished Professor of Law Chair, and Director of 
the Center for Innovation at the University of California 
Hastings. She is an expert in the legal junction of 
intellectual property, health, and medicine.
    Her work illuminates how and why practices often operate to 
the benefit of the pharmaceutical industry over consumers, and 
she offers solutions. J.C. Scott, who joins us in person, is 
the President and CEO of the Pharmaceutical Care Management 
Association representing America's Pharmacy Benefit Managers. 
He joined PCMA in the fall of 2018 and before that held roles 
with Abiomed and the American Council of Life Insurance.
    He also has held various staff offices in the House of 
Representatives. We are going to go in alphabetical order, 
beginning with David Balto, then Craig Garthwaite, Robin 
Feldman, and J.C. Scott. Mr. Balto, if you can hear us, the 
floor is yours.

STATEMENT OF DAVID A. BALTO, ANTITRUST ATTORNEY, DAVID A. BALTO 
                          LAW OFFICES

    Mr. Balto. Thank you. Good morning, Chairman Blumenthal, 
Ranking Member Blackburn, and other members of the 
Subcommittee. I am very grateful that you are holding this 
hearing and that you invited me to speak. There is increasing 
attention to PBMs, and it is very justifiable.
    PBMs are an increasing source of cost increases in the 
pharmaceutical area, and they are probably the least regulated 
area, and they have a significant impact on health care costs 
that is appropriate for attention. And unfortunately, our 
antitrust and consumer protection enforcers, especially FTC, 
have given them a green light and consumers have paid dearly 
for that. In my written testimony, I make four basic points.
    First, PBMs are probably one of the least regulated areas 
of the drug supply chain. There is no Federal enforcement and 
very little State enforcement, and that has left PBMs free to 
engage in anti-competitive conduct. When you look at the--
listen to the complaints of the community pharmacists in your 
state, what they are subject to in trying to deliver better 
services to consumers is truly--[technical problems]--
tremendous power of PBMs.
    Second, the--because of the lack of enforcement, the PBMs 
have formed a tight oligopoly, as ranking member noted. There 
are three elements you need for competition to exist in the 
market. First, you need choice. You need to be able to play 
competitors off against each other. Now, Mr. Scott is going to 
tell you there are 70 PBMs. That doesn't matter. Three firms 
dominate the market. The question of whether a firm has market 
power is the ability of a customer to say no.
    And when a PBM goes to a pharmacist and says, I am going to 
take all these DIR fees or I am going to force you to reimburse 
below cost, or when a generic drug company comes to a PBM and 
says, please put me on the formulary and the PBM says, no, you 
are not offering me rebates like the branded drug manufacturer 
receives, that means the PBM has market power. It has the 
ability to act anti-competitively. What is the result? We have 
seen PBM profits more than double to over $20 billion a year.
    Now, pause for a second. These aren't firms that are 
producing products. These are firms that are moving information 
and money and negotiating contracts, and for that, they are 
taking $28 billion, adding $28 billion of cost into the system. 
Why should consumers be paying so much for so little? And the 
reason that happens is because of the lack of competition. 
Factor two, transparency.
    You have to go no further than PBMs imposing--[technical 
problems]--saying that they don't want any form of transparency 
in the market. Then third, conflicts of interest. PBMs--the 
purpose of PBMs is to lower drug prices, but as the ranking 
member noted, they make more money in rebates when prices go 
up. So their interest is in seeing prices increase. And that is 
why you see them deny access or provide inferior access to 
biosimilars or generic drugs or some competing drugs.
    It is basically an auction for shelf space in which they 
say the highest cost product to the consumers is going to win 
the auction. And that is why prices are increasing so 
significantly. In my testimony, I outline how the FTC has 
really failed at this. And nothing is worse than a decade ago 
when they made the Faustian bargain to allow two of the three 
biggest PBMs, Express Scripts and Medco, to merge under the 
assumption that that increased market power would lead to lower 
prices for consumers.
    Well, they were dead wrong. What is the result? We see 
skyrocketing rebates over the past decade. We see more 
restrictive networks and consumers being denied their 
pharmacies of choice as there has been a flood of PBM 
consolidation over those 10 years. One message I want to leave 
you with is consumers care a lot about their community 
pharmacy.
    The community pharmacist is the health care provider that 
provides the greatest access to consumers, and that is vital, 
vital in underserved, rural, and inner city markets. They are 
the most accessible health care professional. And we saw that 
during the vaccine crisis over the past several years.
    My testimony ends by outlining several amendments to the 
Federal Trade Commission Act, specifying anti-competitive 
practices for the Commission to dig its teeth into to prevent--
to make this market competitive. And I think at the top of that 
list has to be the impact on pharmacies and also this rebate 
system that is leading to skyrocketing drug prices.
    Thank you very much for the opportunity to testify.
    [The prepared statement of Mr. Balto follows:]

       Prepared Statement of David A. Balto, Antitrust Attorney, 
                       David A. Balto Law Offices
    Good morning, Chair Blumenthal, Ranking Member Blackburn, and 
Members of the subcommittee: I thank you for giving me the opportunity 
to testify on the concerns and the need for regulation and 
accountability in the pharmacy benefit manager (``PBM'') market. My 
testimony documents the tremendous competitive and consumer protection 
problems in the PBM market and need for stronger antitrust enforcement, 
oversight, regulation, and Federal legislation. For years PBMs have 
existed with scant regulation, and consumers have paid a heavy price in 
higher costs, less choice and inferior service. Congress and regulators 
need to reverse this permissive stance toward PBMs to lower 
prescription drug prices for patients.
    My testimony is based on my 30 years of experience as a public 
interest antitrust attorney and an antitrust enforcer for both the 
Department of Justice and the Federal Trade Commission (FTC). From 1995 
to 2001, I served as the Policy Director of the FTC's Bureau of 
Competition and the attorney advisor to Chairman Robert Pitofsky. 
Currently, I work as a public interest antitrust attorney in 
Washington, DC. I have represented consumer groups, public interest 
organizations, health plans, unions, employers, retail and specialty 
community pharmacy associations, and even PBMs on PBM regulatory and 
competitive issues. I led the consumer opposition to the proposed 
mergers of Anthem and Cigna and Aetna and Humana and worked with 
consumer groups to oppose CVS' acquisition of Aetna.
    I have testified before Congress on several occasions and before 
fourteen state legislatures on the need for PBM reform and regulation 
and served as an expert witness for the State of Maine on its PBM 
legislation.
    My testimony makes the following points:

   PBMs are one of the least regulated sectors of the 
        healthcare system and drug supply chain. There is almost no 
        Federal antitrust enforcement, oversight, or regulation. The 
        lack of antitrust enforcement and regulation has created an 
        environment in which PBMs are free to engage in 
        anticompetitive, deceptive, and fraudulent behavior that harms 
        patients, payors, employers, unions, and pharmacists and 
        significantly increases drug costs.\1\
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    \1\ How PBMs Make Drug Pricing Problem Worse, David Balto, August 
31, 2016, The Hill, https://thehill.com/blogs/pundits-blog/healthcare/
294025-how-pbms-make-the-drug-price-problem-worse/.

   Because lax antitrust enforcement allowed the three largest 
        PBMs to become vertically integrated and form a tight 
        oligopoly,\2\ the PBM market lacks the essential elements for a 
        competitive market: 1) choice, 2) transparency, and 3) a lack 
        of conflicts of interest. PBMs leverage this lack of 
        competition to further their own interests at the expense of 
        patients, employers, and others in the system.
---------------------------------------------------------------------------
    \2\ Reforming Biopharmaceutical Pricing at Home and Abroad, The 
Council of Economic Advisors, White Paper, February 2018, https://
trumpwhitehouse.archives.gov/wp-content/uploads/2017/11/CEA-Rx-White-
Paper-Final2.pdf.

   The PBM rebate system turns competition on its head with 
        PBMs seeking higher, not lower prices to maximize rebates and 
        profits. In the past decade, PBM profits have increased to $28 
        billion annually.\3\ PBMs are supposed to control costs, but 
        because of the perverse incentives the rebate system creates, 
        they frequently deny access to lower cost drugs including lower 
        cost generics and biosimilars, to maximize rebates available 
        from higher cost drugs.\4\ That is why major consumer and 
        patient groups and unions supported the past administration's 
        efforts to eliminate the antikickback safe harbor for PBM 
        rebates.\5\
---------------------------------------------------------------------------
    \3\ PBM Accountability Project, Understanding the Evolving Business 
and Revenue Models of PBMs, 2021, https://www.pbmaccountability.org/
_files/ugd/b11210_264612f6b98e47b3a850205
4f66bb2a1.pdf?index=true
    \4\ Charlie Grant, Hidden Profits in the Prescription Drug Supply 
Chain, February 24, 2018, Wall Street Journal.
    \5\ Comments of Consumer Action, Consumer Federation of America, 
Consumer Reports, NETWORK Lobby for Catholic Social Justice, and Public 
Research Interest Group PIRG in Support of Department of Health and 
Human Services Office of Inspector General's (``HHS'') proposed new 
rules to eliminate the safe harbor for rebates in Medicare Part D 
plans, April 8, 2019, https://docs.wixstatic.com/ugd/
1859d0_c7d2ccf1d47d4f65a8965e9bbaed989d.pdf.

   Because of their market power and vertical integration these 
        middlemen increasingly stifle competition from this country's 
        most accessible and trusted health care professionals--
        community pharmacies. PBMs create endless schemes to reduce 
        reimbursement, claw back funds, restrict networks, and 
        effectively force pharmacies to provide drugs below cost. In 
        2020 alone, PBMs took $9,535,197,775\6\ from independent 
        pharmacies who serve Medicare Part D participants. Community 
        pharmacies are crucial for consumers in underserved low income 
        and rural neighborhoods. These unfair and coercive tactics by 
        PBMs result in inferior health care, less choice and higher 
        costs.
---------------------------------------------------------------------------
    \6\ Medicare Program; Contract Year 2023 Policy and Technical 
Changes to the Medicare Advantage and Medicare Prescription Drug 
Benefit Programs; Policy and Regulatory Revisions in Response to the 
COVID-19 Public Health Emergency; Additional Policy and Regulatory 
Revisions in Response to the COVID-19 Public Health Emergency, CMS 
4192-F, https://public-inspection.federalregister.gov/2022-09375.pdf.

   The FTC has failed to protect consumers from unfair, 
        deceptive and egregious conduct in this market. Thus, the 
        Committee should consider amending the FTC Act to specify 
        unfair acts or practices and unfair methods of competition that 
        PBMs engage in that the FTC should address and provide a clear 
        mandate for strong enforcement. Consumers should no longer be 
---------------------------------------------------------------------------
        forced to pay billions for the schemes of these middlemen.

    For the PBM market to function properly for patients, employers, 
unions, and other stakeholders, we need strong oversight and regulation 
as well as greater antitrust and consumer protection enforcement. Any 
conversation on drug pricing reform must include a discussion on how to 
rein in PBMs.
                        The PBM Market Is Broken
    Ensuring that patients can afford lifesaving and life-managing 
prescription drugs is critically important to public health because 
better use of medicines has been shown to help patients live longer and 
healthier lives. Unreasonably high out-of-pocket costs for prescription 
drugs at the pharmacy counter threaten patient access to medicines, as 
some choose to stop or delay treatment because they cannot afford 
it.\7\
---------------------------------------------------------------------------
    \7\ Press Release, Kaiser Family Foundation, Poll: Nearly 1 in 4 
Americans Taking Prescription Drugs Say It's Difficult to Afford Their 
Medicines, including Larger Shares Among Those with Health Issues, with 
Low Incomes and Nearing Medicare Age (Mar. 1, 2019), https://www
.kff.org/health-costs/press-release/poll-nearly-1-in-4-americans-
taking-prescription-drugs-say-its-difficult-to-afford-medicines-
including-larger-shares-with-low-incomes/.
---------------------------------------------------------------------------
    Undoubtedly, rising prescription drug prices are a serious problem 
for patients.\8\ PBMs were supposed to be a solution to this problem, 
but a lack of competition, transparency and existing conflicts of 
interest enable PBMs to game the system and put profits before patient 
welfare.
---------------------------------------------------------------------------
    \8\ Leigh Purvis and Stephen W. Schondelmeyer, Brand Name Drug 
Prices Increase More Than Twice As Fast As Inflation in 2018. AARP 
Public Policy Institute, November 2019, https://press.aarp.org/Brand-
Name-Drug-Price-Increases-2018-Rx-Price-Watch?intcmp=AE0POL-TOENG-TOGL.
---------------------------------------------------------------------------
    PBMs represent themselves as ``honest brokers'' or intermediaries 
between drug manufacturers, health insurers, plan sponsors, and 
providers. Although PBMs in principle have great promise in terms of 
their potential to control prescription drug costs, over time their 
role has evolved. Now, there is a pattern of self-dealing and 
anticompetitive behavior. Patients pay higher prices for drugs than 
they should because PBMs are not fulfilling their cost-control 
function. Consider that two of the three largest PBMs are in the 
Fortune 10 and all three in the Fortune 15.\9\ The Pharmaceutical Care 
Management Association (``PCMA''), the PBM trade association, 
frequently says that PBMs are ``the only actors in the pharmaceutical 
supply chain whose fundamental role is to negotiate lower drug prices 
for patients,'' but PBMs are not ``fulfilling their primary mission to 
lower prescription drug costs for consumers and health plan sponsors.'' 
\10\ Instead, consumers are funding profits of more than $28 billion 
annually for network intermediaries that make no products and provide 
no health care, but rather basically serve primarily to transfer data 
and money.
---------------------------------------------------------------------------
    \9\ Fortune Rankings, https://fortune.com/fortune500/2021/search/.
    \10\ J.C. Scott, FTC's Inquiry of PBMs Won't Lower Prescription 
Drug Costs, The Hill, April 18, 2022, https://thehill.com/blogs/
congress-blog/3272225-ftcs-inquiry-of-pbms-wont-lower-prescription-
drug-costs/
---------------------------------------------------------------------------
    Let me be clear, the PBM market is broken because it lacks the 
essential elements for a competitive market, namely: (1) choice, (2) 
transparency and (3) a lack of conflicts of interest.\11\
---------------------------------------------------------------------------
    \11\ ``Protecting Consumers and Promoting Health Insurance 
Competition,'' Testimony of David Balto, Before House Judiciary 
Committee, Subcommittee on Courts and Competition Policy, October 8, 
2009, at http://www.dcantitrustlaw.com/assets/content/documents/CAP/
protecting%
20consumers.pdf.
---------------------------------------------------------------------------
    First, there is a lack of choice. The PBM industry is a tight 
oligopoly, which results in reduced consumer choice. According to the 
Council of Economic Advisors (CEA), three PBMs--CVS Caremark, Optum Rx, 
and Express Scripts--control over 80 percent of the market, ``which 
allows them to exercise undue market power against manufacturers and 
against health plans and beneficiaries.'' \12\ Indeed, the three 
largest PBMs have a higher gross margin than any other players involved 
in the drug supply chain,\13\ and in recent years, more of the increase 
in spending on brand medicines has gone to payers, including PBMs and 
health plans, than to drug manufacturers.\14\ PBM profits have more 
than doubled in the past decade. It is hard to see what value these 
middlemen have added to our healthcare system in return for the 
skyrocketing profits.\15\
---------------------------------------------------------------------------
    \12\ CEA White Paper, supra note 2. The Top Pharmacy Managers of 
2021, the big get even bigger, Drug Channels, April 2022, https://
www.drugchannels.net/2022/04/the-top-pharmacy-benefit-managers-of.html. 
I expect the witness from PCMA will note that there are dozens of PBMs. 
But these firms are not competitors at least from the perspective of 
competition law and economic policy. Under the antitrust laws, a 
``competitor'' in a relevant market is a firm that can constrain 
prices. FTC v. Staples, Inc., 970 F. Supp. 1066, 1078 (D.D.C. 1997) 
(``The pricing evidence indicates a low cross-elasticity of demand 
between consumable office products sold by Staples or Office Depot and 
those same products sold by other sellers of office supplies. This same 
evidence indicates that non-superstore sellers of office supplies are 
not able to effectively constrain the superstores prices, because a 
significant number of superstore customers do not turn to a non-
superstore alternative when faced with higher prices in the one firm 
markets.'') None of these much smaller PBMs have either the incentive 
or ability to constrain the anticompetitive conduct of the three 
dominant PBMs.
    \13\ Charley Grant, Hidden Profits in the Prescription Drug Supply 
Chain, February 24, 2018, Wall Street Journal, https://www.wsj.com/
articles/hidden-profits-in-the-prescription-drug-supply-chain-
1519484401#::text=Drug%20distributors%20converted%2046%25%20of,benefit%
20
from%20higher%20drug%20prices.
    \14\ Brownlee A., The Pharmaceutical Supply Chain, 2013-2020, 
Berkeley Research Group, January 2022, https://www.thinkbrg.com/
insihts/publications/pharmaceutical-supply-chain-2013-2020/; Van Nuys 
K, Ribero R, Ryan M., Estimation of the Share of Net Expenditures on 
Insulin Captured by U.S. Manufacturers, Wholesalers, Pharmacy Benefit 
Managers, Pharmacies, and Health Plans from 2014 to 2018, JAMA Health 
Forum, 2021, https://doi.org/10.1001/jamahealthforum.2021.3409.
    \15\ PBM Accountability Project, Understanding the Evolving 
Business and Revenue Models of PBMs, 2021, https://
www.pbmaccountability.org/_files/ugd/b11210_264612f6b98e47b3a850205
4f66bb2a1.pdf?index=true
---------------------------------------------------------------------------
    Second, the PBM market lacks transparency. PBM operations are 
cloaked in secrecy, and they fight efforts to require transparency 
tooth and nail. There is no better example of their efforts to hide 
information than ``PBM gag clauses'' which PBMs long used to prevent 
pharmacists from telling consumers about available lower-cost 
alternative medications. While Congress finally prohibited PBMs from 
imposing such clauses for federally funded patients (i.e., Medicare 
beneficiaries), in many states, PBMs still utilize such clauses to 
ensure continued receipt of substantial profits on the backs of 
consumers. There is simply no pro-consumer reason to deny consumers the 
necessary information to receive drugs at the lowest cost. None.
    PBMs establish tremendous roadblocks to prevent payors from knowing 
the amount of rebates they secure. Even sophisticated buyers are unable 
to secure specific drug by drug rebate information. PBMs prevent payors 
from being able to audit rebate information. As the Council of Economic 
Advisors observed, the PBM market lacks transparency as ``[t]he size of 
manufacturer rebates and the percentage of the rebate passed on to 
health plans and patients are secret.''\16\ Without adequate 
transparency, plan sponsors cannot determine if the PBMs are fully 
passing on any savings, or whether their formulary choices really 
benefit the plan and subscribers.
---------------------------------------------------------------------------
    \16\ CEA White Paper supra note 2.
---------------------------------------------------------------------------
    Legislation requiring transparency or imposing a fiduciary duty 
might be one solution. Yet PBMs regularly fight against any such 
legislative proposals. For example, the PBMs fought against a 2014 
Department of Labor consideration of transparency even though the 
proposal was supported by HR Policy Association, the AFL-CIO and 
Consumers Union.\17\
---------------------------------------------------------------------------
    \17\ PCMA Testimony to the ERISA Advisory Council, William J. 
Kilberg, June 19, 2014 https://www.dol.gov/sites/dolgov/files/EBSA/
about-ebsa/about-us/erisa-advisory-council/2014-pbm-compensation-and-
fee-disclosure-kilberg-06-19.pdf; Consumers Union Testimony, June 12, 
2014, https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/about-us/
erisa-advisory-council/2014-pbm-compensation-and-fee-disclosure-quincy-
06-19.pdf. I expect that Professor Graithwaite will suggest that that 
PBM transparency may be harmful because it may lead to collusion. I 
firmly disagree with that suggestion. First even Professor Graithwaite 
seems to admit the PBM market may not be competitive. TESTIMONY OF 
CRAIG L. GARTHWAITE, Ph.D., Before the House Committee on Education and 
Labor Subcommittee on Health, Employment, Labor, and Pensions On 
``Making Health Care More Affordable: Lowering Drug Prices and 
Increasing Transparency,'' September 26, 2019, at 21, https://
edlabor.house.gov/imo/media/doc/GarthwaiteTestimony0926191.pdf. Second, 
although there may be a theoretical argument that excessive 
transparency can lead to collusion, I think that is rather unlikely in 
this market. It assumes that buyers will disclose the precise amount of 
rebates to rival manufacturers. I represent payors and based on my 
experience I doubt that would occur. Moreover, in my 15 years as an 
antitrust enforcer including working as the FTC Policy Director, I 
cannot recall a single case where transparency led to the type of 
collusion the Professor suggests.
---------------------------------------------------------------------------
    Third, PBMs create and exploit numerous conflicts of interest. PBM 
rebate schemes create a clear conflict between the PBM and the payor. 
The payor prefers the lowest cost drug. But to maximize its profits 
PBMs often prefer the drug with the highest list price. And they often 
will prevent lower cost drugs such as generics and biosimilars from 
receiving preferred access on their formularies.
    Conflicts of interest also abound because PBMs are vertically 
integrated with health insurers, mail order operations, specialty 
pharmacies, and in the case of CVS, the largest retail and specialty 
pharmacy chain, and the dominant long term care pharmacy. All three 
PBMs own their own specialty pharmacies, which they favor, 
discriminating against rival pharmacies. These PBMs steer patients to 
their own pharmacies as a requirement for patients to access their full 
prescription benefit. And all three PBMs are owned by or affiliated 
with the three largest insurance companies--United, Aetna and Cigna. 
How can they offer fair contracts to their clients when they have a 
vested interest in driving traffic to their own pharmacies? Who sets 
the standards and audits the affiliated pharmacies, and do they have to 
meet the same standards as the independent pharmacies? Are affiliated 
pharmacies charged the DIR fees that independent pharmacies pay and 
have exceeded billions of dollars annually? The fox is guarding the 
henhouse, and Congress needs to ensure that patients are not paying the 
price in less choice, inferior service and higher prices.
A Broken Market Leads to Escalating Drug Costs and Rapidly Increasing 
        PBM Profits.
    The most significant conflict that leads to escalating drug costs 
involves PBMs' incentives to maximize the rebates paid by manufacturers 
to get preferred access on their drug formularies. PBMs were formed to 
act as honest brokers to negotiate with drug manufacturers for lower 
prices for payors, but when PBMs share in the rebates that they 
negotiate, it creates an incentive for them to want higher, not lower, 
list prices. According to a recent Senate Finance Committee Report, 
``PBMs have an incentive for manufacturers to keep list prices high, 
since the rebates, discounts, and fees PBMs negotiate are based on a 
percentage of a drug's list price--and PBMs may retain at least a 
portion of what they negotiate.'' \18\ PBMs have gone so far as to 
require additional payments in the event of any reduction in 
manufacturer list prices.\19\
---------------------------------------------------------------------------
    \18\ Senate Finance Committee. Insulin: Examining the Factors 
Driving the Rising Cost of a Century Old Drug, 2021, https://
www.finance.senate.gov/imo/media/doc/Grassely-Wyden%20
Report%20(FINAL%201).pdf.
    \19\ Sagonowsky, E., UnitedHealthcare demands drug rebates even if 
pharma cuts list prices: analyst, February 2019, https://
www.fiercepharma.com/pharma/letter-to-pharmas-unitedhealth
care-seeks-to-protect-drgug-rebates-from-price-reductions.
---------------------------------------------------------------------------
PBMs' Demand for Rebates Results in Patients Not Having Access to the 
        Most Efficacious and Affordable Medicines that they Need.
    PBMs base formulary access decisions on the amount of the rebates, 
which encourages drug manufacturers to focus on offering higher rebates 
to secure that preferred status. Focusing on rebates gives PBMs 
incentives to put higher-cost drugs on their formularies, because the 
rebates are based on a percentage of a drug's list price. In essence, 
PBMs are making decisions on inclusion of a drug based not on clinical 
research or evidence-based efficacy and safety, but on which 
manufacturer offers a higher rebate payment. In pursuit of higher 
rebates, PBMs routinely deny access to formularies, change drug 
formularies, or require prior authorization for drugs that may be best 
for a patient's condition, even in cases where a more affordable 
medication is available. For example, a PBM often excludes a lower 
priced generic or biosimilar because the higher priced branded drug 
offers higher rebates.
    As important as cost is the adverse impact on patient health. PBM 
rebate schemes interfere with doctor-patient relationships, and harm 
patients' health when they cannot get the drugs they need. PBMs may 
exclude new innovative drugs that may be less expensive and more 
effective, in favor of higher rebates.\20\ On many occasions PBMs may 
require patients to go through cumbersome and health-threatening step 
therapy programs in order to secure the more efficacious drug. As Robin 
Feldman, a professor at UC Hastings College of Law, puts it, ``the 
system contains odd and perverse incentives, with the result that 
higher-priced drugs can receive more favorable health-plan coverage, 
channeling patients toward more expensive drugs.'' \21\ Uninsured 
patients face higher prices and insured patients pay higher coinsurance 
or pre-deductible out-of-pocket costs when list prices rise.\22\
---------------------------------------------------------------------------
    \20\ Mariana Socal and Gerard Anderson, Favorable Formulary 
Placement of Branded Drugs in Medicare Prescription Drug Plans When 
Generics Are Available, JAMA, March 18, 2018, https://jamanetwork.com/
journals/jamainternalmedicine/fullarticle/2728446.
    \21\ Robin Feldman, Why Prescription Drug Prices Have Skyrocketed?, 
Washington Post, November 26, 2018, https://www.washingtonpost.com/
outlook/2018/11/26/why-prescription-drug-prices-have-skyrocketed/.
    \22\ American Patients First: The Trump Administration Blueprint to 
Lower Drug Prices and Reduce Out-of-Pocket Costs, U.S. Department of 
Health and Human Services (``HHS''), May 14, 2018, pg. 17.
---------------------------------------------------------------------------
PBMs use Their Market Dominance to Harm Community Pharmacies.
    As detailed below, PBMs engage in a long list of egregious, unfair 
and abusive practices that harm community pharmacies. Community 
pharmacies simply have no reasonable bargaining power with PBMs who 
extend contracts on a ``take it or leave it'' basis. You simply have to 
look no further than pharmacy direct and indirect remuneration fees. As 
noted above, the PBMs pulled in over $9 billion dollars in these fees 
in 2022 alone. The foundation for these fees are the inflated price 
points that were established by PBMs themselves. The fact that these 
fees skyrocketed from practically nothing to over $9 billion 
demonstrates the PBMs market dominance. They reap additional fees 
beyond the $9 billion by way of inflated coinsurance payments by 
seniors. There is simply no pro-consumer reason to inflate Medicare 
Part D beneficiaries' coinsurance costs at the point of sale. Never 
have seniors received a rebate from PBMs for overpayment of their 
coinsurance.
Lax Antitrust Enforcement of the PBM Industry Has Led to Widespread 
        Anticompetitive Conduct
    The U.S. antitrust agencies have effectively placed PBMs in a 
regulatory free zone. The Department of Justice Antitrust Division 
(``DOJ'') and the FTC have failed to take any meaningful enforcement 
actions, while permitting massive consolidation and anti-consumer 
practices. In the case of the PBMs' ``gagging'' of pharmacists, 
preventing them from telling consumers of lower-priced alternatives. 
The FTC knew about this conduct yet did not act.
    As authors from the Institute for Local Self Reliance have 
observed:

        The FTC was designed to be a forward-thinking agency that would 
        use its investigatory and rule-making authority to stamp out 
        unfair methods of competition and protect the less powerful 
        from fraud and abuse. But the FTC has been quick to dismiss 
        concerns about the impact of concentration on small independent 
        businesses. The agency has presided over an increasingly 
        consolidated economy and has repeatedly embraced vertical 
        integration despite evidence that such industry structures 
        invite self-dealing and inflict harm on small businesses and 
        the communities they serve.\23\
---------------------------------------------------------------------------
    \23\ Stacey Mitchell and Zach Freed, How the FTC Protected the 
Market Power of Pharmacy Benefit Managers, February 19, 2021, Pro 
Market, https://www.promarket.org/2021/02/19/ftc-market-power-pharmacy-
benefit-managers/.

    Ten years ago, the FTC faced a critical decision--whether to 
approve the merger of two of the three largest PBMs--Express Scripts 
and Medco. Despite the fact the merger violated the Merger Guidelines, 
and there was strong opposition by employers, unions, pharmacists and 
consumer groups, and dozens of Congresspersons raising significant 
competitive concerns, the FTC approved the merger. The Commission 
statement is illustrative of its misguided views.\24\ The Commission 
suggested that there were ten competitors in the market, yet by this 
point its list looks more like a list of fossils--a record of firms 
that have since been acquired or exited the market. The Commission also 
suggested the concerns of pharmacies were unfounded because they 
``negotiate'' contracts with PBMs, but no one with any business sense 
would suggest those are anything more than take it or leave it 
arrangements. The merging parties suggested that the country needed the 
merger so the merged firm could force down drug prices. The FTC bought 
into this Faustian bargain, but the real result was skyrocketing 
prescription drug prices, rebates, and massive profit increases.
---------------------------------------------------------------------------
    \24\ Statement of Commission Concerning Proposed Acquisition Medco 
Health Solutions and Express Scripts, Inc., FTC File No. 111-0210, 
April 2, 2012, https://www.ftc.gov/sites/default/files/documents/
public_statements/statement-commission-concerning-proposed-acquisition-
medco
-health-solutions-express-scripts-inc./120402expressmedcostatement.pdf.
---------------------------------------------------------------------------
    The PBMs did secure the market power that the antitrust laws are 
meant to protect against. Rather than use that market power to 
effectively lower drug prices they used it to massively increase 
rebates and rebate schemes. As the following two charts demonstrate, 
PBMs have taken a majority of any reductions in pharmaceutical drug 
costs in the form of rebates and fees over the past five years and they 
are pocketing an increasing portion in profits. 


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    In other words, drug manufacturers are attempting to lower costs 
through rebates, but an increasing portion of those rebates are being 
pocketed by the PBMs. They can do that because of the lack of 
competition, transparency and the conflicts of interest in the system.
    Contrast the FTC decision to ``hope'' creating mega-middlemen would 
benefit consumers with the DOJ decision five years later to block the 
Aetna-Humana and Cigna-Anthem mergers. The insurance companies 
presented many of the same arguments as ESI-Medco--there were lots of 
competitors, there was little risk of monopsony power because 
healthcare providers could protect themselves, and the mergers were 
needed to lower healthcare costs. But the DOJ saw that approving the 
mergers were a poor bargain for consumers and properly challenged them. 
Consumers and providers today benefit from competition between the four 
firms.\25\
---------------------------------------------------------------------------
    \25\ Unfortunately, the DOJ allowed CVS to acquire Aetna, Inc. and 
Cigna, Inc. to acquire Express Scripts, Inc. in 2019.
---------------------------------------------------------------------------
    Unfortunately, the FTC decision to green light the ESI-Medco merger 
led to a flood of additional PBM mergers as the major PBMs devoured 
their smaller rivals and specialty pharmacies. None of these 
transactions were challenged by the FTC, yet the underlying structural 
factors were far worse.
    The lack of FTC merger enforcement is only the tip of the iceberg 
of misguided efforts. States have recognized the rampant consumer 
protection concerns and proposed legislation to regulate PBMs. When 
states tried to regulate deceptive and anti-consumer conduct of PBMs, 
the FTC staff sided with the PBMs, suggesting that ``economic theory'' 
teaches that PBM-pharmacy and PBM-drug manufacturer relationships 
result in lower prices and that regulation would harm consumers.\26\ 
For example, the FTC has consistently opposed PBM transparency even 
though both Republican and Democratic Administrations have been strong 
advocates for healthcare transparency. In many cases, the FTC staff has 
relied on an outdated 2005 FTC mail order study, which Commissioner 
Julie Brill acknowledged was ``antiquated.'' \27\ Ultimately, many 
states rejected the FTC advocacy and adopted state regulations, but the 
broad statements in the FTC's own advocacy hamper the ability of states 
or Federal regulators to engage in meaningful PBM regulation.
---------------------------------------------------------------------------
    \26\ FTC Press Release, FTC Staff: Mississippi Bill That Would Give 
State Pharmacy Board Authority Over PBMS Likely Would Increase Prices, 
March 22, 2011, https://www.ftc.gov/news-events/news/press-releases/
2011/03/ftc-staff-mississippi-bill-would-give-state-pharmacy-board-
authority-over-pbms-likely-increase.
    \27\ See Commissioner Brill's Letter to the ERISA Advisory Council, 
August 19, 2014, avail-
able at https://www.ftc.gov/system/files/documents/public_statements/
579031/140819erisa
letter.pdf.
---------------------------------------------------------------------------
    One of the reasons the FTC advocacy and nonenforcement has missed 
the mark is that it has focused on the wrong set of consumers--payors 
rather than patients. With the vertical integration of the three 
largest PBMs with an insurer, a lowering of cost to the insurer through 
a sharing of rebates and other revenue does not directly equate to 
lower prices for patients taking prescription drugs. Under the current 
system, vulnerable patients are left to pay artificially high prices 
when their cost sharing is tied to the undiscounted list price of a 
medicine, rather than the lower net price the PBMs and insurers pay. 
And uninsured patients are in an even worse predicament. That is why 
consumer groups and unions supported reform of PBM rebates in the prior 
Administration.
    The lack of enforcement has harmed pharmacies, and this has a 
direct impact on consumers. I know as a consumer advocate that 
consumers place tremendous value on their access to community 
pharmacies. Community pharmacists are consistently ranked as our most 
trusted health care professionals. And community pharmacies are often 
the most accessible form of health care services in underserved rural 
or inner-city markets. Community pharmacies provide essential advice 
and health care monitoring especially for patients taking specialty 
drugs. Yet despite receiving hundreds of complaints from community 
pharmacies for the egregious and deceptive actions by PBMs, the FTC has 
never brought an enforcement action. Not even one.
    Just one example of egregious non-enforcement involves the numerous 
allegations that large PBMs are engaging in predatory pricing 
activities through the use of retrospective Direct and Indirect 
Remuneration (``DIR'') and related fees. In practice, these fees 
depress reimbursement rates to pharmacies. In some cases, PBMs ``claw 
back'' more than the pharmacy initially received for the prescription, 
resulting in a net loss to the pharmacy.\28\ In fact, PBM claw backs of 
pharmacy revenue has been increasing each year, causing significant 
financial strain on these small businesses.\29\ The FTC, however, has 
not prevented PBMs from engaging in these predatory acts. Congress 
should ask what the basis for these fees is and how they benefit 
consumers, and why they have increased so dramatically.
---------------------------------------------------------------------------
    \28\ Markian Hawryluk, The Last Drugstore: Rural America is Losing 
Its Pharmacies, WASH. POST (Nov. 10, 2021), https://
www.washingtonpost.com/business/2021/11/10/drugstore-shortage-rural-
america/.
    \29\ Id.
---------------------------------------------------------------------------
    Moreover, PBMs have engaged in a variety of practices that 
fundamentally can be defined as theft from the pharmacies, ultimately 
to the detriment of patients. For example, in 2018, the Ohio State 
Auditor audited its Medicaid Prescription Drug Program and found that 
the difference between what independent pharmacies are paid and what 
PBMs report back to the plans, commonly referred to as the ``spread,'' 
had been growing. However, this growth in savings failed to translate 
into lower costs for the state.\30\ The Auditor further described that 
the spreads, which resulted in reimbursement cuts to local providers, 
actually turned into PBM profits.\31\ The Ohio Pharmacist Association 
explained that ``[b]eing that PBMs also own their own pharmacies, this 
essentially amounts to one pharmacy company reaching into the pockets 
of competitors, pulling out cash, and putting it right into their own. 
Regardless of the intent, this warped incentive has absolutely no place 
in a fair, competitive marketplace.'' \32\ Again, the FTC has failed to 
act despite numerous examples of this type of behavior.
---------------------------------------------------------------------------
    \30\ See Pharmacy Middlemen Made $223.7 Million From Ohio Medicaid, 
Kaitlin Schroeder, June 23, 2018, Dayton Daily News, https://
www.daytondailynews.com/news/pharmacy-middlemen-made-223-from-ohio-
medicaid/JsPLtbs3wfKoBmaGbF9GrK/
    \31\ Id.
    \32\ Ohio Pharmacist Association Press Release, Ohio Auditor 
releases stunning Medicaid PBM audit report, https://
www.ohiopharmacists.org/aws/OPA/pt/sd/news_article/184063/_PAR
ENT/layout_interior_details/false.
---------------------------------------------------------------------------
    And, because antitrust agencies have allowed PBMs to vertically 
integrate with insurers, mail order operations, and pharmacies, PBMs 
have financial incentives, and the necessary market power, to steer 
patients to their affiliated services.\33\ Since PBMs have their own 
pharmacies (indeed the largest pharmacy chain CVS owns the second 
largest PBM) PBMs frequently access rival pharmacy patient data and 
provide it to their pharmacy affiliate in an effort to steer patients 
away from rivals. Patients may be forced into PBM-owned mail order or 
1-800 specialty pharmacy operations that provide an inferior level of 
service to competing community pharmacies and specialized pharmacies 
like AIDS Healthcare Foundation pharmacies.\34\ Or the PBMs may engage 
in egregious auditing practices to harm rival pharmacies.
---------------------------------------------------------------------------
    \33\ Vertical Integration Isn't Great for Health Care Consumers or 
Purchasers, PURCHASER BUSINESS GROUP ON HEALTH (Aug. 23, 2021) 
available at https://www.pbgh.org/despite-claims-vertical-integration-
isnt-great-for-health-care-consumers-or-purchasers/.
    \34\ Dr. Michael Wohlfeiler of the AIDS Healthcare Foundation 
testified in the CVS-Aetna Tunney Act proceeding that the merger could 
endanger HIV and AIDS patients because the merged firm could steer its 
``patients to leave HIV and AIDS specific treatment providers for 
providers that are unequipped to treat those conditions.'' United 
States v. CVS Health Corp., 407 F. Supp. 3d 45, 57 (D.D.C. 2019). AHF 
has created an extraordinarily successful model for delivery of care to 
HIV/AIDS patients, a one stop shop model in which AHF functions as a 
testing, linkage, specialist, health insurer, pharmacy, and price care 
facility. Patient steering to cookie-cutter models results in 
fragmentation of care, inferior quality of care, and severance of 
trusted provider relationships, which is very problematic for 
vulnerable patients with chronic conditions like HIV.
---------------------------------------------------------------------------
    PBMs ``offer'' independent pharmacies ``take it or leave it'' 
contracts, where a pharmacy must choose between accepting unfavorable 
reimbursement terms, or exclusion from the PBM's network (and patient 
population). In some cases, pharmacies are coerced into agreeing to 
below-cost reimbursement. This unsustainable choice has forced many 
pharmacies to close their doors.\35\ This has caused what has been 
characterized as ``pharmacy deserts'' and has disproportionately harmed 
rural and urban African American and Hispanic populations that now lack 
pharmacies because PBMs have driven the independents out of business, 
but these PBMs do not put new pharmacies in these locations and instead 
they steer patients to mail order or long distance driving.\36\ This is 
a significant problem for these vulnerable patients because no group of 
healthcare providers is as accessible, service oriented and dedicated 
as community pharmacies.\37\ A community pharmacist is there to serve 
the patients and make sure they get the right prescription at the 
lowest cost. That is why consumer and patient groups have consistently 
supported the advocacy efforts of community pharmacies and their 
requests for PBM reform. The FTC has heard these concerns but has 
chosen not to take any action to prevent PBM predatory behavior 
designed to eliminate pharmacy competition. Patients lose when 
community pharmacies are handcuffed in the competitive battle.
---------------------------------------------------------------------------
    \35\ Markian Hawryluk, The Last Drugstore: Rural America is Losing 
Its Pharmacies, WASH. POST (Nov. 10, 2021), https://
www.washingtonpost.com/business/2021/11/10/drugstore-shortage-rural-
america/.
    \36\ Id., Stacy Mitchell and Charlie Thaxton, The Rebirth of 
Independent Pharmacies Could Cure Rural Ills, The American 
Conservative, November 5, 2019, https://www.theamerican
conservative.com/articles/the-rebirth-of-independent-pharmacies/.
    \37\ See, Stacy Mitchell, Small Pharmacies Beat Big Chains at 
Delivering Vaccines. Don't Look So Shocked, Washington Post, February 
5, 2021, https://www.washingtonpost.com/outlook/small-pharmacies-beat-
big-chains-at-delivering-vaccines-dont-look-so-shocked/2021/02/05/6bb3
07ec-671b-11eb-886d-5264d4ceb46d_story.html.
---------------------------------------------------------------------------
    And, when state legislatures try to pass basic reform laws to 
protect independent pharmacies and consumers from predatory practices 
of PBMs, the PBMs, without fail, bring lawsuits to challenge such 
statutes based on ERISA (the Employee Retirement Income Security Act of 
1974) pre-emption. Recently, such PBM reform passed by the State of 
Arkansas, which guaranteed that Arkansas pharmacists would be 
reimbursed by PBMs for the dispensing of drugs at least the amount of 
their wholesale cost, was challenged by the PCMA. This lawsuit 
culminated in a unanimous decision by the U.S. Supreme Court that such 
PBM reform legislation aimed at protecting independent pharmacies in 
the wake of PBM oppression is not pre-empted by ERISA. See Rutledge v. 
PCMA, 141 Sp. Ct. 474 (2020). While consumers hold out hope that such 
state protections could open a fair playing field for pharmacies, PBMs 
have found ways to circumvent such laws resulting in more invasive 
pharmacy audits, network exclusions and increased pharmacy 
terminations.
Legislative Action to Prevent PBM Abuse
    We are at a crucial turning point on PBMs. It is increasingly 
evident that these middlemen are significantly increasing drug costs 
and reducing access because of clear market failures and a lack of 
meaningful regulation. We can ill afford middlemen that extract $28 
billion in profits or $9 billion in DIR fees and increasingly deny 
consumers access to the lowest price and most efficacious drugs and the 
most effective pharmacy services.
    This Committee should consider amending the FTC Act to specify 
certain practices that harm consumers and competition as ``unfair or 
deceptive acts or practices'' and ``unfair methods of competition.'' 
Congress established the FTC to use a broad range of powers including 
enforcement and regulation to prevent and proscribe practices that were 
harmful to the marketplace. In doing so, Congress established a 
flexible standard in which it has occasionally proscribed certain 
practices as an ``unfair or deceptive act or practice.''
    This Committee should evaluate what practices should be considered 
for potential enforcement. Some of the practices that should be 
considered include:

   Failing to pass on all rebates and clawbacks to payors and 
        patients;

   Basing PBM compensation on the price of a drug;

   Schemes that prevent lower priced drugs from being included 
        on a formulary or being placed in a disadvantageous position;

   Discrimination in reimbursement to pharmacies;

   Forcing pharmacies to dispense below acquisition cost;

   Failing to disclose DIR and other associated fees; and

   Discriminatory practices against community pharmacies.

    The FTC should be given broad rule making power to address these 
practices. In addition, the Commission should be instructed to use its 
6b power to study past PBM mergers including the ESI-Medco merger. 
Congress should use all its powers to insure this is a major priority 
for the FTC.
Concluding Thoughts
    The dominant PBMs play a significant role in driving up 
prescription drug prices, reducing patient choice of medicines that 
they need, and lessening competition among pharmacies. Patients care 
deeply about rising healthcare costs, including out-of-pocket costs for 
prescription drugs, as well as ensuring they can access the medicines 
that they need. If PBMs continue to evade FTC scrutiny, they will 
continue to engage in egregious conduct that is fraudulent, deceptive, 
and anticompetitive. What health plans and employers should 
fundamentally be purchasing is the service of an honest broker to 
secure the lowest prices and best services from both pharmaceutical 
manufacturers and pharmacies. When PBMs exist in a regulatory-free 
environment, the result is misaligned incentives and inherent conflicts 
of interest. Fraud, deception, anticompetitive conduct, higher prices, 
and reduced choice harms payors, including the government and 
taxpayers, and, most importantly, patients, who rely on access to 
lifesaving and life-managing prescription drugs.
    I look forward to answering any questions.

    Senator Blumenthal. Thank you so much, Mr. Balto. And now, 
Mr. Garthwaite.

            STATEMENT OF CRAIG L. GARTHWAITE, Ph.D.,

          PROFESSOR OF STRATEGY, HERMAN SMITH RESEARCH

           PROFESSOR IN HOSPITAL AND HEALTH SERVICES

        MANAGEMENT, DIRECTOR OF PROGRAM ON HEALTHCARE AT

         KELLOGG (HCAK), KELLOGG SCHOOL OF MANAGEMENT,

                    NORTHWESTERN UNIVERSITY

    Mr. Garthwaite. Thank you, Chairman Blumenthal and Ranking 
Member Blackburn for inviting me today. As we discussed, the 
high and rising price of pharmaceuticals attracts a deservedly 
large amount of attention from policymakers, the press, and 
citizens across the United States.
    Many point to these high prices as evidence of a clearly 
broken market. However, it is not clear that is obviously true. 
High pharmaceutical prices represent a fundamental tradeoff 
that sits at the center of the U.S. health care market. New 
drugs are developed through a risky and expensive process where 
we ask private firms to provide enormous amounts of capital at 
risk to fund scientific progress.
    Evidence of the progress in this field abounds as we now 
treat huge numbers of diseases that previously would have been 
death sentences. In order to generate the incentives to make 
these investments, we provide innovative firms with time 
limited periods of market exclusivity where they have the 
ability to charge higher prices. These higher prices do 
decrease access to medications today.
    However, we tradeoff that lack of access today in order to 
get new drugs in the future. In this way, the system provides 
access in the future to people who have no treatments available 
at any price today. And while there are many potential current 
concerns about our existing pharmaceutical system, a critical 
point is that the high prices today need to generate sufficient 
returns to generate new products in the future.
    If instead, these firms are captured or dissipated by other 
people in the pharmaceutical supply chain, our existing system 
may not provide the optimal incentives. Understanding whether 
firms are capturing this value requires more context about 
prices in the pharmaceutical supply chain. In the U.S., there 
are many prices associated with prescription drugs, as we have 
talked about already.
    Of particular importance in today's hearing is that there 
is a publicly available list price that is set by the 
manufacturer. Payers, such as insurers or large employers, then 
employ pharmacy benefit managers to, among other things, 
negotiate rebates or discounts from this list price. And that 
leads us to the focus of the hearing today, these PBMs or 
pharmacy benefit managers.
    As Chairman Blumenthal noted, most Americans have no clue 
what a PBM is, but they are central to everything about 
pharmaceutical distribution and insurance in the United States. 
They take their relatively obscure position in the market, but 
they control everything about our access to drugs. In return 
for those activities, PBMs do earn revenue through a variety of 
means.
    A primary concern, then, is whether they capture too much 
value through those means. And given the high concentration in 
the market that David Balto spoke about, and increasing amounts 
of vertical integration, it is logical people should be 
concerned about a possibility of where the market is providing 
an efficient outcome.
    One primary area of concern are these list prices and 
rebates in the system, which directly cause higher consumer 
cost sharing payments. Given PBMs often receive their payments 
as a function of the list price, the pitch--the push for high 
list prices is seen as abuse by PBMs of the market. But like 
many things in health care, the reality is likely far more 
complex.
    Plan sponsors, these insurers and these large employers, 
use the system of rebates and high cost sharing as a way to 
decrease the premiums for their insurance products. This is 
done to make the products more competitive and to help them 
gain share in the market. The result of that is that we are 
witnessing, through rebates and cost sharing, a reintroduction 
of the concept of medical underwriting in health insurance that 
was taken away by the Affordable Care Act.
    Through a combination of predictable cost sharing payments 
and high premiums, individuals with chronic conditions such as 
diabetes and those with expensive acute conditions such as 
cancer are paying more for insurance so healthy people can pay 
less. It is important to note this does not appear to be driven 
independently by the PBMs. Instead, it is driven by the demands 
of their clients.
    PBMs have long offered contracts to these plan sponsors 
where rebates were passed along to the customer at the point of 
sale. Plan sponsors have routinely ignored these contracts in 
favor of capturing high rebates. That fact should influence 
policy. If we are worried about high list prices leading to 
high cost sharing, we should attack that directly through 
Congressional action.
    That said, there are also features of the markets where 
PBMs do appear to be exploiting a lack of transparency. For 
example, we are now seeing increasingly administrative fees 
that are a function of the list price. Those are often not 
apparent to the plan's sponsor. They do not have insight into 
the amount of money that is going between the manufacturer of 
the pharmaceutical and the pharmacy benefit manager.
    And given that those fees are a function of the list price, 
you may be concerned that PBMs are taking advantage of that 
lack of transparency. In my testimony, I identify ways in which 
we can try and improve transparency to allow more complete 
contract negotiations between plan sponsors and PBMs. It should 
be clear that PBMs do play a valuable role in the market. They 
are counterpoint to the market power of innovative 
pharmaceutical firms. It is important we provide them with the 
tools to negotiate these lower prices.
    That said, any compensation they get should reflect their 
unique contribution to the market. As a closing point, I will 
agree with what the chairman and the ranking member said, we 
just lack insight in many ways into the PBM market.
    And so, Ranking Member Blackburn, I am heartened to hear 
that you have a bill to have the GAO look more into this 
because without more information about how PBMs interact with 
manufacturers and PBMs interact with the plan sponsors that 
they are giving rebates to, we simply are not going to be able 
to develop good policy in this area. Thank you very much.
    [The prepared statement of Mr. Garthwaite follows:]

    Prepared Statement of Craig L. Garthwaite, Ph.D., Professor of 
   Strategy, Herman Smith Research Professor in Hospital and Health 
                               Services 
   Management, Director of Program on Healthcare at Kellogg (HCAK), 
         Kellogg School of Management, Northwestern University
    In contrast to other developed countries, the United States relies 
more heavily on private markets to finance and provide healthcare 
services. This use of economic markets is not a policy accident and 
instead reflects an intentional belief that market-based healthcare 
provides many advantages. A large and diverse country such as the 
United States has a wide variety of preferences and meaningful 
differences in the willingness to pay for quality. In this setting, the 
central planning inherent to regulated prices is unlikely to maximize 
welfare, and an economic market is the superior method of allocating 
goods and services. This is even more true once we consider the variety 
of economic actors necessary for the development of innovative new 
healthcare products and services. It is hard to imagine what omniscient 
actor could balance the forces necessary to promote value creating 
innovations more efficiently than the market.
    Therefore, despite many contentions to the contrary, a market-based 
system remains the best mechanism for providing the appropriate 
incentives for long term welfare maximization in the U.S. healthcare 
market. However, relying on the market for the provision of such a 
vital set of goods and services requires both recognizing that 
healthcare markets, like any other market, can fail and that all 
markets require vigilant protection of the structures and institutions 
necessary to promote robust and vigorous competition.
    Concerns about the appropriate role for markets in healthcare are 
perhaps most frequently discussed in the world of pharmaceuticals. 
These discussions are motivated by high and rising pharmaceutical 
prices. While many claim these high prices provide prima facie evidence 
of a market failure, in reality they are the result of the complex and 
delicate balancing of incentives that sits at the center of the U.S. 
healthcare market.
    This delicate balance is necessary because market failures at the 
center of the innovative process for developing new drugs requires some 
degree of market intervention in the first place. This failure results 
from that fact that the scientific advancements generated by firms 
developing innovative pharmaceutical products are essentially a public 
good, i.e., the knowledge is effectively non-rival and non-
excludable.\1\ Rational firms realize they will be unlikely to capture 
a sufficient amount of the value generated by the large, fixed, and 
sunk investments necessary to bring a product to market. This results 
in an economic phenomenon known as ``hold up'' whereby firms, absent 
some form of government intervention, are unwilling to make value 
creating investments in the first place.
---------------------------------------------------------------------------
    \1\ The degree to which this is fully a public good depends on how 
much information can be gleaned from the actual product, the regulatory 
filings, and the published research. For example, small molecule 
products can be more easily reverse engineered and therefore absent 
intellectual property protections are relatively easier to copy. 
Biologic products, however, have a more complex production process and 
therefore copying the technology is easier than making the product de 
novo but harder than for a small molecule product.
---------------------------------------------------------------------------
    To address this initial market failure, governments offer various 
forms of intellectual property protection. Through patents or other 
forms of market exclusivity, governments arm firms with time limited 
periods of enhanced market power that allow them to capture a larger 
portion of the value created by their innovative products. During this 
limited time period, higher prices than would otherwise exist curtail 
some access to valuable medicines. This reduced access is deliberately 
traded off for the development of new products in the future.\2\ These 
new products, however, provide access to patients for whom there would 
otherwise be no available treatments.
---------------------------------------------------------------------------
    \2\ In considering this tradeoff it is important to consider the 
role of health insurance in mitigating decreased quantity resulting 
from high prices. To the extent that insurance mitigates some of this 
quantity decline it is possible that the welfare loss are smaller than 
would be expected. See D. Lackdawalla and N. Sood, ``Health Insurance 
as a Two-Part Pricing Contract,'' Journal of Public Economics, 2013, 
102: 1-12.
---------------------------------------------------------------------------
    In this way, policies governing the development of pharmaceutical 
products involve trading off the static inefficiency of reduced access 
to products today in order to create the dynamic efficiency of the 
increased development of new products. To the extent the value created 
by the new products exceeds the welfare losses resulting from the high 
prices (and decreased quantity), the granting of these periods of 
market exclusivity is welfare enhancing. This could be true even if the 
prices today are quite high.
    This tradeoff is a source of much of the controversy surrounding 
prescription drug prices because it involves some number of readily 
identifiable individuals who are unable to access existing and 
potentially life-saving medications.\3\ Unsurprisingly, this particular 
form of a lack of access garners large amounts of press and political 
attention. However, it is critical to remember a perhaps far greater 
access problem for patients suffering from conditions for which no 
treatment options exist at all.\4\ For these individuals, there is no 
price at which they can purchase a treatment. These patients will gain 
access in the future only as a result of the dynamic incentives created 
by intellectual property protection. As we consider the optimality of 
policies governing the pharmaceutical market, we must balance the oft-
discussed need for access to existing products with the less-discussed 
lack of access from the absence of effective treatments.
---------------------------------------------------------------------------
    \3\ Garthwaite, Craig, and Benedic Ippolito. 2019. ``Drug pricing 
conversations must take the cost of innovation into consideration.'' 
STAT. January 11.
    \4\ This is particularly true because the impact of high prices on 
quantity is far more complicated in a world of widely available health 
insurance. Those who are insured may not suffer as much decreased 
access as they would in a market without third party payment. However, 
those for whom drugs do not exist certainly will not access a treatment 
at any price.
---------------------------------------------------------------------------
    A central parameter of this tradeoff of static and dynamic 
incentives is the relationship between the elevated prices paid for 
prescription drugs today and the incentives of innovative firms to 
develop new products in the future. Economic research has clearly 
documented a relationship between increased market size and investments 
in research and development.\5\ Therefore, to the extent high prices 
signal expected economic returns for the providers of the risk-based 
capital necessary for innovation then the prices could represent a 
welfare enhancing policy choice. However, if the revenue generated by 
high drug prices is instead captured by other parts of the value chain 
there are valid concerns that our current policies are not providing an 
optimal level of innovation to outweigh the welfare losses from the 
price related reduced access.
---------------------------------------------------------------------------
    \5\ D. Acemoglu and J. Linn. 2004. ``Market Size in Innovation: 
Theory and Evidence from the Pharmaceutical Industry,'' The Quarterly 
Journal of Economics, 119(3): 1049-1090; A. Finkelstein, ``Static and 
Dynamic Effects of Health Policy: Evidence from the Vaccine Industry,'' 
Quarterly Journal of Economics, 119(2): 527-564; Dubois et al., 
2015``Market size and pharmaceutical innovation,'' RAND Journal of 
Economics, 46(4): 844-871; and Dranove, Garthwaite and Hermosilla, 
2020. ``Pharmaceutical Profits and the Scientific Novelty of 
Innovation,'' NBER Working Paper #27093.
---------------------------------------------------------------------------
    Determining the optimality of this tradeoff in today's market 
requires a more careful understanding of the pharmaceutical supply 
chain. In particular, it is important to understand how various firms 
capture a share of the value created by innovative pharmaceutical 
products. provides a broad overview of this supply chain and the flow 
of funds across firms at its various stages. Perhaps most important for 
today's hearing is the relationship between manufacturers, payers, and 
pharmacy benefit mangers (PBM), which is depicted in the figure's upper 
right corner.
    While largely unknown to customers, PBMs are the private firms that 
effectively manage all aspects of insurance coverage for 
pharmaceuticals. Despite their relative lack of attention, these firms 
occupy a central role in nearly every facet of the pharmaceutical 
distribution and insurance market. At a high level, PBMs sign contracts 
with plan sponsors (e.g., risk bearing health insurers or employers) to 
undertake activities such as negotiating drug prices, establishing 
pharmacy networks, processing pharmaceutical claims, and developing 
drug formularies.
    In return for these activities, PBMs earn revenue through a variety 
of means. These include, but are not limited to, direct per member per 
month (PMPM) fees paid by plan sponsors, the ability to keep a 
negotiated share of the rebate (i.e., the discount from the 
manufacturer that the PBM is able to negotiate), spread pricing (i.e., 
the difference between what a PBM is paid by a plan sponsor for a drug 
and what they pay to the pharmacy to fill the prescription), and 
various administrative fees from manufacturers.
    The primary role of PBMs is to help manage the static inefficiency 
resulting from high prices. Historically, these firms emerged to 
implement some degree of managed care and negotiation to the 
pharmaceutical benefit offered by plan sponsors. In particular, they 
allowed relatively small insurers to pool together and negotiate as a 
group against manufacturers.\6\ By constructing formularies, PBMs 
negotiate lower prices and can increase access to products and 
potentially to insurance overall. Of course, such activities limit 
revenues to pharmaceutical manufacturers and have been shown to blunt 
incentives to develop new products.\7\ This demonstrates the importance 
of the role of PBMs in the tradeoff central to drug development.
---------------------------------------------------------------------------
    \6\ Z. Brot-Goldberg, C. Che, and B. Handel, ``Pharmacy Benefit 
Managers and Vertical Relationships in Drug Supply: State of Current 
Research,'' NBER Working Paper #29959, April 2022.
    \7\ L. Agha, S. Kim, and D. Li, ``Insurance Design and 
Pharmaceutical Innovation,'' forthcoming American Economic Review: 
Insights.
---------------------------------------------------------------------------
    It is important to note that if the construction of formularies 
represents the preferences of consumers for access to new products, a 
reduction in innovative activity is not necessarily a problem. After 
all, our goal is to maximize welfare not innovation. However, if the 
reduction of revenues to manufacturers comes instead from PBMs 
capturing an inappropriately large fraction of spending as profits--
there could be concerns about whether the pharmaceutical market is 
operating in a way that maximizes welfare. In particular, concerns 
about whether the welfare losses from the lack of access today are 
sufficiently offset by incentives to develop new products in the 
future. These concerns are central to today's hearing investigating the 
PBM market.
    Concerns about this possibility stem from features of the existing 
market. For example, the PBM market is dominated by three large firms--
Caremark, Express Scripts and OptumRX. Figure 2 contains the market 
share of each of these firms in 2021 and shows that these firms 
comprise approximately 80 percent of all volume in this market. Beyond 
concentration, there have also been changes in the vertical structure 
of this industry over time as each of these PBMs is now part of a 
larger firm that also owns health insurers, specialty pharmacies, and 
medical providers. The degree of vertical integration can be seen in 
Figure 3.\8\ These concerns are magnified by the relative opacity of 
the process by which pharmaceutical prices are determined. While none 
of these market features (i.e., the high concentration, increased 
vertical integration, or opaque pricing) provide clear evidence of a 
potential problem they are areas that should be investigated. This is 
likely why this market has attracted the attention of a variety of 
regulators and policymakers.
---------------------------------------------------------------------------
    \8\ In earlier testimony, I discussed the potential benefits and 
concerns of this vertical integration. This testimony is available at: 
https://www.judiciary.senate.gov/download/garthwaite-testimony.
---------------------------------------------------------------------------
    Given these concerns, I will concentrate my testimony today on the 
relationships between plan sponsors (i.e., third party payers such as 
insurers and employers), PBMs, and manufacturers. In particular, I will 
focus on the degree to which features of these relationships may allow 
PBMs to capture more value than might be appropriate or whether 
negative features of the market instead reflect the actions and 
incentives of firms in other parts of the value chain.
    A consistent point to consider throughout my testimony is that any 
analysis of this market is meaningfully hampered by a lack of 
information about numerous features of the contractual arrangements 
between the various types of firms. While it is easy to identify 
potential areas of concern, without more information about the nature 
of these arrangements it is difficult to truly understand the validity 
of such concerns. Therefore, Congressional action in this area should 
be initially focused on creating more insight for regulators into these 
areas. That said, I will also highlight several policy options that 
exist to more directly confront potentially undesirable features of the 
current pharmaceutical market without generating unintended 
consequences.
I. Pricing, Rebates, and Cost Sharing in the U.S. Pharmaceutical Market
    In the U.S., there are many prices associated with pharmaceutical 
products. Of particular importance to today's hearing, pharmaceutical 
products have a publicly available list price that is set by the 
manufacturer. Payers then employ PBMs to, among other things, negotiate 
rebates (i.e., discounts from list prices) on the pharmaceuticals 
purchased by their enrollees.
    PBMs are able to secure the discounts based on their ability to 
shift customers across competing therapeutic substitutes. For example, 
if there are two brand-name statin medications that treat high 
cholesterol, the PBM can place the product from a manufacturer offering 
a lower net price on a more preferential tier of its formulary, thus 
lowering the out-of-pocket payments from an individual enrollee when 
they purchase the drug. This should result in this product selling 
higher quantity, albeit at a lower price. In extreme cases, a PBM could 
entirely exclude a product from its formulary if the manufacturer is 
unwilling to provide a sufficiently low net price (i.e., they are 
unwilling to pay the PBM a sufficiently large rebate). The use of 
exclusion lists has grown in recent years. Figure 4 shows the number of 
products that are excluded by the largest PBMs. It is this ability to 
credibly threaten to move volume across products that results in larger 
discounts from the list price.
    The increased use of strict formularies and exclusion lists has 
contributed to a growing spread between the list and the net (i.e., 
post rebate) price. Figure 5 depicts these prices from 2014--2020 and 
documents a large spread between the publicly known and often discussed 
list prices and the actual prices received by manufacturers. This 
figure demonstrates that any discussion of list prices provides an, at 
best, incomplete picture of the returns to innovative manufacturers in 
this market.
    The spread between list and net prices has resulted in a large 
amount of total rebates in the system. Figure 6 shows that in 2016, 
pharmaceutical manufacturers paid total rebates of approximately $127 
billion--an increase of 108 percent ($66 billion) since 2011. The 
recent rise is larger in both absolute and relative terms than the 
history of this market. From 2007 to 2011, the total magnitude of these 
rebates increased only 42 percent, for a total increase of $18 billion.
    While the increasing magnitude of rebates in the system is often 
discussed in a negative light, it is not necessarily a problem. After 
all, higher rebates could simply reflect more sophisticated or 
effective bargaining by PBMs. The ultimate question is which parties in 
the supply chain capture the value of those rebates and what features 
of the market determines the ability of those firms to capture that 
amount of value. The split of the rebate between the PBM and the payer 
is dictated by a contract that is the result of a bilateral negotiation 
between those firms. The specifics of this contract depends on the 
relative bargaining power of the two parties. Figure 7 contains 
estimates of the existing contractual structure in the commercial 
market with respect to rebates over time based on whether plan sponsors 
are large or small employers. From 2014-2018, there has been a marked 
increase in employers with PBM contracts that entitle them to receive 
100 percent of the rebates. By that year a majority of both types of 
employers were using such contracts.
    Unsurprisingly, PBMs often point to increasing rebates as evidence 
of their effectiveness. It is not clear this is accurate. After all, a 
large rebate can come from a higher list price, a lower net price, or a 
combination of both. If rebates are only the result of higher list 
prices then the actual price paid in the market (and the return to 
manufacturers) has not necessarily changed. It is tempting to think 
that in that situation the high list prices have little economic 
effect. However, even in contracts where 100 percent of the rebate 
flows to the plan sponsor, higher list prices can negatively impact 
other market participants.
    In particular, high list prices can have direct and economically 
meaningful impacts on consumer out-of-pocket payments. This 
relationship between cost sharing and list prices results from the 
desire to maintain the confidentiality of negotiated prices. Such 
confidentiality provides stronger incentives for larger discounts. For 
this reason, the size of rebates paid to each PBM is kept strictly 
confidential, up to and including onerous audit restrictions in the 
contracts that limit the ability of the payer to monitor the financial 
activities of the PBM.\9\
---------------------------------------------------------------------------
    \9\ Weinberg, Neil, and Robert Langreth. 2017. ``Inside the 
`Scorpion Room' Where Drug Price Secrets Are Guarded.'' Bloomberg. May 
4.
---------------------------------------------------------------------------
    To maintain this confidentiality, consumers whose cost sharing for 
pharmaceutical products is tied to prices (either because of a 
deductible or percentage based coinsurance) make these cost sharing 
payments as a function of the list rather than the net price.\10\ Thus, 
any inefficiencies that create incentives for higher list prices (even 
if those are entirely offset by rebates) affect consumer out of pocket 
spending.\11\ In the presence of liquidity constraints, this cost 
sharing could meaningfully reduce access to drugs in ways that magnify 
the static inefficiency of high drug prices. For this reason, high 
cost-sharing is not simply a financial inconvenience for consumers. 
Recent evidence has shown that increased cost sharing for consumers 
results in the decreased use of prescription drugs and increased 
mortality.\12\
---------------------------------------------------------------------------
    \10\ This is mainly an issue for consumers enrolled in certain 
high-deductible health plans, as well as Medicare beneficiaries.
    \11\ While the number of consumers with this type of cost-sharing 
has grown, it should be noted that customers in the pharmaceutical 
market are largely shielded from list prices.
    \12\ A. Chandra, E. Flack, and Z. Obermeyer, ``The Health Costs of 
Cost-Sharing,'' NBER Working Paper #28439, February 2021.
---------------------------------------------------------------------------
    The importance of cost sharing for prescription drugs has grown 
over time. Consider the evidence in Figure 8, which contains the 
average annual out of pocket payment for Medicare patients purchasing 
insulin. According to these data, in 2018 nearly 30 percent of Medicare 
patients purchasing insulin were paying more than $5,000 per year out 
of pocket. This is a marked increase from 2010 where less than 5 
percent of those customers had that level of cost sharing.
    Insulin is not the only place where we see high cost-sharing. 
Overall, prescription drugs enjoy far less insurance coverage than 
other parts of healthcare. Figure 9 shows that insured patients are 
exposed to only 3 percent of their hospital spending. In contrast, 
patients directly pay 15 percent of their prescription drug spending 
out of pocket.
    Given the negative health and financial effects of high cost-
sharing, it is at first puzzling why such high cost-sharing persists in 
the market. Cost sharing is intended to be a form of utilization 
management that attempts to overcome the potential moral hazard arising 
from patients that are fully insured for their pharmaceutical 
purchases. This moral hazard could occur both through the 
overconsumption of products where the price exceeds value or more often 
from purchasing products that have less expensive therapeutic 
substitutes. Both of these would be negative features of an insurance 
product that cost sharing was intended to mitigate.
    The ability to use cost-sharing to move patients across products is 
a key tool that PBMs use to negotiate lower net prices from 
manufacturers. However, we increasingly see high cost-sharing on 
products that are unlikely to be overconsumed (e.g., insulin and oral 
oncology products) or in areas where there are no therapeutic 
substitutes. This suggests this high cost-sharing serves goals other 
than simply utilization management.
    It is not obvious that cost-sharing at the levels we observe is an 
independent strategic choice PBMs undertake to maximize their profits. 
After all, if plan sponsors desired less onerous cost-sharing they 
certainly could instruct their PBMs to construct such a formulary. In 
fact, in recent testimony before Senate Finance Committee, Cigna's 
Chief Clinical Officer noted that formularies which pass rebates along 
to customers at the point of sale have existed for many years but have 
failed to gain traction with plan sponsors.\13\
---------------------------------------------------------------------------
    \13\ https://www.finance.senate.gov/imo/media/doc/
Cigna%20ExpressScripts%20Testimony%
20of%20Steven%20Miller%20MD.pdf
---------------------------------------------------------------------------
    Instead of signing contracts that pass rebates to customers, plan 
sponsors increasingly demand higher rebates from PBMs--even when those 
rebates are not associated with lower prices.\14\ Such rebates come 
from surging list prices and contribute to higher cost sharing payments 
by patients. It appears that this is because the combination of large 
rebate payments and high cost-sharing for expensive products provides a 
mechanism for plan sponsors to offer lower premiums to healthy patients 
and higher expected costs to sick patients requiring expensive 
medications.
---------------------------------------------------------------------------
    \14\ https://www.finance.senate.gov/imo/media/doc/Grassley-
Wyden%20Insulin%20Report%20
(FINAL%201).pdf.
---------------------------------------------------------------------------
    Consider the stylized example in 0 where a consumer in the 
deductible period pays the full list price of the drug. This customer 
does not benefit from any of the negotiation efforts of the PBM. Both 
the PBM and plan sponsor, however, can profit from the consumer's 
purchase of a prescription drug because these firms still collect a 
rebate when one of their patients buys a pharmaceutical product. This 
is true even when the product is entirely paid for by the patient. A 
similar logic exists when a patient makes a very large cost sharing 
payment because of coinsurance. Sponsors are then able to use those 
extra rebate dollars to lower premiums or decrease the cost of employer 
provided healthcare. In this way, high cost sharing combined with large 
rebates reintroduces medical underwriting and unwinds the community 
rating of health insurance premiums.
    This stylized example is not simply an academic exercise. In a 
recent Senate Finance Committee report on insulin pricing, the Eli 
Lilly CFO for Diabetes noted that PBMs reacted negatively to a 
potential lower list price product because their customers (i.e., plan 
sponsors) reported that ``such adjustment may impair market 
competitiveness (i.e., rebate levels on lower gross price levels 
translating to higher plan premiums.'' \15\
---------------------------------------------------------------------------
    \15\ https://www.finance.senate.gov/imo/media/doc/Grassley-
Wyden%20Insulin%20Report%20
(FINAL%201).pdf
---------------------------------------------------------------------------
    Understanding these dynamics is important in considering the causal 
role of PBMs with respect to increasing list prices and rebates. It 
suggests that much of the furor at PBMs over increasing list prices, 
rebates, and cost sharing may be aimed at the wrong target. If such 
contractual features are being dictated by PBM clients (i.e., plan 
sponsors) than regulators should more carefully consider the incentives 
of those plan sponsors when constructing policy in this area. 
Furthermore, as I discuss below, if the concern about high list prices 
is primarily motivated by the effect on cost sharing there are policies 
that can be considered which more directly address this cost sharing.
II. Lack of Transparency in Financial Relationships in the Value Chain
    While a large portion of plan sponsors have signed contracts that 
allow them to collect all of the rebates associated with prescription 
drug purchases by their customers, there are still many contracts where 
the PBM receives a percentage of the rebate as compensation. In 
addition, PBMs collect other fees that I discuss below which are also a 
function of the list price. Some have proposed that this provides a 
perverse incentive for the PBM to prefer higher list priced products 
where there is a large rebate compared to even lower prices products 
with a smaller rebate.
    The concern about PBMs being attracted to higher-priced drugs can 
be best demonstrated by a simple example. Consider a drug that 
currently has a list price of $100. The manufacturer proposes to the 
PBM a 20 percent list price increase--resulting in a new list price of 
$120, which is initially paid by the payer (i.e., employer or fully 
funded insurer). The manufacturer also proposes to increase the rebate 
paid to the PBM by $15, resulting in a net price increase of only 5 
percent (i.e., the number that is reported in charts such the one shown 
in Exhibit 6). However, the PBM is only required by its contract to 
transfer 50 percent of rebates to the payer, meaning it keeps $7.50 of 
the rebate and the payer gets $7.50. Therefore, the payer spends $12.50 
more, with $5 going to the manufacturer and $7.50 for the PBM.
    Ultimately, the unanswered question is whether the $7.50 collected 
by the PBM in this example represents ``too much'' surplus or instead 
is the appropriate payment for its negotiating activities. In a well-
functioning competitive market, we would expect that if the $7.50 the 
PBM captures from the example above represents too much of the surplus, 
the PBM would ultimately face competition from another firm offering a 
better contract to the payer. Such a contract would propose to decrease 
the total spending to the payer. However, this requires a market with 
multiple PBMs actively competing for contracts, a situation that may 
not exist in the current concentrated PBM market. Price competition 
between PBMs also may not emerge if the existing firms realize there 
are large barriers to entry and that incumbent firms would be better 
off not actively engaging in price wars to gain share.
    Strong competition is even less likely to emerge if payers are 
unaware of the full scope of surplus created by their prescriptions. As 
discussed above, many large firms hire sophisticated benefit 
consultants and increasingly demand fully transparent contracts that 
provide them a complete picture of all ``rebate'' dollars. In theory, 
this provides information about the surplus created by their 
prescriptions. That said, there are reasons to be concerned that 
despite these efforts at disclosure, payers remain unaware of all of 
the funds (particularly those not labeled as rebates) flowing between 
the PBM and the manufacturer. For example, in addition to rebates, PBMs 
also receive various administrative fees and other payments from 
manufacturers--fees that are often a function of the list price of a 
drug.
    The PBM and the manufacturer determine which of these payments are 
classified as ``rebates'' (and therefore covered by the price 
transparency and rebate sharing requirements), and what is instead an 
``administrative fee'' (that does not need to be disclosed or 
shared).\16\ These fees are not trivial--for some contracts they can 
account for 25-30 percent of the money moving between the manufacturer 
and the PBM.\17\ Furthermore, since these fees are often structured as 
a function of the list price there is little economic distinction 
between an ``administrative fee'' and a ``rebate.'' Describing this 
system, the Senate Finance Committee report on insulin pricing said 
``[a]lthough Part D plans are required to report rebates to CMS, they 
are not required to report administrative fees collected and retained 
by PBMs `if the fees are for bona fide services and are at fair market 
value.' This basic lack of transparency in the Medicare program has 
been an area of concern to HHS OIG, as has the competing interests that 
PBMs and manufacturers find themselves in due to the administrative 
fees being based on the WAC price.'' \18\ Figure 11 documents the 
increase in such fees over time in this market.
---------------------------------------------------------------------------
    \16\ Eickelberg, Henry C. 2015. ``The Prescription Drug Supply 
Chain `Black Box': How it Works and Why You Should Care.'' American 
Health Policy Institute. December.
    \17\ Dross, David. 2017. ``Will Point-of-Sale Rebates Disrupt the 
PBM Business?'' Mercer. July 31.
    \18\ https://www.finance.senate.gov/imo/media/doc/Grassley-
Wyden%20Insulin%20Report%20
(FINAL%201).pdf, page 81.
---------------------------------------------------------------------------
    If we consider the simple example above, the situation for the 
payer could be even worse if, instead of offering a ``rebate'' of $15, 
the manufacturer offers a $15 ``administrative fee'' to the PBM. In 
that case, the payer would bear the full cost (i.e., $20) of the list 
price increase, and the PBM and manufacturer would split the surplus. 
Ultimately, manufacturers are agnostic between describing payments to 
the PBM as ``fees'' or ``rebates''--they simply care about the total 
amount of money they collect and distribute as a result of these 
negotiations.\19\ Given the existing structure of contracts and cost 
sharing, other members of the value chain are far less agnostic about 
the labeling of these fund transfers.
---------------------------------------------------------------------------
    \19\ To the extent manufacturers have preferences about this 
labeling it is likely related to the intersection with cost sharing 
discussed above. Note that high cost sharing impacts manufacturer 
revenue by reducing demand for pharmaceutical products.
---------------------------------------------------------------------------
    To further complicate matters, sophisticated payers hoping to 
gather more information about the flow of funds between the PBM and 
manufacturers that results from their prescriptions often face 
meaningful restrictions on the ability to audit their PBM-payer 
contracts.\20\ These can include the exclusion of particular auditors 
that are deemed to hold views that are hostile to PBMs, requirements 
that audits be held at the headquarters of the PBM, unwillingness to 
provide contracts with manufacturers, restricted access to claims data, 
and strict limitations on the number of years that can be audited.\21\ 
While many of these restrictions can be cast as attempts to maintain 
rebate confidentiality, they also increase the amount of asymmetric 
information between PBMs and payers about the amount of available 
surplus. Such information asymmetries can affect the efficiency of 
bargaining between these two groups.
---------------------------------------------------------------------------
    \20\ Weinberg, Neil, and Robert Langreth. 2017. ``Inside the 
`Scorpion Room' Where Drug Price Secrets Are Guarded.'' Bloomberg. May 
4.
    \21\ Advisory Council on Employee Welfare and Pension Benefit 
Plans. 2014. ``PBM Compensation and Fee Disclosure.'' Report to the 
United States Secretary of Labor.
---------------------------------------------------------------------------
    As a result of these concerns, some have proposed policies where 
PBMs are not allowed to have contracts in which they are compensated 
based on the size of the rebate or the list price of a product. While 
this would certainly eliminate any perverse incentives for large 
rebates, it would also diminish the incentives for PBMs to push for 
large discounts. If the primary motivation for such policies is an 
underlying concern about the competitiveness of the PBM market, 
eliminating the ability for firms to sign incentive compatible 
contracts could have meaningful unintended consequences
    In a similar vein, the Department of Health and Human Services 
previously proposed to instead address this problem by eliminating the 
safe harbor for rebates in the Medicare program. While this policy has 
been abandoned, other efforts underway have the same goal of ending 
confidential rebates based on the price of the drug and shift the 
market to a series of up-front price discounts and flat fees negotiated 
between PBMs and manufacturers.\22\ This would effectively end the 
confidentiality of negotiated prices while also not decreasing the 
amount of surplus captured by PBMs--after all, a PBM with market power 
can calculate a flat fee as easily as the current percentage based-
rebate system.
---------------------------------------------------------------------------
    \22\ U.S. Department of Health and Human Services. 2019. ``Trump 
Administration Proposes to Lower Drug Costs by Targeting Backdoor 
Rebates and Encouraging Direct Discounts to Patients.'' January 31.
---------------------------------------------------------------------------
    It is perhaps not surprising that policies from both parties are 
coalescing on attempting to end rebates. Frustrated by rising drug 
prices, people are looking for a scapegoat and a system of shrouded 
prices by large firms fits a convenient narrative. That said, it would 
be extremely unwise to limit the ability of PBMs to negotiate large 
discounts. Instead of ending the current system of confidential 
rebates, I've proposed (along with Fiona Scott Morton) that we move to 
a system where all payments currently paid between the manufacturer and 
the PBM flow first to the payer before being split between the payer 
and the PBM.\23\ PBMs and payers would be free to negotiate any split 
of the rebates, fees, and other funds that are paid by the 
manufacturer--including contracts that compensate a PBM as a percentage 
of the savings that they generate. Importantly, under this policy these 
contracts would emerge from a negotiation between two parties with 
equal information about the amount of money at stake. There are variety 
of ways to implement the move to such a system. One possible solution 
would be for regulators to end the safe harbor for payments between 
manufacturers and PBMs and instead create a separate safe harbor for 
payments between manufacturers and payers. I'd note that if the current 
PBM market is truly competitive, this proposed policy solution should 
have little effect on the distribution of surplus.
---------------------------------------------------------------------------
    \23\ Garthwaite, Craig, and Fiona Scott Morton. 2017. ``Perverse 
Market Incentives Encourage High Prescription Drug Prices.'' ProMarket 
Blog. November 1.
---------------------------------------------------------------------------
III. Congress Should Address Cost Sharing and Price Negotiations More 
        Directly
    While the optimality of the existing PBM market remains unclear, it 
is becoming apparent that Congress should enact some meaningful reforms 
in this area. I offer some suggestions for such policies below.
    As a starting point, there is a clear case for a reform to Medicare 
Part D's reinsurance program. Currently, this program blunts the 
incentives of firms to negotiate price discounts for the most expensive 
drugs and increases consumer cost sharing. Figure 12 shows the 
distribution of spending responsibilities under Part D. During the 
deductible period, the beneficiary is responsible for all the spending. 
Then, during the initial coverage phase, enrollees are responsible for 
25 percent of their drug spending and the plans are responsible for the 
remaining 75 percent of spending. If individuals spend through the 
initial coverage period, they find themselves in the coverage gap where 
they are responsible for 25 percent of spending, the plan is 
responsible for 5 percent, and manufacturers are required to give a 
discount of 70 percent. If an individual spends more than the 
catastrophic coverage threshold (approximately $8,000 in 2019), then 
the government is responsible for 80 percent of all additional costs, 
plans are responsible for 15 percent, and beneficiaries are responsible 
for the final 5 percent. Given the lack of a lifetime limit on out-of-
pocket spending by enrollees, this benefit structure is part of the 
reason why beneficiaries find themselves on the hook for exceptionally 
high cost-sharing for prescription drugs.
    Furthermore, for high priced products the private firms empowered 
to negotiate on behalf of Medicare are largely shielded by reinsurance 
from the costs of most price increases--limiting the ability of the 
market to lower these drug prices. Perhaps more concerning, PBMs 
operating in both the commercial and the Part D markets may face 
different incentives for rebates across these different markets and 
could use the confidential nature of rebates to unnecessarily increase 
government Part D spending. Initially, reinsurance was not a dominant 
feature of Part D. This has changed. Figure 13 shows the average 
national plan bid across Part D firms by its component parts--the 
direct subsidy from the government, the base premium from the enrollee, 
and the expected reinsurance payment. These data show that from 2007 to 
2018, the reinsurance component of Part D spending has grown from a 
relatively minor part of the program (25 percent of the plan bid) to 
the dominant source of payments to firms under Part D (60 percent of 
the plan bid).
    This level of reinsurance shields plans from the costs of the most 
expensive specialty drugs--a category of products that represents a 
growing share of overall prescription drug spending. While such a large 
amount of reinsurance may have been necessary to attract plans to the 
newly established Part D market, it is highly unlikely this remains 
true today. Part D is now an established market where firms have 
sufficient data to make reasonable projections about potential risk. 
Therefore, I propose that Congress either remove catastrophic 
reinsurance entirely from Part D (and force plans to pay 100 percent of 
the cost of these expensive products) or at a minimum switch the cost 
sharing so that the plan is responsible for 80 percent of the spending 
above the catastrophic limit and the government is responsible for 20 
percent.\24\ This would provide the appropriate incentives for firms to 
strongly negotiate for larger rebates and lower prices within Part D.
---------------------------------------------------------------------------
    \24\ As I discuss below, very large consumer cost sharing (such as 
the 5 percent of spending that patients must pay under Part D) can 
decrease the efficiency of insurance.
---------------------------------------------------------------------------
    Beyond changing the incentives to negotiate prices, it is clear we 
should find policy solutions to pass along more of the negotiated 
discounts to consumers. However, it is critical that any policy 
solution saves the proverbial baby while throwing out the bathwater by 
maintaining the ability of PBMs to effectively negotiate larger rebates 
with manufacturers. Therefore, I propose that PBMs be required to base 
cost-sharing payments on a number that more closely approximates the 
net price of the product even if it is not the exact net price 
associated with that purchase. For example, this number could be the 
average net price across PBMs for that product, the average net price 
for the therapeutic class, or the minimum price paid in the market, 
i.e., the Medicaid best price. Assuming PBMs have sufficient ability to 
modify their formularies, any of these options should still expose the 
patient to enough of the cost of the product to address moral hazard 
concerns while not exposing consumers to artificially high prices that 
unwind the generosity and efficiency of the insurance contract.
    Some have complained that policies that pass along rebates to 
consumers at the point of sale would lead to higher premiums. This fact 
is almost certainly true. However, this is not necessarily a problem. 
Our current system of using cost sharing by patients requiring 
expensive products to lower the premiums paid by healthier patients 
subverts many popular policy goals regarding the treatment of pre-
existing conditions in the health insurance market. In addition, these 
higher premiums would reflect, in part, a more complete insurance 
product. It is not immediately clear consumers are fully aware of the 
financial exposure they have to expensive medications, and therefore we 
should not think that increasing the completeness of insurance in this 
setting is clearly a negative outcome.
IV. More Information is Needed Before Implementing New Policies Aimed 
        at PBMs
    The role of various entities in the supply chain is clearly 
complicated. Pharmaceuticals move through a relatively lengthy supply 
chain inhabited by private firms with differing incentives, 
information, and market power. Given their central role in both 
negotiating prices and establishing formularies, it is tempting to 
blame PBMs for every negative feature of the system we observe. And it 
is possible that such blame may ultimately be valid. However, it is 
also apparent that we simply lack the information necessary to 
determine the degree to which these aspects of the market are actually 
caused by the independent motivations of PBMs to maximize profits 
versus how much they reflect the incentives of other firms in the value 
chain. For example, as mentioned above PBMs have offered contracts 
where rebates are passed along to customers at the point of sale and 
plans sponsors have largely avoided those plans. This suggests a more 
complicated story is necessary to explain the current market dynamics.
    Given the uncertainty in this area, it is incumbent on policymakers 
and regulators to gather more information before attempting to develop 
and implement solutions. Certainly, the recent Senate Finance Committee 
investigation into insulin pricing shed some important light on the 
relationships between PBMs and manufacturers. In that document we 
learned more about the role of administrative fees and the views of 
PBMs about the motivations of their customers, i.e., the plan sponsors. 
However, that report fell short on investigating the relationship 
between PBMs and plan sponsors. More information about those contracts 
and whether the actions of PBMs vary based on the contractual 
relationship with the plan sponsor would be useful for understanding 
the degree to which potentially undesirable features of the market are 
the result of the structure of the PBM market or other features of the 
supply chain.



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    Source: Drugchannels.net, available at: http://
www.drugchannels.net/p/about-blog.html 

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    Source: https://www.drugchannels.net/2022/04/the-top-pharmacy-
benefit-managers-of.html 

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    Source: https://www.drugchannels.net/2021/01/the-big-three-pbms-
ramp-up-specialty.html 

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    Source: https://www.drugchannels.net/2021/01/surprise-brand-name-
drug-prices-fell.html 

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    Source: Drugchannels.net, available at: http://
www.drugchannels.net/2017/06/new-data-show-gross-to-net-rebate.html 

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    Source: https://www.drugchannels.net/2019/03/employers-are-
absorbing-even-more.html  

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    Source: https://www.finance.senate.gov/imo/media/doc/Grassley-
Wyden%20Insulin%20Report%20(FINAL%201).pdf 

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    Source: https://www.drugchannels.net/2021/01/latest-cms-data-
reveal-truth-about-us.html 

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    Source: https://payorsolutions.cvshealth.com/insights/consumer-
transparency 

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    Source: https://www.pewtrusts.org/-/media/assets/2019/03/
the_prescription_drug_land
scape-explored.pdf 

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    Senator Blumenthal. Thank you very much, Professor. We will 
now go to Professor Feldman.

   STATEMENT OF PROFESSOR ROBIN FELDMAN, ARTHUR J. GOLDBERG 
      DISTINGUISHED PROFESSOR OF LAW, ALBERT ABRAMSON '54 
 DISTINGUISHED PROFESSOR OF LAW CHAIR, DIRECTOR OF THE CENTER 
     FOR INNOVATION, UNIVERSITY OF CALIFORNIA HASTINGS LAW

    Ms. Feldman. Thank you, Mr. Chairman, and esteemed members 
of the Subcommittee. Open and vigorous competition is the 
backbone of U.S. markets. But we are not seeing that with 
pharmaceuticals. Instead, we are seeing troubling and 
persistently rising prices on everyday medications.
    Now, there are many contributors to rising prices, but a 
critical place to start is with the industry that sits at the 
center of everything. Specifically at the heart of the drug 
pricing system lies the industry known as pharmacy benefit 
managers or PBMs. And historically, PBMs operated mostly as 
claims processors, just handling the paperwork flow.
    However, 15 years ago, when Medicare expanded to include 
prescription drugs, PBMs took on an expanded role as well. They 
began serving as a health plans representative for negotiating 
better prices from drug companies. There are many contributing 
factors, but the price increases that followed have been 
dramatic. For example, the prices of 65 common medicines have 
almost tripled just during those 15 years.
    So how did this happen? How did PBMs, which were supposed 
to help control prices, end up helping inflate prices instead? 
Well, the problem has emerged because rather than act fully as 
honest brokers for the health plans, PBMs, perhaps 
unsurprisingly, act in their own interests. And it turns out 
that their interests are not aligned with keeping prices low. 
So to set the stage for how this works, consider a store that 
raises the price of a jacket before putting the jacket on sale 
at the old price.
    When you walk in the store, the markdown looks like a great 
bargain, but it is not. For PBMs, their best interests are 
served when drug companies increase the starting price of the 
drug. That price is known as the list price. If the list price 
goes up and the PBM negotiates a rebate back down, the PBM 
looks more successful. It gets paid more by the health plan 
because the PBMs pay depends on the size of the rebate.
    In addition, because PBMs generally get to keep a portion 
of the rebate, they get to pocket even more. All this might not 
be so bad if no one actually paid that high list price, but 
many plans are set up so that people do pay that list price out 
of pocket in various ways, and many Americans don't have 
coverage for prescription drugs. I talked before about raising 
the price of a jacket so you can put it on sale at the old 
price, but it gets worse.
    Imagine if the price jump is higher than the sale discount. 
That is what is happening with medicine. Prices are rising 
faster than the rebates. Between 2010 and 2017 in Medicare, 
prices for drugs after rebates still rose 313 percent on 
average. We are buying the same jacket, but it is costing us 
more and more. And a significant portion of that increase is 
going to the PBMs.
    And despite the fact that PBMs should be serving as honest 
brokers for health plans, PBMs also take side payments from 
drug companies for providing services to the drug companies 
themselves. And what can PBMs offer drug companies to continue 
this payment stream of rebates and side income? Well, PBMs 
stand at the center of the system. As well as negotiating 
prices, they help decide if patients will be reimbursed for a 
particular medicine, how much they will be reimbursed.
    So PBMs can agree with the drug company that they will 
exclude the competitor's product and they can also make it 
harder for patients to get the competitor's medicine. That is 
of great value to a drug company. Finally, PBMs and drug 
companies claim that those rebate details are trade secrets and 
can't be disclosed even to the health plan. Now, markets thrive 
on information.
    And when heavily concentrated industries tightly control 
the flow of information, the end result is rarely in the 
interests of consumers. Most important, from an intellectual 
property perspective, simple price and price terms shouldn't be 
considered trade secrets at all. Thank you, and I look forward 
to your questions.
    [The prepared statement of Ms. Feldman follows:]

   Prepared Statement of Professor Robin Feldman, Arthur J. Goldberg 
   Distinguished Professor of Law, Albert Abramson '54 Distinguished 
    Professor of Law Chair, Director of the Center for Innovation, 
                 University of California Hastings Law
    Mr. Chairman and esteemed members of the Subcommittee, I am honored 
to be here today to address an issue that is causing real pain for 
consumers and for those trying to help them.
    Open and vigorous competition is the backbone of U.S. markets, but 
we are not seeing that in the pharmaceutical industry. Instead, we see 
persistently rising prices on the medications people depend on, day 
after day, to treat widespread problems such as diabetes, high blood 
pressure, high cholesterol, and opioid addiction.\1\ There are many 
contributors to the rising prices, but a critical place to start is 
with the industry that sits at the center of everything.
---------------------------------------------------------------------------
    \1\ See Ctr. for Medicare & Medicaid Serv., Fact Sheet, Drug 
Spending Information Products (2018), https://www.cms.gov/newsroom/
fact-sheets/drug-spending-information-products-fact-sheet (listing the 
ten drugs with highest annual price increases from 2012 to 2016 covered 
by Medicare); Cal. Office of Statewide Health Planning and Development, 
Prescription Drug Wholesale Acquisition Cost (WAC) Increases (2019) 
(detailing wholesale price increases of more than 16 percent for 
hundreds of drugs between 2017 and Q2 of 2019); Feldman, Devil, supra 
note 1, at 2.
---------------------------------------------------------------------------
    Specifically, at the heart of the drug pricing system lies the 
industry known as pharmacy benefit managers or PBMs.\2\ Historically, 
PBMs operated mostly as claims processors, just handling the paperwork 
flow.\3\ However, when Medicare expanded in 2006 to include 
prescription drugs, PBMs took on an expanded role, as well. They began 
serving as the health plan's representative for negotiating better 
prices from drug companies.
---------------------------------------------------------------------------
    \2\ For additional information on pharmacy benefit managers, see 
Robin Feldman, Drugs, Money, and Secret Handshakes: The Unstoppable 
Growth of Prescription Drug Prices (2019) (discussing the role of PBMs 
in the pharmaceutical market); Robin Feldman, Perverse Incentives: Why 
Everyone Prefers High Drug Prices--Except for Those Who Pay the Bills, 
57 Harv. J. on Leg. 303 (2020) (describing the incentive structures 
that lead PBMs to contribute to rising drug prices); Robin Feldman, The 
Devil in the Tiers, 8 J.L. & Biosci. 1 (2021) (analyzing the role PBMs 
play in distorting the organization of drug formularies); Robin 
Feldman, Why Prescription Drug Prices Have Skyrocketed, Wash. Post 
(Nov. 26, 2018), https://www.washington
post.com/outlook/2018/11/26/why-prescription-drug-prices-have-
skyrocketed/ (discussing the role PBMs play in the pharmaceutical 
market). For a discussion of potential solutions, see Feldman, Devil, 
at 31-41 (suggesting that drugs should be located on formulary tiers 
based on list, rather than net, price to remove the incentive for 
anticompetitive formulary manipulation); Feldman, Secret Handshakes, at 
95-102 (describing the significance of transparency and potential state 
and Federal level responses). For an explanation of why prices and 
price terms negotiated between PBMs and drug companies do not 
constitute trade secrets, see Robin Feldman & Charles Tait Graves, 
Naked Price & Pharmaceutical Trade Secret Overreach, 22 YALE J.L. & 
Tech 61 (2020) (defining trade secrets and discussing PBM efforts to 
assert that pricing arrangements should be considered trade secrets).
    \3\ Feldman, Wash. Post, supra note 1.
---------------------------------------------------------------------------
    Although there are many contributing factors, the rise in prices 
that followed that shift fifteen years ago has been dramatic. Looking, 
for example, at sixty-five common medicines that need to be taken over 
a long period of time, prices have almost tripled during those fifteen 
years.\4\
---------------------------------------------------------------------------
    \4\ Stephen W. Schondelmeyer & Leigh Purvis, AARP Public Policy 
Institute, Trends in Retail Prices of Brand Name Prescription Drugs 
Widely Used by Older Americans, 2006 to 2020 1-2 (2021).
---------------------------------------------------------------------------
    So how did this happen? How did PBMs--which were supposed to make 
healthcare more efficient--end up helping to inflate drug prices 
instead? The problem has emerged because rather than act as honest 
brokers for health plans, PBMs, unsurprisingly, act in their own 
interests. And it turns out that their own interests are not aligned 
with keeping prices low. To set the stage for how this works, consider 
a store that raises the price of a dress before putting the dress on 
sale at the old price. When you walk in the store, the sale price looks 
like a great bargain; but it's not.
    PBMs, similarly, have discovered that their best interests are 
served when drug companies increase the starting price of the drug. 
That price is known as the list price. If the list price goes up, and 
the PBM negotiates a rebate back down, the PBM looks more successful. 
It gets paid more by the health plan, and--because PBMs generally keep 
part of the rebate--it gets to pocket more.
    All of this might not be so bad if no one actually paid that high 
list price. But people do. Many consumers have what are called high-
deductible plans, in which they pay that high list price out of their 
pocket until they reach a certain threshold\5\; other plans require 
that patients pay a percentage of the high list price as what is known 
as co-insurance.\6\ And many Americans still do not have coverage for 
prescription drugs, even if they have health insurance. Thus, people 
are often forced to pay the high list price.
---------------------------------------------------------------------------
    \5\ For an example of a plan requiring that the patient pay 100 
percent of the costs of drugs up to a certain limit, see the Anthem 
insurance plan described at First Am. Consolidated Class Action Compl., 
at para. 13, In re Express Scripts/Anthem ERISA Litigation, 2018 U.S. 
Dist. LEXIS 3081 (S.D.N.Y. 2016) (No. 16-3399).
    \6\ See Medicare Payment Advisory Comm'n, Report to the Congress: 
Medicare Payment Policy 408-09 (2017).
---------------------------------------------------------------------------
    I talked before about raising the price of a dress so you can put 
it on sale at the old price. It gets worse. Imagine if the price jump 
is higher than the sale discount. That's what is happening in the case 
of medicine. Prices are rising faster than the rebates are rising. For 
example, between 2010 and 2017 in Medicare, prices for drugs after 
rebate still rose 313 percent on average.\7\ We are buying the same 
dress, but it is costing us more and more. And a significant portion of 
that increase is going to PBMs.
---------------------------------------------------------------------------
    \7\ Feldman, Devil, supra note 1, at 19, 21-22.
---------------------------------------------------------------------------
    In addition, despite the fact that PBMs should be serving as honest 
brokers for health plans, PBMs also take side payments from drug 
companies for providing services to the drug companies.
    And what do the PBMs have in their pocket to offer drug companies 
to continue this payment stream of rebates and side income? PBMs stand 
at the center of the system. As well as negotiating prices, they help 
decide whether a patient will be reimbursed for a particular medicine 
and how much they will be reimbursed. Therefore, PBMs can agree with a 
drug company that they will exclude the company's cheaper competitors 
or make it harder for patients to get the competitor's medicine.\8\ 
That is of great value to a drug company.
---------------------------------------------------------------------------
    \8\ See, e.g., Charles Ornstein & Katie Thomas, Take the Generic, 
Patients Are Told. Until They Are Not., )N.Y. Times (Aug. 6, 2017) 
(describing health plans forcing patients to pay more for the generic 
version of a drug or declining to reimburse for the generic at all;, 
https://www.nytimes.com/2017/08/06/health/prescription-drugs-brand-
name-generic.html?mtrref=unde
fined [https://perma.cc/U4JU-4P3X]; see also Complaint, Shire U.S., 
Inc. v. Allergan, Inc., No. 17-7716 (D.N.J. 2017) (alleging bundled 
rebates for the eye medication Restasis deterred health plan 
formularies from including competitors); Complaint, Pfizer, Inc., v. 
Johnson & Johnson and Janssen Biotech, Inc., 2018 U.S. Dist. LEXIS 
31690 (E.D. Pa. 2018) (No. 17-4180) (bundled rebates for the rheumatoid 
arthritis drug Remicade resulted in hospitals and health plan 
formularies essentially excluding the lower-priced biosimilar).
---------------------------------------------------------------------------
    PBMs and drug companies refuse to disclose the precise size of 
rebates or the details of the terms given, asserting that the 
information is a trade secret. Even auditors and regulators are not 
given full access. Trying to reform the system--or even talk about it--
is like shadow boxing.
    Finally, the PBM industry is highly concentrated. Just three PBMs 
control 80 percent-85 percent of the market.\9\ They tend to offer the 
same terms to health plans. Thus, if health plans want something 
different, they are out of luck.
---------------------------------------------------------------------------
    \9\ Neeraj Sood, Dana P. Goldman, & Karen Van Nuys, Follow the 
Money to Understand How Drug Profits Flow, STAT (Dec. 15, 2017), 
https://www.statnews.com/2017/12/15/prescription-drug-profits-pbm/ 
(``The top three pharmacy benefit managers, which negotiate drug prices 
on behalf of insurers and self-insured employers, dominate 85 percent 
of their market.''). See also Neeraj Sood, Transcript of Understanding 
Competition in Prescription Drug Markets: Entry & Supply Chain Dynamics 
Workshop (Nov. 8, 2017), https://www.ftc.gov/system/files/documents/
videos/understanding-competition-prescription-drug-markets-panel-2/
ftc_understanding_competi
tion_in_prescription_drug_markets_-_transcript_segment_3.pdf.
---------------------------------------------------------------------------
    Markets thrive on information, and when heavily concentrated 
industries control the flow of information, the end result is rarely in 
the interests of consumers. Most important, from an intellectual 
property perspective, simple price and price terms shouldn't be 
considered trade secrets at all.\10\
---------------------------------------------------------------------------
    \10\ Robin Feldman & Charles Tait Graves, Naked Price & 
Pharmaceutical Trade Secret Overreach, 22 Yale J.L. & Tech 61 (2020) 
(discussing PBM efforts to assert that price and price terms should be 
considered trade secrets).
---------------------------------------------------------------------------
    One cannot overemphasize the major life improvements over the past 
century that flow from innovation in prescription medications, 
including new lifesaving antibiotics, treatments for pain, 
psychopharmacological treatments and cancer drugs. However, if we don't 
get a handle on the perverse incentives operating in various parts of 
the drug supply chain, the burden on consumers and taxpayers will 
continue to be crushing.
    Thank you, and I look forward to your questions.

    Senator Blumenthal. Thanks so much, Professor Feldman. And 
now, Mr. Scott.

   STATEMENT OF JUAN CARLOS ``JC'' SCOTT, PRESIDENT AND CEO, 
           PHARMACEUTICAL CARE MANAGEMENT ASSOCIATION

    Mr. Scott. Good morning, Chairman Blumenthal, Ranking 
Member Blackburn, and members of the Subcommittee. My name is 
J.C. Scott. I am the President and CEO of the Pharmaceutical 
Care Management Association, the national trade association 
representing pharmacy benefit managers. On behalf of PCMA's 
member companies, I appreciate the invitation to testify today.
    Mr. Chairman, we agree drug pricing and affordability is a 
challenge for too many patients in America. We can and should 
talk about what is driving that affordability challenge and how 
we solve for it, which begins with an understanding of the 
entirety of the prescription drug supply chain, from 
manufacturer to wholesaler to pharmacy to those paying the 
bills.
    Today, the Subcommittee is focused on just one piece of 
that ecosystem, understanding the work done by our companies 
pharmacy benefit managers. I appreciate the opportunity to 
share our perspective that our companies are delivering value 
for those who pay for health care coverage for patients and for 
patients themselves by making sure they have seamless, safe, 
and affordable access to the medications they need.
    I know that during your time in the Senate, you have met 
with many people representing the health care industry. With 
respect to prescription drugs, you have heard from retail 
pharmacies who are essential to serving patients and providing 
access to medications, and generally speaking, argue for higher 
payments.
    Representatives of drug manufacturers, those responsible 
both for the amazing innovations that benefit patients and for 
setting the prices, generally seek to justify their price 
setting decisions and argue for higher, not lower prices. I am 
not trying to judge either of those arguments.
    I simply want to make the point that the PBM industry is 
the only stakeholder in the chain dedicated to seeking lower 
costs, and we are proud to play that role. PBMs do that work 
for the employer, union, health plan, and Government clients 
who hire them, and most importantly, the patients for whom 
those plans provide coverage. PBMs return $10 in savings for 
every $1 spent on their services.
    PBMs will lower the cost of health care by $1 trillion this 
year alone. And for many of us, that can be a hard number to 
get our head around. But it comes down to savings of about $962 
per person per year.
    PBMs lower prescription drug costs by encouraging 
competition in the market, promoting the use of generic 
medications, negotiating discounts and rebates, encouraging 
better pharmacy quality, and offering things like home delivery 
for those on chronic medications. Understandably, stakeholders 
in the supply chain want to be paid more for their services and 
products.
    For the plan sponsors who are paying the bills, they need a 
balancing force to push for lower costs and better access, and 
that is where PBMs come in. The Medicare Part D program is a 
great example where seniors are able to choose among private 
plans to get their drug benefits. PBMs support Part D plans by 
negotiating rebates and discounts and promoting better pharmacy 
quality, passing the savings from those negotiations to the 
plans, who in turn use that to keep premium costs reliably low 
for seniors.
    It is worth emphasizing, no employer, union, pension fund, 
or health plan has to hire or use a PBM, but virtually all do 
choose to use a PBM to lower the cost of providing health care 
and to better serve the patients they represent. PBM clients 
choose their PBMs through a transparent and highly competitive 
bidding process.
    And Mr. Balto was right. I am going to tell you that with 
over 70 full service PBMs in the marketplace, including new 
entrants coming into the market regularly, plan sponsors have a 
tremendous diversity of opportunity to contract with the PBM 
that best meets their unique needs. Some may choose a PBM based 
on their scale and ability to negotiate deep discounts and 
manage the risk of price changes. Others choose to hire PBMs 
based on their innovative care management programs or different 
levels of service.
    It is important that there is choice and the ability for 
plan sponsors to decide how to set up their drug benefits to 
best serve their unique populations. PCMA and the companies we 
represent are committed to working with the Subcommittee and 
all stakeholders to continue improving the affordability of 
prescription drugs for patients.
    While I have talked a lot about the work we do for those 
who provide health coverage for consumers, the most important 
lens through which to judge these issues are not what will best 
benefit the plan sponsor or the PBM or the retail pharmacy or 
the manufacturer. It comes down to what best serves the 
consumer.
    Through their work, PBMs are contributing to lower costs 
for health coverage for consumers, lower cost for medications, 
and better access, which means more people getting the 
medicines they need to lead healthier lives.
    I hope that this hearing is an opportunity for a continued 
conversation not only about the work done by PBMs, but to look 
at the entire supply chain so that we can identify solutions 
for patients and consumers. Thank you again for the opportunity 
to speak with you. I look forward to your questions.
    [The prepared statement of Mr. Scott follows:]

  Prepared Statement of Juan Carlos ``JC'' Scott, President and CEO, 
               Pharmaceutical Care Management Association
Introduction
    Good morning, Chairman Blumenthal, Ranking Member Blackburn, and 
members of the Subcommittee on Consumer Protection, Product Safety, and 
Data Security.
    My name is JC Scott. I am the President and CEO of the 
Pharmaceutical Care Management Association (PCMA).
    PCMA is the national association that represents America's Pharmacy 
Benefit Managers (PBMs), which administer prescription drug plans and 
operate specialty and mail-order pharmacies for more than 266 million 
Americans who have health coverage from a variety of sponsors, 
including through employers, labor unions, health insurers, Medicare 
Part D plans, state government employee plans, Medicaid plans, the 
Federal Employees Health Benefits Program, TRICARE and others.
    PBMs are proud of the work they do to reduce prescription drug 
costs, expand affordable access to medications, and improve patient 
outcomes. PBMs negotiate with drug companies to lower prescription drug 
costs. PBMs work with pharmacies to create networks of pharmacies that 
provide the best value. PBMs facilitate home delivery of prescription 
drugs to patients safely and seamlessly, and PBMs help patients stay on 
their prescription drugs to live healthier lives. PBMs advocate for 
patients in the fight to keep prescription drugs accessible and 
affordable.
    On behalf of PCMA's member companies, I appreciate the invitation 
to testify before the subcommittee today as it seeks to understand 
better the role PBMs play in the drug supply chain and our impact on 
consumers, small businesses, and drug costs.
    Drug pricing and affordability are a challenge for too many 
patients in America. We can and should talk about what is driving that 
affordability challenge and how we solve it, which begins with an 
understanding of the entirety of the prescription drug supply and 
payment chain, from manufacturer to wholesaler to pharmacy to those 
providing health coverage.
    Today, the subcommittee is focused on just one piece of that 
ecosystem--understanding the work done by our companies, PBMs.
    During your time in the Senate, you have met with many people 
representing the health care industry.
    With respect to prescription drugs, you have heard from retail 
pharmacies, which are essential to serving patients and providing 
access to medications, and which, generally speaking, argue for higher 
payments, which lead to higher drug costs.
    Representatives of drug manufacturers, those responsible for both 
the amazing innovations that benefit patients and for setting prices, 
generally seek to justify their price-setting decisions and argue for 
higher, not lower, prices.
    Understandably, stakeholders in the supply chain want to be paid 
more for their services and products. That is the way the market 
functions. But those paying the bills need a balancing force to push 
for lower costs and better access, and that is where PBMs come in.
    The PBM industry is the only stakeholder in the chain dedicated to 
seeking lower costs. PBMs do that work for the employer, union, health 
plan, and government clients who hire them, and, most importantly, the 
patients for whom those health plans provide coverage.
    PBMs return $10 in savings for every dollar spent on their 
services. As a result, PBMs will lower the cost of health care by $1 
trillion this year alone.i For many of us, that can be a 
hard number to get our heads around, but it comes down to saving about 
$962 per person per year.
---------------------------------------------------------------------------
    \i\ Visante. The Return on Investment (ROI) on PBM Services. An 
analysis prepared by Visante on behalf of PCMA. February 2020. 
Available at https://www.pcmanet.org/wp-content/uploads/2020/02/ROI-on-
PBM-Services-FINAL_.pdf.
---------------------------------------------------------------------------
    PBMs are able to negotiate for lower drug costs when they can bring 
competition between pharmaceutical manufacturers and between pharmacies 
to bear. PBMs lower prescription drug costs by using these negotiations 
to deliver discounts and rebates, promoting the use of generic 
medications, encouraging better pharmacy quality, and offering things 
like home delivery for those on chronic medications.
Simplifying the Consumer Experience
    People with insurance filled more than 6.4 billion prescriptions in 
retail pharmacies in 2021.ii Every day, that amounts to 
nearly 15 million prescriptions, so it is critical that patients can 
pick up their prescriptions as quickly as possible at the pharmacy 
counter to establish and maintain medication adherence. PBMs perform 
many essential functions that combine disparate information and 
expertise, as well as advanced technology to facilitate and streamline 
getting a prescription filled as seamlessly as possible.iii
---------------------------------------------------------------------------
    \ii\ IQVIA. The Use of Medicines in the U.S. 2022. April 2022. 
Available at https://www.iqvia.com/insights/the-iqvia-institute/
reports/the-use-of-medicines-in-the-us-2022.
    \iii\ Pharmaceutical Care Management Association (PCMA). PBM 
Technology and Expertise Improves Patient Health Outcomes. June 2016. 
March 8, 2022. Available at https://www.pcm
anet.org/pbm-technology-and-expertise-improves-patient-health-
outcomes/.
---------------------------------------------------------------------------
    To achieve optimal PBM-patient coordination, once a pharmacy enters 
a prescription into the system, it is sent electronically to the 
patient's PBM, which checks the pharmacy benefit information to confirm 
the patient's insurance status and cost-sharing amount, as well as the 
patient's medication history for any errors and possible harmful 
dangerous drug interactions. While pharmacies have records of 
prescriptions filled by them or a fellow chain pharmacy, they do not 
have records of prescriptions filled in other pharmacies. However, PBMs 
do, as long as the patient has used insurance. Given that information 
and the technology, in real-time and almost instantaneously, the PBM 
can determine if the prescribed drug should not be taken by that 
patient and can alert the pharmacist to any dangerous interactions 
before the patient pays any cost sharing and receives any medication. 
All of this happens rapidly, seamlessly, and behind the scenes to 
improve patient safety and care.
Reducing Health Benefit Costs for Businesses
    PBMs have an established record of negotiating with drug 
manufacturers and pharmacies to reduce drug costs. PBMs work to bring 
drug prices down to the lowest net cost for employers, both large and 
small, and others who provide health insurance.
    No employer, union, pension fund, or health plan has to hire or use 
a PBM. But virtually all do choose to hire a PBM to lower the cost of 
providing health care coverage and to better serve the patients they 
represent.
    PBM clients choose their PBMs through a transparent and highly 
competitive bidding process. With more than 70 full-service PBMs in the 
market, including regular new entrants, unions, and employers, health 
plans have a tremendous diversity of opportunities to contract with the 
PBM that best meets their unique needs.iv
---------------------------------------------------------------------------
    \iv\ Pharmaceutical Care Management Association (PCMA). The PBM 
Marketplace Is Highly Competitive. April 2021. Available at https://
www.pcmanet.org/wp-content/uploads/2021/04/PBM-Landscape-2021.pdf.
---------------------------------------------------------------------------
    Some may choose a PBM based on its scale, ability to negotiate deep 
discounts or manage the risk of price changes. Others choose to hire 
PBMs based on their innovative care management programs or different 
levels of service. For small employers, many of whom may struggle to 
provide health insurance to employees, PBMs lower drug costs and 
provide cost predictability, enabling them to stretch their benefit 
dollars even further.
    For all those sponsoring health insurance, it is important that 
there is choice among PBMs and the ability to decide how to set up 
their drug benefits to best serve their unique populations.
    PBMs typically develop a basic preferred drug list, or formulary, 
under the guidance of their pharmacy and therapeutics (P&T) committee. 
P&T committees are comprised of independent physicians, pharmacists, 
and other clinical experts who consider the most recent data on 
prescription drugs and tell the PBM what drugs it must include, must 
not include (for safety reasons), and may include on its formulary. The 
drugs it ``may'' include are typically for conditions or diseases for 
which there are competing therapeutically equivalent treatments, and 
for which the PBM may leverage competition between drug manufacturers 
to negotiate lower costs. Once the PBM has concluded its negotiations 
and devised its formulary, it then recommends it to those sponsoring 
health insurance, who may choose to utilize it, customize it, or go 
with another approach.v PBMs create formularies of 
clinically appropriate drugs, preferring ones that are the most cost 
effective, including generic drugs, biosimilars, and lower-cost 
alternative brand drugs.
---------------------------------------------------------------------------
    \v\ Pharmaceutical Care Management Association (PCMA). The 
Management of Specialty Drugs. June 2016. Available at www.spcma.org/
wp-content/uploads/2016/06/sPCMA_The
_Management_of_Specialty_Drugs.pdf.
---------------------------------------------------------------------------
    One method that PBMs use to lower drug costs is incentivizing the 
use of lower-cost generic alternatives to name-brand drugs. Indeed, 
generic dispensing has grown over the past decade as more generics have 
entered the market and patients have responded to health plan designs 
encouraging their use, so that now roughly 90 percent of prescriptions 
filled in the United States are for generic drugs, at a fraction of the 
cost of their brand-name equivalents.vi PBMs also sometimes, 
for some conditions, require patients to try generic drugs before 
trying more expensive brand drugs, and employ other tools designed to 
deliver high-quality drug benefits while bringing down 
costs.vii
---------------------------------------------------------------------------
    \vi\ U.S. Food and Drug Administration (FDA). Generic Drugs. 
February 5, 2021. Available at https://www.fda.gov/drugs/buying-using-
medicine-safely/generic-drugs.
    \vii\ Pharmacy Benefit Management Institute (PBMI). Solving 
America's High Drug Cost Problem: Prevent Drug Company Tactics that 
Increase Costs and Undermine Clinical Quality. 2020. Available at 
https://www.pcmanet.org/wp-content/uploads/2021/01/Solving-
America%E2%80
%99s-High-Drug-Cost-Problem_whitepaper_FINAL2.pdf. Pharmacy Benefit 
Management Institute (PBMI). 2017 Trends in Specialty Drug Benefits. 
2017. Available at www.pbmi.com/research. Pharmacy Benefit Management 
Institute (PBMI). 2016 Trends in Drug Benefit Design. 2016. Available 
at www.pbmi.com/research.
---------------------------------------------------------------------------
    As a result, PBMs have a pro-competitive influence on the 
prescription drug marketplace, and PBM services provide a significant 
and measurable benefit for businesses and others providing health 
insurance. Without PBMs in the marketplace, those organizations would 
be left to negotiate drug costs on their own or pay the full costs of 
these drugs.
Lowering Drug Costs for Consumers
    As mentioned earlier, PBMs, working with those providing insurance, 
encourage patients through formulary design and cost-sharing incentives 
to use the most affordable drugs, which are usually generics. For many 
brand drugs, PBMs negotiate directly with drug manufacturers who 
compete for formulary placement by offering a type of discount called 
rebates.viii For drugs on the preferred tier of a plan's 
formulary, consumers typically have lower cost sharing.ix As 
competing products enter the market, PBMs gain the flexibility to 
leverage competitor products to negotiate deeper drug discounts for 
patients and payers.x
---------------------------------------------------------------------------
    \viii\ Foley Hoag. The History of Rebates in the Drug Supply Chain 
and HHS' Proposed Rule to Change Safe Harbor Protection for 
Manufacturer Rebates. April 2, 2019. Available at https://
foleyhoag.com/publications/ebooks-and-white-papers/2019/march/the-
history-of-rebates-in-the-drug-supply-chain.
    \ix\ Congressional Budget Office (CBO). Prescription Drugs: 
Spending, Use, and Prices. January 17, 2020. Available at https://
www.cbo.gov/system/files/2022-01/57050-Rx-Spending
.pdf.
    \x\ Congressional Budget Office (CBO). Prescription Drugs: 
Spending, Use, and Prices. January 17, 2020. Available at https://
www.cbo.gov/system/files/2022-01/57050-Rx-Spending
.pdf.
---------------------------------------------------------------------------
    PBMs have also led the industry in creating contracts that account 
for the value of specialty and high-cost medications.xi 
Value-based arrangements are at the forefront of new drug payment 
designs and will be critical to managing the costs of next-generation 
therapies like cell and gene therapies, orphan drugs, and ultra-
expensive specialty drugs. Value-based contracts will better allow 
plans to manage these high costs, and health plans will need broad 
flexibility to craft and employ value-based contracts.
---------------------------------------------------------------------------
    \xi\ Pharmacy Benefit Management Institute. Solving America's High 
Drug Cost Problem: Prevent Drug Company Tactics that Increase Costs and 
Undermine Clinical Quality. January 2021. Available https://
www.pcmanet.org/wp-content/uploads/2021/01/Solving-America%E2%80%
99s-High-Drug-Cost-Problem_whitepaper_FINAL2.pdf.
---------------------------------------------------------------------------
    The Medicare Part D program, where older Americans and those living 
with disabilities can choose among private plans to get their drug 
benefits, is a great example of PBM value. PBMs support Part D plans by 
negotiating rebates and discounts and promoting better pharmacy 
quality, passing 99.6 percent of those savings from those negotiations 
to the Part D plans, which in turn use them to enhance drug benefits 
and keep premium costs reliably low for beneficiaries.xii
---------------------------------------------------------------------------
    \xii\ Government Accountability Office (GAO). Medicare Part D: Use 
of Pharmacy Benefit Managers and Efforts to Manage Drug Expenditures 
and Utilization. August 13, 2019. Available at https://www.gao.gov/
products/gao-19-498.
---------------------------------------------------------------------------
    As another cost-saving measure, PBMs offer prescription home 
delivery through highly efficient, virtually error-free mail-service 
pharmacies. As with many other products, patients can safely access 
prescription drugs through home delivery. Mail-service pharmacies are 
convenient, dependable, and affordable. Patients will often fill the 
first few prescriptions at a retail pharmacy if the prescription is for 
a chronic condition. Patients may then choose to use a mail-service 
pharmacy for home delivery once they are stabilized on the 
medication(s). On 90-day supplies of medicines, mail-service pharmacies 
result in lower copayments for consumers and improved medication 
adherence overall.xiii
---------------------------------------------------------------------------
    \xiii\ O. Kenrik Duru, Julie A. Schmittdiel, Wendy T. Dyer, Melissa 
M. Parker, Connie S. Uratsu, James Chan, and Andrew J. Karter. January 
2010. Mail-Order Pharmacy Use and Adherence to Diabetes-Related 
Medications. American Journal of Managed Care. Vol. 16, No. 1: 33-40. 
Available at https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3015238/.
---------------------------------------------------------------------------
    Savings from PBMs benefit health plans, employers, and consumers 
directly. Prescriptions cost health plans and employers an average of 
$1,315 per person per year, with consumers paying an average of $180 
for their prescriptions, or 14 percent.xiv Without PBMs and 
the savings they generate, drug costs could be $2,000 per person per 
year.xv
---------------------------------------------------------------------------
    \xiv\ Visante. The Return on Investment (ROI) on PBM Services. 
February 2020. An analysis prepared by Visante on behalf of PCMA 
Available at https://www.pcmanet.org/wp-content /uploads/2020/02/ROI-
on-PBM-Services-FINAL_.pdf.
    \xv\ Visante. The Return on Investment (ROI) on PBM Services. 
February 2020. An analysis prepared by Visante on behalf of PCMA 
Available at https://www.pcmanet.org/wp-content /uploads/2020/02/ROI-
on-PBM-Services-FINAL_.pdf.
---------------------------------------------------------------------------
The Value of Pharmacy Networks
    PBMs lower pharmacy costs by negotiating with pharmacies to 
establish competitive rates at which the PBM will reimburse for each 
prescription that a pharmacy fills, which enables the PBM to form 
preferred pharmacy networks. Through these pharmacy negotiations, 
pharmacy networks enable PBMs to maximize accessibility, choice, and 
quality of service, as well as hold down costs for patients enrolled in 
health plans, including, among others, Medicaid, Medicare Part D, state 
employee plans, and employer-sponsored plans.
    Pharmacies have been willing to negotiate price concessions, some 
based on proven volume, to ensure they have access to the plans and 
PBMs with the largest and fastest-growing membership bases. Often, but 
not always, independent pharmacies participate in preferred networks 
through contracts negotiated and administered by their Pharmacy Service 
Administration Organizations or PSAOs. As of 2019, all but one major 
PSAO chose to negotiate for the pharmacies they represent to 
participate in PBMs' preferred networks and fill prescriptions for 
patients served by plans utilizing those networks.xvi Some 
83 percent of independent pharmacies contract with a 
PSAO.xvii Between 2011 and 2021, the number of independent 
pharmacies nationwide increased by approximately 13 percent (or by 
2,645), whereas chains lost around 80 stores (0.2 percent) on 
average.xviii Today, there are more retail pharmacies in the 
U.S. than Starbucks, McDonald's, Burger Kings, and Subways combined.
---------------------------------------------------------------------------
    \xvi\ Pharmaceutical Care Management Association (PCMA). Putting 
the Growth of Pharmacy DIR in Context. August 2021. Available at 
https://www.pcmanet.org/wp-content/uploads/2021/11/Putting-the-Growth-
of-Pharmacy-DIR-in-Context-2021.pdf; Fein, Adam. The Law of Holes: Some 
Independents Skip 2019 Part D Preferred Pharmacy Networks. Drug 
Channels. October 23, 2018. (Oct. 23, 2018), Available at https://
www.drugchannels.net/2018/10/the-law-of-holes-some-independents-
skip.html/.
    \xvii\ Pharmaceutical Care Management Association (PCMA). Pharmacy 
Services Administrative Organizations (PSAOs) and their Little-Known 
Connections to Independent Pharmacies. January 25, 2021. Available at 
https://www.pcmanet.org/research-pharmacy-services-administrative-
organizations-psaos-and-their-little-known-connections-to-independent-
pharmacies/.
    \xviii\ Pharmaceutical Care Management Association (PCMA). Putting 
the Growth of Pharmacy DIR in Context. August 2021. Available at 
https://www.pcmanet.org/wp-content/uploads/2021/11/Putting-the-Growth-
of-Pharmacy-DIR-in-Context-2021.pdf.
---------------------------------------------------------------------------
    By creating preferred networks, PBMs are able to negotiate savings 
that reduce Medicare Part D premiums by $63 per member per year. One 
study estimated that preferred networks created by PBMs for Part D 
health plans save Federal taxpayers at least $870 million 
annually.xix
---------------------------------------------------------------------------
    \xix\ Pharmaceutical Care Management Association (PCMA). Putting 
the Growth of Pharmacy DIR in Context. August 2021. Available at 
https://www.pcmanet.org/wp-content/uploads/2021/11/Putting-the-Growth-
of-Pharmacy-DIR-in-Context-2021.pdf.
---------------------------------------------------------------------------
    When patients present a prescription to be filled, the pharmacies 
in a PBM's network dispense prescriptions for them using prescription 
drugs that they have purchased directly from wholesalers or 
manufacturers. Before dispensing a drug, the pharmacy checks with the 
PBM to confirm the applicable plan design for the patient to determine 
eligibility, coverage, and cost-sharing information.
    After the prescription is filled, the PBM reimburses the pharmacy 
at a contractually agreed-upon rate minus any applicable cost-sharing 
collected by the pharmacy from the patient. The PBM then separately 
bills the health plan at the rate negotiated between the PBM and the 
health plan.
    Patients recognize potential savings and, as a result, most prefer 
plans with preferred networks. For plan year 2021, 99 percent of Part D 
beneficiaries chose Part D plans with preferred pharmacy networks--an 
increase from 92 percent in 2020. In a survey, 85 percent of Medicare 
Part D beneficiaries reported satisfaction with their preferred network 
plan, and nearly 80 percent said they would be disappointed if their 
plan were eliminated.xx These examples demonstrate that PBMs 
are delivering value to patients through intense competition amongst 
pharmacies for access to preferred networks.
---------------------------------------------------------------------------
    \xx\ Pharmaceutical Care Management Association (PCMA). Putting the 
Growth of Pharmacy DIR in Context. August 2021. Available at https://
www.pcmanet.org/wp-content/uploads/2021/11/Putting-the-Growth-of-
Pharmacy-DIR-in-Context-2021.pdf.
---------------------------------------------------------------------------
    PBMs are instrumental in ensuring that patients have good options 
for where to fill their prescriptions at reasonable prices, including 
at independent pharmacies. In Medicare Part D, PBMs and Part D plan 
sponsors use a form of value-based contracting referred to as 
``pharmacy DIR'' to reward high-performing pharmacies, create high-
quality pharmacy networks, promote quality access for beneficiaries, 
improve health outcomes, and reduce premiums. Pharmacies that help 
Medicare beneficiaries stay on their medications, increase generic 
dispensing, and improve overall patient access to care are rewarded 
through pharmacy DIR.
Meaningful, Actionable Transparency
    Transparency that helps patients and payers is necessary across the 
entire prescription drug chain. PBMs support and practice actionable 
transparency that empowers patients, their physicians, those sponsoring 
health coverage, and policymakers, so that they can make informed 
decisions that can lead to lower prescription drug costs. Actionable 
transparency encourages consumers to shop for coverage that best fits 
their health needs and budgets, and once covered, use the most cost-
effective, highest-value healthcare goods and services. It enables 
prescribers and patients to avoid pharmacy-counter surprises and helps 
ensure that physicians can prescribe drugs that are affordable for 
patients. To that end, PBMs provide consumers and prescribers with 
real-time benefit tools (RTBTs), which provide real-time information on 
exactly where the patient is with respect to progressing through a 
deductible or another benefit phase, what drugs are on the patient's 
formulary, and exactly what cost-sharing to expect for a given drug at 
the pharmacy. PBMs also provide consumers with information on in-
network pharmacies, premiums, general cost-sharing, and benefits for 
their prescription drug coverage.
    PBMs provide health plans, employer plan sponsors, and consumers 
with a broad array of accurate, actionable information on price and 
quality to make efficient purchasing decisions. PBMs' customers are 
able to set the terms of the transparency and information they want to 
receive, as well as their audit rights, as part of their contracts.
    In recent years, Congress has added more requirements for PBMs to 
report to Federal agencies, as well as public reporting in more 
aggregated form, in both cases with appropriate protections for 
confidential data to avoid encouraging tacit collusion, efforts that we 
support. As the Federal Trade Commission has noted, there are limits to 
the benefits of transparency and unintended consequences that can 
result.xxi PBMs encourage Congress to focus its efforts on 
actionable transparency that reduces drug costs versus transparency 
that raises them.
---------------------------------------------------------------------------
    \xxi\ See FTC Staff Comment to the Honorable James L. Seward 
Concerning New York Senate Bill 58 on Pharmacy Benefit Managers (PBMs), 
FED. TRADE COMM'N. March 2009. Available at https://www.ftc.gov/sites/
default/files/documents/advocacy_documents/ftc-staff-comment-honorable-
james-l.seward-concerning-new-york-senate-bill-58-pharmacy-benefit-
managers-pbms/v090006newyorkpbm.pdf
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Promising Policy Solutions
    PCMA supports efforts to increase competition in the pharmaceutical 
market and increase patient access to needed medications. Generally, we 
support bills by several of the committee's members and others that 
would:

   Increase competition in the pharmaceutical market and 
        eliminate patent system abuses that stifle competition.

   Prevent pay-for-delay patent settlements for patent 
        infringement claims between brand and generic manufacturers.

   Put an end to abuses of the citizen petition process that 
        may slow new competition by slowing applications seeking market 
        approval.

   Improve Medicare's online pricing tools, allowing 
        beneficiaries to compare costs across healthcare settings.

   Prohibit product hopping that would allow drug manufacturers 
        to switch from an expiring patent on a reference drug to a 
        later-expiring patent on a follow-on product.

   Reimagine and modernize Medicare Part D to allow for 
        comprehensive benefit redesign and increased transparency while 
        protecting sensitive proprietary pricing information and 
        avoiding inadvertent price increases for patients and the 
        Federal government.

    I want to thank Chairman Blumenthal and Ranking Member Blackburn 
and Senators Klobuchar, Cruz, Peters, and others for their work on 
these efforts. The PBM industry looks forward to working with the 
committee's members on these policy concepts.
Conclusion
    PCMA and the companies we represent are committed to working with 
the subcommittee and all stakeholders to continue improving the 
affordability of prescription drugs for patients. While I have spoken a 
lot about the work we do for those who provide health coverage for 
consumers, the most important lens through which to judge these issues 
is not what will best benefit the plan sponsor, the PBM, the retail 
pharmacy, or the manufacturer; it should come down to what best serves 
the consumer--the affordability of their health care, the ease of their 
access, and ultimately their health care outcomes.
    Through their work, PBMs are contributing to lower costs for health 
coverage, lower costs for medications, and better and more affordable 
access for patients, which means more people getting the medications 
they need to lead healthier lives.
    I hope that this hearing is an opportunity for a continued 
conversation not only about the work done by PBMs but a look at the 
entire supply chain so that we can identify solutions for patients and 
consumers.
    Thank you again for the opportunity to speak with you. I look 
forward to answering your questions.

    Senator Blumenthal. Thanks, Mr. Scott. And this hearing 
will be indeed an opportunity to continue the conversation 
about all the segments of this industry. PBMs, as I indicated, 
right at the start, are far from the only source of increased 
costs. But they are, in fact, bedeviling many of the consumers 
we represent. Whatever the abstractions and the generalities we 
here in this committee room, are real life experience in 
Connecticut or Tennessee or elsewhere in the country show that 
PBMs can have a detrimental impact. And I will give you just 
one example.
    The 47-year-old woman in Norwich, Connecticut who told my 
office about PBMs getting in the way of her treatment and her 
access to cancer drugs that she was prescribed, an oral cancer 
drug that was denied twice by the PBM before there was approval 
for the generic. The problem with the generic is that it added 
larger out-of-pocket costs for the patient than the brand name 
drugs she was denied.
    I want to reiterate, she was prohibited from using the 
brand name drug that was prescribed, even though it would have 
been more affordable to her, and that is because of how the PBM 
set up her drug plan. Instead, she had to find assistance, 
literally from a charity. This 47 year old woman in Norwich had 
to go to a charity for help.
    The PBMs who are responsible for creating these 
formularies, the formularies are for the health care plan. It 
is a core part of how the PBMs operate, but the net effect is 
to deny certain drugs for patients. So if the purpose of PBMs 
is to lower costs for patients, how is it possible that she was 
denied access to a drug that would have cost her less out-of-
pocket?
    Mr. Scott. Thank you, Mr. Chairman. I think that question 
is for me, so I will jump in. And I think you are right to 
focus on the real life experience. I will share briefly, if I 
could, my PBM story when my dad suffered from cancer as well 
and Alzheimer's disease, and at the end of his life as many 
people who have family members who suffered through dementia 
and Alzheimer's know, there was a constant switching of 
medications that was necessary that the doctor was recommending 
in order to control that process.
    And the plan, the Medicare plan that he was on was 
affordable. The drugs were covered. He was able to get the 
access he needed, which meant thanks to that work done by the 
PBM to make the system work, my mom and I were able to focus on 
spending time with my dad rather than focusing on those issues 
of medication access. So I am grateful for the work that was 
done.
    In regards to the example you raised, Mr. Chairman, about a 
patient with cancer drugs and having troubles navigating the 
formulary system, I will just level--say if I could, that first 
of all, PBMs develop and recommend formularies, those lists of 
what drugs are covered at what cost sharing amount for the 
patient for the plan sponsors that hire them.
    Ultimately the plan sponsors making the decision to go with 
the PBM recommended formulary, make alterations to it, do 
something else altogether. Those formulary recommendations are 
developed with two important lenses. The very first one is 
always the clinical consideration, what drugs are necessary to 
cover in order to meet patients' therapeutic needs.
    We employ teams of physician--of outside physicians and 
clinicians to help make those determinations. And then in those 
areas where there are competing therapies available that are 
going to work equally well for the patient, then the lens is 
the economic one where the PBM is recommending the preferred 
formulary status to the lowest net cost drug.
    So that, the intention is to address the clinical, address 
the lowest net cost drug, which in theory should keep the 
health coverage more affordable for the plan offering it and 
for the patient who is getting access through that plan.
    Senator Blumenthal. In theory, but in practice, what we see 
in the real world is that patients don't have access to drugs 
at affordable prices. And the kinds of legislation that have 
been introduced, and I want to give credit to our chairman, 
Senator Cantwell, for her work in this area and her interest in 
this hearing, shows that all of us on both sides of the aisle 
are responding to a felt need that we see in the real world.
    And I might just tell you, the woman I mentioned eventually 
got the drugs she needed, but it took 4 months. It is a woman 
with advanced breast cancer waiting 4 months to get the 
treatment she needed. Time is not on the side of a patient. It 
is not a neutral factor. It is not like waiting in line for 
your ticket at the movies. I have heard multiple stories of 
patients being denied coverage of cancer drugs, and the problem 
is only seemingly getting worse.
    While there were two cancer drugs excluded from formularies 
in 2017, the number now or as of 2021 is 60 cancer drugs. 
Professor Garthwaite provided a graph that shows the number of 
rapidly--that that number is rapidly increasing, especially in 
the last 4 years. So what assurance can you give us that this 
increase in exclusions isn't leading to more disturbing stories 
like the one that I just gave you from Connecticut?
    Mr. Scott. Mr. Chairman, first, I completely understand the 
urgency of the scenario that you presented, and for any 
patient. As I have heard others say, every family has a lot of 
problems until someone gets sick and then you just have one 
problem.
    And we probably all been through that experience of feeling 
that urgency. When you have a sick loved one, when you are sick 
yourself, you simply want to get access to the medications that 
you need. There are steps in the process that the PBM provides 
to make that in theory, again, work seamlessly so that if a 
doctor is recommending a different drug, if they need to go 
through that step therapy process, that should work in real 
time. There are times, as you pointed out, where there is that 
abrasion for the patient.
    I think the entire health care system could do better 
making use of electronic tools and certainly in the PBM 
industry's case, continuing to dive into that technology, which 
we have started down that path, to make sure that that can 
happen in a more real time ways, so these questions are 
resolved quickly when patients need to switch their 
medications.
    Senator Blumenthal. Well, I am going to yield to the 
Ranking Member and then come back for some additional 
questions. But I just want to show you this graph. It is figure 
4 in Professor Garthwaite's testimony. It is pretty--pretty 
graphic, pretty dramatic. And I am going to be asking some 
additional questions about the FTC and why it hasn't taken some 
action to investigate. Let me yield to the ranking member.
    Senator Blackburn. And thank you, Mr. Chairman. Mr. 
Garthwaite, we hear from seniors all the time that are looking 
for lower cost alternatives. And so talk to me about list price 
erosion, what you see there, and Medicare patient out of pocket 
cost, and how are they going to be--when you look at these 
things, how are you going to be able to get to lower cost, 
especially as you look at biosimilars that are coming into the 
marketplace in 2023, and maybe they are not on the formulary, 
maybe there is another rebate. So, just in the nugget, let's 
touch that impact on the market.
    Mr. Garthwaite. I will do my best as an academic. To speak 
in a nugget, it is not really what we are good at----
    [Laughter.]
    Mr. Garthwaite.--but I think one thing is you want to think 
about what--we say cost, what we mean, right, and there is sort 
of clearly, there is out-of-pocket cost and then sort of the 
cost of the plan. I think what we have seen, particularly in 
Medicare Part D, is surging out-of-pocket costs for seniors. 
And I encourage Congress, in my testimony, to do something to 
address that.
    There is no reason why we should see patients spending 
thousands of dollars out of costs to get access to medication 
other than using that to try and return money back to the 
insurer to decrease the price of the insurance plan overall. It 
is not serving anything good----
    Senator Blackburn. OK, then let me ask you this. When you 
look at the PBMs, is the costs the PBM inserts in the 
marketplace worth the benefit to the patient?
    Mr. Garthwaite. I don't think I can answer that. I am not 
trying to evade your question. I think it gets back to your 
point and why I think your bill is very important. We just 
don't know enough about where the money is going as it flows 
through the system to figure out exactly, you know, whether the 
PBM is, ``worth it or not.''
    What I will say, and I think the Senate Finance committee 
report on insulin pricing you talked about is very instructive 
on this, that so much of the demand for high list prices 
appears to be coming from the plan sponsor. As I quote in my 
testimony, the head of diabetes for Lily, right, saying like, 
listen, we can't lower our list price because our plan sponsor 
wants the rebate so that they can maintain competition in the 
market.
    And I think that is not the goal of insurance and certainly 
not of insurance that doesn't include medical underwriting and 
is supposed to be community rated. That we are taking money 
from healthy--or from sick patients and transferring it to 
healthy patients in the form of lower premiums. But the 
politics, as I understand it, when we look sort of at the 
debate to get rid of rebates are such that anything that 
increases the premiums for seniors is a nonstarter. The part of 
the conversation we are going to have to have here is there is 
going to be a tradeoff.
    If you would like to get list prices lower, if you would 
like to remove rebates from the system, if you like to get drug 
prices lower, access is going to be impinged somewhere, right. 
It is either going to be because the PBM puts an exclusion 
list, or it is going to be because prices get pushed down and 
we get fewer drugs in the future.
    We have to make a choice somewhere about where we want to 
have reduced access if we want lower prices.
    Senator Blackburn. That is true. You have got to make 
choices within the system. But what Medicare enrollees tell us 
is there are fewer choices for them, and the prices are higher, 
and restrictions seem to increase every single enrollment 
period. And we know there will be an additional impact on the 
marketplace in 2023. Ms. Feldman, let me come to you.
    Ms. Feldman. Yes, ma'am.
    Senator Blackburn. Mr. Scott wrote an op-ed recently, and 
he is with PCMA. He is here as one of our witnesses. He argues 
in this that drug makers alone are responsible for setting and 
raising the prices. So do you agree with this, yes or no?
    Ms. Feldman. No. I think there is plenty of blame to go 
around in this system. The prices are negotiated terms. That is 
what the PBMs are supposed to be doing, negotiating price with 
the drug companies. If there is no negotiation going on, why 
are they there?
    Senator Blackburn. OK. So this current rebate system that 
we have, is it working to effectively lower the prices? Kind of 
the same question to you that I had to, Mr. Garthwaite, is the 
cost delivering the expected benefit?
    Ms. Feldman. Let me just try to put it in very simple 
terms. If my job is to bring prices down, however you define 
price, and if we look across 15 years and we see that prices 
after rebates are rising dramatically, I am not doing my job 
somehow. I do want to be clear that rebates aren't the only 
problem.
    There are all kinds of other flows of payments from drug 
companies to the PBMs. So we can call things a rebate or a flat 
fee or an elephant, it is still a flow of lucrative dollars and 
the influence that brings.
    Senator Blackburn. OK, thank you. I would like to hear a 
little bit more, but I am going to ask for it in writing. Mr. 
Garthwaite to you, and Professor Feldman to you, I would like 
to know what you would see a competitive marketplace be. We 
know there has been consolidation.
    Mr. Scott says there are 70 PBMs, but we know we have very 
few players in this area. So in a perfect world, how would you 
structure a competitive PBM marketplace that would indeed yield 
our Medicare enrollees a lower cost? Thank you. Thanks, Mr. 
Chairman.
    Senator Blumenthal. Thank you. Thanks for that assignment 
to the professors and other witnesses here.
    [Laughter.]
    Senator Blumenthal. And by the way, I would invite all of 
the panelists to respond to that question in writing. It is a 
big question and at the heart of what we are doing here. We 
have been joined by the Chairwoman of the Committee. I 
mentioned earlier her leadership in this area, and we are 
grateful to her for coming today. And I recognize Senator 
Cantwell for her remarks and questions.

               STATEMENT OF HON. MARIA CANTWELL, 
                  U.S. SENATOR FROM WASHINGTON

    The Chair. Thank you, Chair Blumenthal and Ranking Member 
Blackburn, for holding this important hearing. We know that the 
lack of transparency in the marketplace is a concern to all of 
us, and let's understand where we are today. Since 2014, 
prescription drug prices have increased much faster than the 
rate of inflation. Drug prices have gone up 35 percent, while 
the cost of all goods and services have jumped just 19 percent. 
So price increases for prescription drugs have outpaced wages, 
gas, telephone, Internet services, food, tuition, 
transportation, and personal care.
    So there is a consistent issue here. We have found the 
prescription drug prices have increased for 30 percent of 
Americans who take prescription drugs medications, many of whom 
have experienced increased annual cost of more than $100. The 
worst news, however, is that many who saw such spikes in their 
out-of-pocket costs were almost twice as likely not to fill a 
prescription or skip their medication.
    So this is of concern. We know that the average list price 
for insulin has doubled over the past 10 years, even though 
insulin has been available for patients for over 100 years, and 
significant hike prices have become a matter of life or death 
for many Americans with diabetes. In my state, Molly Stenson, a 
Washington resident, used to travel from Mason County to Canada 
just to purchase insulin.
    That is because at the time the average price of insulin 
was $450 a month. It wasn't until Washington State passed a law 
and put a cap on insulin at $100 a month that she was able to 
finally stop making these trips. Unfortunately, only 18 states 
have this cap on insulin co-payments. So there are drug insulin 
prices increasing faster than most goods and services.
    According to Senate Finance Committee staff report released 
by Senators Grassley and Wyden, the price increases are due in 
part to the business practices of pharmacy benefit managers. 
That is the subject of today's hearing. They are--PBMs are 
contracted by Government programs, insurance companies, self-
insured employers to negotiate on behalf of the pharmaceutical 
firms.
    And the way the system works, they also make a lot of money 
driving up the price on consumers. Today, fewer than five PBMs 
control more than 80 percent of the drug benefit for over 260 
million Americans. These companies, who most Americans know 
nothing about, set drug costs, decide what drugs will be 
included in your plan, and determine how drugs are dispensed. 
And these companies have abused their responsibility to protect 
Americans from these drug pricing crises--continued an opacity 
on the drug supply chain.
    So we want to shine a bright light here. We want PBMs, the 
effective drug price for consumer--we want to understand how 
PBMs affect drug prices for consumers. First, PBMs develop what 
is known as formularies, which are a list of covered drugs on 
behalf of insurers or payers. To get their drugs placed on the 
formulary, manufacturers provide rebates to PBMs, some of which 
are passed on to consumers, but they keep some for themselves.
    And because PBMs retain a share of that rebate, they have 
an incentive to keep those list price high. And who bears the 
brunt of that? Consumers, particularly if their cost sharing is 
based on a percentage of the list price or if they are among 
the 25 percent of Americans who have a high deductible health 
plan. The second way PBMs are affecting drug prices is 
something called spread pricing.
    Spread pricing occurs when a PBM charges an insurer a 
higher price for the drug than the amount it is reimbursed by 
the pharmacy, with the PBMs keeping the difference. According 
to an investigative report, PBMs skimmed off $1.3 billion of 
the $4.25 billion that Medicaid insurers spent on drugs in 
2017.
    There are examples of that. In 2015, PBMs charged Indiana's 
Medicaid program $204 for a drug and reimbursed the pharmacies 
only $197, with the PBMs pocketing the $7. Three years later, 
in 2017, PBMs charged the Medicaid program $147, but reimbursed 
the pharmacy $17, with PBMs pocketing $130.
    That is right, PBMs profits increased by $123 for a single 
30 day supply of a heartburn medication, all at the expense of 
the American consumer. And what makes spread pricing possible? 
The lack of transparency in the PBM market. PBMs affect drug 
pricing for consumers by enforcing a number of post-sale fees 
on pharmacies, effectively limiting the pharmacy's profits.
    PBMs keep these fees--and just let me be clear, I am a big 
fan of the pharmacies. There is a guy across or a woman across 
the counter, when you go in to get your prescription, who tells 
you some things about that medication. Oh, be careful of this, 
what about this, are you taking this? So they are part of our 
health care delivery system. So the notion that some people 
want to have mega conglomerates control pharmacy drugs by mail 
and control the market and have a continued concentration, mark 
me down as not a fan.
    PBMs keep these fees and really pass them on to consumers, 
thereby raising the costs for pharmacy--pharmaceutical market 
as a whole. Now, believe me, I am from an innovation State, and 
I also worked in software for 5 years. It is easy to raise 
capital if you are going to produce a product in 6 months and 
ship it. It is a lot harder to raise money for a product you 
have to have for 18 years.
    So no one is saying that it isn't hard to get capital to 
invest in new groundbreaking drugs. But the issue is, do we 
have enough transparency in this market? In 2019, the 
Washington legislature passed a law prohibiting PBMs from 
charging phantom fees that raised the costs of dispensing 
medications.
    Several states have enacted laws requiring PBMs to obtain a 
license to operate in their state, and some have gone further 
prohibiting or regulating spread pricing and requiring PBMs to 
report pricing and rebate information to promote transparency. 
And they have brought enforcement actions. For example, April 
13, 2022, the Louisiana Attorney General sued Optum Rx--Optum 
Rx, I believe that is the pronunciation, for inflating the 
price of prescription drug charges in their State's Medicaid 
program, included by spread pricing and claw back money from 
pharmacies without passing it back--without passing it back to 
the state.
    But we in Congress must do more to ensure that all 
Americans and all American consumers are protected. That is why 
I am so appreciative of Chairman Blumenthal holding this 
hearing this morning and using your experience as a former AG 
to help us work through these issues at today's hearing.
    We know that we have a system where patients get--if our 
system is where patients get inferior treatment and still pay 
more, this is setting us back. So it is time for us to take 
action on this. Mr. Chairman, I will put the rest of my 
statement in the record, but I would like to turn to our 
witness, Mr. Balto.
    I understand that you are an attorney at the FTC for 
several years and were involved in many FTC's earliest 
enforcement actions involving pharmaceutical and health care 
companies. Could you explain why the FTC action against PBMs 
under a current authority of unfair and deceptive practices, 
and what more authority could help us in moving the market to a 
more transparent market?
    Mr. Balto. Thank you, Senator. I think the FTC has made 
some major errors in terms of enforcement in this area, and 
part of it is relying a lot on economic theory and not looking 
at the reality of what is going on, and also not properly 
defining who the consumer is. You and I and everybody else in 
the room know that the ultimate consumer is, you know, real 
people. The FTC focuses almost exclusively on the question of 
the first buyer, the plan sponsor, and whether the plan sponsor 
is harmed, and in that way misses a lot of the anti-competitive 
effects.
    Just to give you one example that sort of hits the point 
you are making about the service in the community pharmacist. 
Assume that you are a person who needs a complex specialty drug 
in which you really need the services of your community 
pharmacist. The PBM engages in various tactics to drive that 
community specialty pharmacist out of business or make it very 
hard for them to compete.
    You are forced, perhaps into an exclusive PBM owned 
specialty pharmacy. And by the way, the FTC has permitted the 
PBMs to acquire all these specialty pharmacies. You move then 
from having--being able to see your community pharmacist, 
having them monitor your health care, having them give you 
advice, to all of a sudden having a pharmacist at a 1-800 
number. And there is terrific testimony about HIV patients that 
I testify--that I cite in my testimony, that suggest how this 
is a problem.
    The FTC Act is broad. And one thing that could be very 
helpful besides the efforts by Senator Blackburn and other 
members to compel the FTC to do well, to have the GAO do a 
comprehensive study of this market, and I know Senator Grassley 
and others have suggested the FTC to do a study, would be for 
Congress to specify what are unfair methods of competition that 
the FTC should scrutinize.
    And the FTC Act is broad. It prohibits unfair methods of 
competition and unfair trade practices. And Congress can 
specify what some of those practices are. And when you look at 
things like the gag clauses, you know, preventing pharmacies 
from telling consumers where the lowest priced drug is, I mean, 
that is blatantly an unfair method of competition. It blatantly 
is something that harms consumers.
    Consumers are in no fashion better off when a pharmacist 
can't tell them where the--you know, what is the lowest price 
without means of getting the drug at the lowest price. And 
there is no reason for that other than for PBMs to protect 
their PBM rebates. And so, you know, that is the kind of 
practice that could be specified.
    Also, some of the practices that prevent generics or 
biosimilars from getting on the formularies because, again, 
PBMs are preferring drugs with a high rebate to these lower 
cost biosimilars or generics, which offer a lot of promise for 
ultimately lowering drug costs.
    In my testimony, I specify about five or six practices that 
could be outlined in legislation to attack these unfair methods 
of competition that ultimately harm consumers.
    The Chair. Could you remind me, Mr. Balto, because I feel 
like we had this hearing a decade ago or maybe longer, and I 
thought we took action as a Congress to outlaw PBMs being owned 
by drug companies, and so that some of these same practices 
wouldn't be continued. What did we do before and why are we 
here again?
    Mr. Balto. In the Clinton Administration, we recognized 
that pharmaceutical manufacturers owning PBMs was like the fox 
guarding the henhouse. Unfortunately, in the past several 
Administrations, we forgot that basic principle of economic 
policy, you don't want foxes looking after chickens.
    And so they have permitted the PBMs to acquire all of, you 
know, all these major pharmacies. They all have their own mail 
order pharmacies, which they prefer. They go and aggressively 
audit independent pharmacies. They reduce their reimbursement 
to ultimately force them to dispense below cost. They capture 
these retroactive DIR fees. Do you think they do those things 
with their own pharmacies? I don't think so.
    And so that kind of fox owning the henhouse operation is 
just a poor recipe for competition. And by the way, Senators, 
you know, there is a lot of legislation going on right now to 
address this problem in high tech industries where we are very 
concerned about the major tech firms having their own--
preferring their own businesses.
    I don't know why we should let this happen with PBMs. As 
important, PBMs being able to secure part of the rebates 
distorts their incentives and turns competition on its head so 
that PBMs prefer higher, not lower drug prices.
    And by the way, you have identified, many of you have 
identified the key issue here, which is ultimately non-
uninsured consumers lose. And that is, even Professor 
Garthwaite identifies that problem. And that is why consumer 
groups, if you will note in footnote five of my testimony, 
consumer groups supported the past Administration's proposal to 
eliminate the anti-kickback safe harbor for PBM rebates.
    Aggressive--and PBM rebates are just screwing up health 
care decisions right now and leading to a rapid escalation in 
drug prices, as demonstrated by the Grassley, Wyden report.
    The Chair. Thank you. I wanted to ask you about the FTC 
brought a case against ABV, I think it is. If you recall, this 
was a court awarded the FTC $448 million in consumer redress, 
which had been--had to be invalidated as a result of the AMG 
decision. So how does the absence of 13(b) redress affect the 
FTC's ability in this space?
    Mr. Balto. It should be a significant priority of everybody 
in Congress to pass legislation to return the FTC's power to 
secure our financial redress. I know as being the former policy 
director, how crucial that is to being able to effectively 
enforce the antitrust laws. If bad actors, including major 
corporations, know that they can engage in conduct and 
basically get a slap on the hand, just stop now.
    That is not going to deter them much from engaging in bad 
conduct. It is only when you can stick a significant monetary 
penalty on them that they know that they are going to have to 
pay the piper. So I think that you absolutely have to--that 
this is a major priority to strengthen the FTC's enforcement 
powers here.
    And certainly if the FTC had that restored, it could look 
at these egregious practices that PBMs engage in and possibly 
bring actions under Section 13(b) to provide redress to payers 
and consumers for these egregious actions.
    The Chair. So what exactly does the Committee need to do to 
give the FTC the authority to properly police this market?
    Mr. Balto. I think the FTC need--the Committee needs to 
strengthen the FTC's powers under--well, let me start off. 
First, I think the importance of a study is crucial, and I 
agree with the professor that study and more information is 
really vital. However, the Committee needs to instruct the FTC. 
It needs to identify the right consumer.
    The FTC's past studies like their mail order study two 
decades ago just looked at the impact of the plan sponsor. You 
know, and a plan sponsor may or may not care, you know, if the 
consumers are harmed in the fashion that Senator Blumenthal and 
Senator--and Ranking Member Blackburn describe. They are not 
necessarily going to care. They need to do a study and actually 
focus on the real consumer.
    Then, I think it is vital for the Committee to consider 
identifying specific practices by PBMs that are unfair methods 
of competition that harm consumers. For example, the DIR--you 
know, and to me the patient--the gag clauses is a very 
straightforward example.
    But also the DIR fees, especially DIR fees imposed by a 
rival, seem relatively--seem like the kinds of things that you 
could consider to be an unfair method of competition, and that 
the Committee--the Commission needs its powers strengthened by 
identifying some of those practices that they should look at as 
unfair methods of competition or unfair trade practices.
    The Chair. And you--but you think that those--in your 
testimony you outline, I think it is on page 13 here, 
legislative action to prevent PBM abuses. So you think there 
are known practices now? Is that correct?
    Mr. Balto. Absolutely, absolutely. And the fact, I mean, 
the FTC has brought no actions--I mean, they have received 
hundreds upon hundreds of complaints by pharmacies about some 
of these actions, about PBMs going and taking information from 
its PBM affiliate and sending it to its pharmacy affiliate so 
that pharmacy could target and try to steal those customers, or 
PBMs imposing, you know, egregious audit practices to try to 
drive those independent pharmacies out of market.
    Again, you know, you are going to--you know, in other 
industries when you see those kind of practices occur, five 
alarms go off, and they should certainly go off in these 
industries because consumers really care tremendously about 
their ability to access community pharmacies.
    The Chair. Thank you. Thank you, Mr. Chairman.
    Senator Blumenthal. Thanks very much, Chairman Cantwell, 
for the excellent remarks and questions. And I want to follow 
up on some of them. I think there is no question that there 
ought to be a study by the FTC under 6(b) into the PBM market.
    As a number of our witnesses have said, there is a lack of 
transparency, there is a lack of current data. The 2005 study 
is woefully out of date. That is the reason that I and others, 
including Senator Grassley, six Republicans, two Democrats, 
have sponsored the Prescription Pricing for the People Act of 
2021, S. 1388.
    There are a number of other legislative proposals in this 
area that would produce more data and more authority for the 
FTC to take action. You know, one of the areas that has been 
mentioned is rebates. The fact of the matter is patients should 
know that they have to pay co-pays and deductibles based on the 
list price, not the actual price after rebates. That is a 
glaring injustice here.
    This arrangement is actually costing them money. So two 
questions for you, Mr. Scott. How does a consumer know what 
this list price is, what the basis is for that payment of 
deductibles, what the rebates are to the PBMs, which is 
benefiting from the higher list price, how do they know? And 
did they see any direct benefit from the rebates?
    Mr. Scott. Thank you for the question, Mr. Chairman. The 
short answer is, yes. The individual patient, the individual 
consumer does see benefit from the rebates. Again, the rebate 
is simply a discount that is negotiated by the PBM from the 
manufacturer to try and get to the lowest net cost for the 
drug. What typically happens in the Medicare program----
    Senator Blumenthal. The co-pays and deductibles are based 
on the list price, correct?
    Mr. Scott. Yes, sir. And I will get there very quickly. So 
the Medicare example, that net--those rebates are negotiated, 
fully pass through to the plan sponsor, and then the plan 
sponsor makes the determination, even in the commercial market, 
how to use those savings. Are they going to go to defray 
premiums--?
    Senator Blumenthal. So you are saying that the plan sponsor 
has a kind of throttle or hand on whether or not consumers 
benefit, and if out of the goodness of their heart they decide 
consumers should share in the benefit, which is key to their 
profits, then they will do it, but there is no automatic 
benefit.
    Mr. Scott. So the consumer is benefiting. The cost of the 
drug itself is too expensive. That is sort of a fundamental 
starting point that I think we can all agree on. What the plan 
is trying to determine is where they are going to squeeze the 
balloon. Is it going to be to try and bring the consumers 
premium cost down? Is it going to try and bring their out-of-
pocket costs down?
    We have to address the underlying cost of the drug that is 
set by the manufacturer, because otherwise it is a series of 
tradeoffs, and one way or the other, the consumer pays 
whether--depending on the plan sponsor's design.
    Senator Blumenthal. I think you have just summarized the 
problem here, one way or the other, the consumer pays.
    Mr. Scott. Until we address the cost of the drug----
    Senator Blumenthal. Let's talk about----
    Mr. Scott.--underlying drug, that is correct. Yes, sir.
    Senator Blumenthal. And the incentives for higher costs of 
the underlying drug, those incentives are increased by PBMs 
that profit from discounts on that higher list price. Is that 
true, Professor Feldman? I think that is the point you were 
making.
    Ms. Feldman. Yes. The interests of PBMs are aligned with 
the drug companies in those moments for higher prices because 
their pay is based on the difference and because they get, in 
some cases, to keep some of those rebates.
    Senator Blumenthal. You agree, Professor Garthwaite?
    Mr. Garthwaite. There are certainly contracts where that is 
true, but over half of employers now are in contracts where 100 
percent rebates are going back to the plan sponsor. And so, 
again, at times--we can point to negative parts of the system 
we don't like and say PBMs are at fault. But I also think we 
need to look at insurance companies and those plan sponsors and 
we start talking about the consumer that is harmed.
    There is the person buying the drug and then there is 
actually the vast majority of the insurance pool that is paying 
the premium but not paying for expensive medications. And they 
are benefiting because they are taking money from those sick 
patients and getting lower premiums.
    Senator Blumenthal. So it is a lose, lose for consumers. In 
fact----
    Mr. Garthwaite. Well, it is a win for the consumer with a 
lower premium.
    Senator Blumenthal. Well, let me--let me recite to you from 
Professor Feldman's journal article. ``In short, it is the 
perfect lose, lose for patients. Manufacturers raise the price, 
the consumer pays the higher price, the extra goes to the PBM, 
and in exchange, the PBM creates competition free zones for the 
drug company's drug.
    In the short term, the patient pays more in the form of 
higher prices. In the long term, the patient pays more in the 
form of fewer competitors to offer lower priced drugs.'' 
Professor Feldman, that is roughly the current situation, 
correct?
    Ms. Feldman. I believe that is a clear summary of what is 
happening for the consumer and the patient on all ends. 
Everyone is benefiting other than the consumer, the drug 
companies, the PBMs, and the plans themselves that may decide 
to pass through some of those rebates to some of the consumers 
that sometimes or may not. That could go into many other 
places, including their own pay. So everybody makes off well, 
except for the patient, the consumer.
    Senator Blumenthal. Mr. Scott, in your prepared remarks, 
you say that employers and unions, ``have a tremendous 
diversity of opportunities'' to select a PBM power. As evidence 
you offer that there are 70 full service PBMs in the market, 
but the Council of Economic Advisers pretty recently under the 
Trump Administration found, ``three PBMs account for 85 percent 
of the market, which allows them to exercise undue market power 
against manufacturers and against health plans and 
beneficiaries they are supposed to be representing.''
    All the witnesses so far have raised the issue of 
consolidation, lack of competition. Among PBMs, three companies 
clearly controlled the market for PBMs. How can you claim there 
is tremendous diversity of opportunity?
    Mr. Scott. Thank you for the question, Mr. Chairman. I 
think the first point to understand is that no entity, no plan 
sponsor, no employer, pension fund union is required to hire a 
PBM. This is all a voluntary decision to hire companies that 
they believe are going to add value in helping them to manage 
the cost of their drug benefit for the patients that they 
represent.
    Senator Blumenthal. But let me just interrupt to say----
    Mr. Scott. Yes, sir.
    Senator Blumenthal. There is no principle of competition 
policy that says antitrust law and requirements for competitive 
conduct apply only when a consumer or some other entity is 
required or mandated to buy a product, right.
    Mr. Scott. So if I could address your question about the 
consolidation in the market, you are correct. My testimony 
cites 70 PBMs actively in the marketplace today. That is 
actually about a 10 percent increase in new entrants into the 
market over just the last 3 years. So we are seeing new 
iterations of PBMs, new players see an opportunity to come into 
the market because they believe it is competitive.
    You have probably read in the headlines, Amazon is looking 
to get into the space. Mark Cuban is looking to get into space. 
These are sophisticated players who see opportunity in a 
competitive marketplace to pick up business from employers, 
pension funds, and others. Some, you know, employers who choose 
to hire a PBM are doing it because they just simply want to get 
the deepest discounts possible to really focus in on that 
ability to negotiate.
    That requires scale in the marketplace in order to be the 
most effective at those negotiations. Others may be looking for 
different services from their PBMs that are better offered by a 
smaller, standalone company.
    Senator Blumenthal. Well, let me just, again, Professor 
Garthwaite, this is your graph, another graph.
    Mr. Garthwaite. It is not my graph, but yes.
    Senator Blumenthal. Well, I apologize. It is from Drug 
Channels Institute based on 2021 data. This shows CVS Health, 
Caremark 33 percent, Cigna, Evernorth Express Scripts 26 
percent, United Health, Optum Rx 21 percent, and then way down 
there, there is Humana Pharmacy Solutions 8 percent, and all 
the others, there are only two others at 4 percent. All other 
PBMs, cash pay, all of them, all those 70, or let's say 64 at 4 
percent. That is not what I would call a competitive market 
with a diversity of opportunities.
    Mr. Scott. What we experienced in the marketplace, Mr. 
Chairman, is that employers have choice. They exercise that 
choice. So within those competitors that you see out there, 
whether it is those with the larger market share or the smaller 
ones, there is--active changes are made to over time as they 
look for different types of service. And they have the ability 
to do that because there is enough competition in that market.
    Senator Blumenthal. Mr. Balto, I suspect you may have 
something to remark.
    Mr. Balto. Yes, I just wanted to point out, the question 
isn't the number of competitors, the question is, can they 
constrain anti-competitive conduct? And obviously they haven't 
been--if you see--especially if you see their profits 
increasing so dramatically. By the way, I represent union plan 
sponsors and those union plan sponsors do not believe they have 
many alternatives. They think it is basically these three.
    I wanted to also go back to a point, just so we really get 
this down about, you know, this question about rebates 
benefiting all of the subscribers, and maybe there is a small 
subset that are hurt. As the chairman noted, there are lots of 
uninsured people. There are lots of people on high deductible 
plans. Those people are all harmed.
    And as a matter of just general competition policy, we 
don't say that firms can engage in anti-competitive conduct 
because it benefits one segment of consumers, but other 
segments of consumers are harmed. If there is anti-competitive 
conduct harming any consumers, that is a violation of the 
antitrust laws.
    Senator Blumenthal. And let me just point out a stunning 
fact about this health care market and the relationships 
involved here. Each of these three dominant PBMs are owned by 
or own their health insurers and have financial relationships 
with pharmacies and medical providers. This is a vertical 
integration in a consolidated industry. It is concentrated 
power through the industry, and it creates a high risk of 
conflict of interest, and in effect, a take it or leave it 
approach toward competitive pharmacies.
    And as the Chairman rightly remarked, the pharmacies often 
try to offer choices and advice and pro-consumer conduct. Mr. 
Balto, in his testimony said, ``because of their market power 
and vertical integration, these middlemen increasingly stifle 
competition from this country's most accessible and trusted 
health care professionals, community pharmacies.''
    The AIDS Health Care Foundation wrote in February that 
PBMs, ``steadily squeeze specialty pharmacies, preventing 
patients insured by their parent companies from using 
specialized pharmacies like AHF's.'' I am going to stop there. 
I have a couple more questions, but I want to yield to Senator 
Cantwell if she has any additional questions.
    The Chair. Well, thank you, Mr. Chairman. I think I just 
wanted to drill down on this a little bit more, given some of 
the--your questions and the response, and certainly our 
witnesses which we appreciate them being here. But, Ms. 
Feldman, I saw in her testimony where she said, you know, 
trying to get to the bottom of this is like shadow boxing. And 
that is the point.
    The point is PBMs negotiate on behalf of some consumers, 
but they pocket a lot of the discount. And that is what we are 
trying to get at. Like what is--we believe in buying in bulk 
that, yes, you get a discount. But who is getting the discount? 
And the question is they are pocketing that. And when we want 
to understand what this is about, this issue of spread pricing, 
there is no transparency.
    So the consumer doesn't have the information to make the 
choice or the plan that someone is representing who wants to 
say, why should I let somebody go negotiate a deal for me and 
say that they are going to give me a 30 percent discount and 
then basically only give me a third of that discount and then 
pocket the rest, and then when I go to the pharmacy, I end up 
having to pay more because the out-of-pocket expense is 
different.
    So this lack of transparency is not giving us choice. So do 
I have that right, Mr. Balto and Ms. Feldman on the spread 
pricing, is this--do I have this correct?
    Ms. Feldman. The spread pricing and the all the price in 
the price terms are held as deep secrets. Both the 
pharmaceutical companies and the PBMs assert that they are 
trade secrets, and they are deeply hidden, even from the plans 
themselves. Auditors aren't given full access to the terms.
    Regulators aren't given full access to the terms. Certainly 
consumers and those who might disrupt the industry don't have 
access to any of these things. Markets in general thrive on 
information, and you have got a throttle on information here.
    Mr. Balto. I totally agree. Information is essential for 
consumer sovereignty. And look, the PBMs won't even allow your 
pharmacists to tell you, don't use that card, just pay cash, 
you will pay less. Obviously, they are doing a lot to throttle 
information so that they can protect their stream of rebates.
    The Chair. I think we had a similar situation with what was 
it Ticketmaster where people were going and buying all these 
tickets up in bulk and then charging extra pricing and then 
saying to people, here is what--you know, I am doing you a 
favor because I got these tickets. But in reality, they were 
just--had supply and gamed the market and then charged up, 
increasing pricing.
    And so I think that the issue here is where is the 
transparency so that consumers can understand, or a plan who is 
making a purchase, can understand because there may be other 
avenues. Not saying that every PBM isn't doing something, but 
at what cost, at what price should be PBMs just because they 
got to go to negotiate a deal, how much should they be 
pocketing instead of passing that on to the consumer?
    So, Mr. Chairman, I think that is my question and it has 
always been my concern, because I do think buying in bulk 
should get you a discount. I just believe that most of the 
money should go to the consumer. And the fact that we can't get 
answers, or the consumer can't get an answer about this is very 
frustrating because then they can't make decisions about these 
plans, or they certainly can't make judgments as it relates to 
what kind of savings that their plan is entitled to.
    I do really, though, have a concern about this--where this 
keeps going. And so not surprising that more people want to 
jump in. Well, why not, if you can make this much money in a 
dark, transparent situation, why not jump in? So that doesn't 
mean anything. And the key thing, though, is by undermining the 
system and undermining that line of delivery that I think 
pharmacists represent as part of our health care delivery 
system, then I think you really do take away part of the 
system.
    And there are people who are--who definitely would love 
nothing other than to just have major control over a mail in 
pharmacy market, and thereby have less, even less kind of 
delivery system for us. So, Mr. Balto, at your time at the FTC, 
did they deal with spread pricing and other areas?
    Mr. Balto. No. These problems have become phenomenally 
worse. And again, because you create an environment that is 
sort of a petri dish for all of this anticompetitive conduct, 
lack of competition, lack of transparency, and conflicts of 
interests, they just have gotten phenomenally worse because 
you--and then you don't regulate. And, you know, this is just--
it is a real fertile environment for this kind of anti-
competitive conduct. And----
    The Chair. And what is the conflict of interest?
    Mr. Balto. The conflict of interest is that they make more 
money by securing higher rebates when they are supposed--and 
which results in higher list prices when they are supposed to 
be seeking lower list prices. That is the conflict of interest. 
And if you are a payor--again, I do represent some payors. If 
you are a payor and you want that rebate information, no way. 
Absolutely not.
    Then you want to bring your auditor in and have your 
auditor check. They limit who can audit. They limit the kind of 
information you can audit. This isn't like other markets, you 
know--I mean, they just come out, and, you know, and they just 
come up with new and novel ways of preventing the market from 
working effectively.
    And by the way, when you think about State regulation and 
PBMs trying to require State regulation akin to the 
transparency provisions that you included in the Medicare 
Modernization Act, the PBMs fight those tooth and nail. They 
know darkness is the best environment for them to engage in 
anti-competitive conduct.
    The Chair. Well, why can't we do something right now about 
that, about making sure that there is a transparent market as 
it relates to these rebates?
    Mr. Balto. We can. You know, there are transparency 
provisions that, you know, that Congress can consider enacting 
so that at the very least the plan sponsors have the 
information so they can properly audit and make sure that they 
are getting the benefit of the rebates that are being secured.
    The Chair. Thank you. Thank you, Mr. Chairman.
    Senator Blumenthal. Thanks, Senator Cantwell. I have just a 
few more questions and we have a vote that we will be 
beginning. I am not sure of the exact time. I want to talk 
about 340(b) health programs. This is a Federal law, there is a 
Federal law that provides for discounted drugs to health care 
providers who serve a high number of low income individuals, 
community health centers.
    Some of them are federally qualified community health 
centers. They are safety net providers who serve some of the 
lowest income patients. They are one type of provider that 
benefits from 340(b) drug discounts. I have talked to a number 
of them in Connecticut and have heard that PBMs are 
inappropriately siphoning off these discounts and pocketing 
them.
    Rather than allowing the discounted savings to go to the 
community health center and the patients they serve, the PBMs 
force them into contracts with lower reimbursement rates, 
denying the community health center and its patients the 
benefit of the discount and instead keeping it. Mr. Scott, have 
you heard about such practices?
    Mr. Scott. Senator, at the association, we don't have a 
position around these 340(b) questions. Our companies have 
different business models and deal with 340(b) pharmacies in 
different ways. I will say, what is important for the 
processing, from the processing standpoint is having those 
claims modifiers as they do in the Medicaid program, to be able 
to understand which drugs are 340(b) drugs and which are not so 
that we can make that distinction.
    Senator Blumenthal. Well, will you commit to work with the 
Committee in making sure that the community health centers, and 
the patients get the benefit of the discounts?
    Mr. Scott. I will be happy to continue to work with you on 
that and other issues. And Mr. Chairman, if I could just take 
one more minute. I am sorry that Senator Cantwell had to leave. 
A number of her thematic questions were around this question of 
transparency. And I just want to make sure that there is a sort 
of complete understanding of how that transparency exists in 
the marketplace today.
    And taking it in a bit of a reverse order, important to 
understand that our companies, in Part D plans already report a 
lot of this information to CMS when it comes to the Medicare 
program, and we have supported legislation to make that 
information available to you in Congress through MedPAC, your 
Congressional advisors.
    Congress actually enacted new transparency requirements 
recently that will kick in at the end of this year. So a lot a 
whole lot of additional commercial market reporting to HHS, 
Department of Labor, the Treasury Department on rebates, fees, 
impact on out-of-pocket costs, premiums, and the like.
    Most importantly, when it comes to the clients, the 
customers who hire us, and the consumers that they serve, for 
the client base, it is essential that they are informed, able 
to shape their contracts, get the information that they want. 
We want informed choice and so that they can best manage cost 
and manage risk.
    And for the consumer and the physician who is prescribing 
their drug, it is essential that they understand what is 
covered, how expensive it is going to be, what the out-of-
pocket is going to be. So that information is available right 
on hand through tools that our companies provide, electronic 
tools, real time benefit tools, so that that information is on 
hand and the prescribing decision can factor in those costs 
questions specific to the consumer.
    So we are happy to continue to work with you to make sure 
you have the information you need.
    Senator Blumenthal. Thank you. I assume, then, that you 
would support the Prescription Pricing for the People Act of 
2021?
    Mr. Scott. And can you refresh that? That is calling for 
further FTC examinations----
    Senator Blumenthal. Would require an FTC study.
    Mr. Scott. You know, we have actually engaged, and I think 
that the scope of the study that is contemplated there makes 
sense because it looks not only at PBMs, but other parts of the 
supply chain as well, which to me is really important for 
getting under the hood and understanding these questions.
    Senator Blumenthal. I take that as a yes?
    Mr. Scott. We would not be opposed to that study, Senator.
    Senator Blumenthal. OK. That is not exactly the answer that 
I was looking for. I would like your endorsement of a study. 
You said you are for more transparency.
    Mr. Scott. If that legislation is enacted as move forward, 
we would not oppose it. If that study is commenced, we would 
engage in making sure we provided information. We--as I 
articulated before, there is a lot of reporting that already 
happens in the marketplace. If more is required for better 
understanding here at the Committee or----
    Senator Blumenthal. Here we are. What is really required is 
more facts, more transparency, more sunlight on a process that 
is invisible to a lot of consumers. And to go back to where we 
began, most consumers have no idea what a PBM is. They don't 
know what a pharmacy benefit manager is, which is the reason 
why currently we have absence of competition, potential 
conflicts of interest, and excessive profits, and prices higher 
than they should be in prescription drug.
    PBMs are not the only cause of drug price inflation and 
excessive pricing. But they are integral to this system. In 
fact, they are part of an increasingly integrated, 
uncompetitive system involving PBMs owned or owning insurers 
and constraining pharmacies in the amount of information they 
give to consumers.
    That is just one slice of a broken system. And the effort 
to repair the system often runs into armies of lawyers and 
lobbyists hired by those actors that currently profit from it. 
So I am seeking to enlist the PBMs.
    If they are blameless they should cooperate fully in 
uncovering every aspect of this system, full transparency, and 
endorsing full throatily a study into the entire system, 
including PBMs. I hope for the cooperation of PBMs in the work 
that we have ongoing. I will be submitting additional questions 
for the record. We are at the end of the time we have for this 
hearing.
    And the hearing record will remain open for two weeks. Any 
Senators that would like to submit questions for the record 
should do so by May 19. We ask that your responses be returned 
to the Committee as quickly as possible, and in no case later 
than two weeks after you receive them. I apologize that we are 
going to have to end this hearing.
    There is a lot more to discuss here, and I hope that we 
will continue this conversation. I appreciate all the 
witnesses, Mr. Balto, Professor Feldman, Professor Garthwaite, 
and Mr. Scott, thank you so much. This has been a very valuable 
session and I hope to continue it. Thank you. This hearing is 
concluded.
    [Whereupon, at 11:50 a.m., the hearing was adjourned.]

                            A P P E N D I X

        Prepared Statement of FMI--the Food Industry Association
    On behalf of the food industry and the many thousands of 
supermarket pharmacies operated by our member companies, we at FMI--the 
Food Industry Association thank Chairman Blumenthal, Ranking Member 
Blackburn and the Senate Commerce Subcommittee on Consumer Protection, 
Product Safety, and Data Security for holding this hearing to further 
discussion around this important topic. FMI strongly agrees with the 
Subcommittee that pharmacy benefit managers (PBMs)--from how they 
operate to the lack of transparency surrounding their operations--have 
contributed to higher drug prices for consumers. For years, PBMs have 
leveraged their concentrated market power and lack of oversight to the 
detriment of supermarket pharmacies and other providers, health plans 
and consumers. With that in mind, FMI strongly supports the Federal 
Trade Commission (FTC) moving forward with a 6(b) study of the PBM 
industry, including the relationship between large PBMs and pharmacies 
and the impact of PBM anticompetitive practices on both drug prices and 
pharmacies, and we ask the Subcommittee to help ensure this is a major 
priority for the FTC. We wish to highlight for the Subcommittee the 
following information, which reflects not only FMI's insight, but also 
the expertise of FMI's Pharmacy Operations Task Force.
    As the food industry association, FMI works with and on behalf of 
the entire industry--from retailers who sell to consumers, including 
supermarket pharmacies, to producers who supply the food and other 
products sold in grocery venues--to advance safer and more efficient 
consumer supply chains for both food and pharmaceuticals. In total, FMI 
member companies, which range from independent operators to the largest 
national and international players, operate roughly 33,000 grocery 
stores and 12,000 pharmacies, ultimately touching the lives of more 
than 100 million U.S. households on a weekly basis and representing an 
$800 billion industry with nearly 6 million employees. Throughout the 
ongoing COVID-19 health emergency, our members have been and continue 
to be a critical component of ensuring the availability of food, 
pharmacy and health care services in communities across this Nation. 
Moreover, supermarket pharmacies have played an outsized role in the 
COVID-19 vaccination effort while also serving as a bridge between our 
communities and other providers, offering patients immediate care that 
is close and convenient to home. www.fmi.org
Background
    PBMs were originally formed in the late 1960s, initially to assist 
with processing claims. Insurance plans were offering prescription drug 
benefits and PBMs filled out the paperwork, ensuring that 
reimbursements were passed along to pharmacies. Over time, PBMs 
portrayed themselves as cost-reducers who could form large patient 
networks, negotiate discounts from drug companies and pharmacies, and 
pass savings through to health plans and consumers. They claimed to be 
simple intermediaries between the health care entities. However, 
today's reality is very different as the PBM industry has grown and 
consolidated rapidly in recent decades. For perspective, in 1989, 
roughly 60 million prescription drug customers had their coverage 
administered by PBMs. Currently, however, PBMs control nearly 80 
percent of the market share for prescription drug access and around 180 
million prescription drug customers. Additionally, these PBMs are also 
vertically integrated with health insurance companies, rebate 
aggregators and retail, specialty and mail-order pharmacies, giving 
them unprecedented power. 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

     Frier Levitt, LLC. All rights reserved.
    This situation, coupled with a lack of transparency, enables PBMs 
to enjoy multiple hidden revenue streams from other stakeholders 
throughout the health care system. The hidden revenue streams include, 
but are not limited to, the difference between the amount a pharmacy is 
reimbursed and the amount the PBM bills to the health plan (spread 
pricing), post-adjudication fees that are charged to pharmacies and 
often referred to as Direct or Indirect Remuneration Fees (DIR fees), 
and manufacturer rebates that pharmaceutical companies pay to have 
their drugs placed on preferred formularies. The post-adjudication DIR 
fees are described by the PBMs as ``performance-based pharmacy 
incentive'' fees designed to incentivize pharmacies to perform better, 
yet there is typically no transparency to the process and pharmacies 
are not told what metrics are being used.
    Importantly, this market concentration empowers the PBMs to offer 
supermarket pharmacies of all sizes take-it-or-leave-it contracts. The 
pharmacy must either accept the PBM's mandated contract terms 
(including, among other things, allowing the PBM to set prices for 
certain drugs unilaterally and then later impose retroactive DIR fees 
based on an opaque methodology), or give up the ability to serve the 
many customers whose health plans contract with the PBM; importantly, 
this would include existing customers who have longstanding 
relationships with their pharmacists. Furthermore, given PBMs also 
operate their own pharmacies, FMI pharmacy members are effectively 
forced to accept contractual terms from their direct competitors--a 
clear conflict of interest.
PBMs Leverage Concentrated Market Power to Force Pharmacies to 
        Accept Below-Cost Pricing and Other Financially Oppressive 
        Practices
    PBMs' profit model is dependent upon their ability to dictate 
prices and impose upon pharmacies arbitrary and often below-cost 
reimbursement terms for generic drugs through maximum allowable cost 
(``MAC'') price lists. Unlike with on-patent drugs, where PBM 
reimbursements typically are based on the actual prices paid by drug 
wholesalers to manufacturers, PBM reimbursements to pharmacies for 
generic drugs are based on PBMs' ``proprietary'' MAC lists, which bear 
no necessary relation to pharmacies' acquisition costs. Additionally, 
one of the many ways PBMs profit is by maximizing the difference 
between what they pay pharmacies for a drug and the inflated amount 
they charge a health care plan for that same transaction. To take just 
one reported example, an Iowa county was billed by its PBM $198.22 for 
a drug that the PBM reimbursed the dispensing pharmacy just $5.73--a 
markup of more than 3,400 percent.\1\
---------------------------------------------------------------------------
    \1\ Robert Langreth et al., The Secret Drug Pricing System 
Middlemen Use to Rake in Millions, Bloomberg, Sept. 11, 2018.
---------------------------------------------------------------------------
    PBMs frequently assert that below-cost reimbursement is a problem 
only for poorly run pharmacies, and that low PBM reimbursement rates 
create an incentive for such poorly run pharmacies to improve their 
purchasing practices. However, the PBM industry has resisted attempts 
to force price transparency that would reveal the basis for these 
claims. Furthermore, pharmacies of all sizes--not just ``poorly run'' 
ones--are suffering as a result of PBMs' below-cost MAC pricing. Even 
FMI's largest members--Fortune 500 companies with efficiencies, 
expertise in supply chain logistics, and economies of scale--struggle 
to operate financially viable pharmacies.
    Below-cost pricing is just one way that PBMs systematically 
leverage their market power. They also impose on pharmacies unfair and 
exorbitant retroactive DIR fees. PBMs charge these fees to pharmacies 
without warning or market justification weeks or months after the 
pharmacy dispenses a drug to a beneficiary. The Centers for Medicare & 
Medicaid Services (``CMS'') tracks DIR fees and recently reported an 
increase in such post-sale fees charged to pharmacies by PBMs of more 
than 107,000 percent from 2010 to 2020.\2\ There is no competitive 
market justification for such an exponential growth in these fees. As 
with MAC pricing, PBMs tout these post-sale fees as disincentives to 
``poor performance'' by pharmacies. In reality, however, they are just 
another example of PBMs leveraging their market power to maximize their 
profits. Charges for ``poor performance'' far exceed incentive payments 
to pharmacies intended to reward ``high performance.'' As a result, 
beneficiaries pay higher costs and drug prices become even less 
transparent. Additionally, FMI members cite these retroactive fees as a 
key reason for their pharmacies' financial struggles, forcing some to 
close their pharmacies altogether.
---------------------------------------------------------------------------
    \2\ Medicare Program; Contract Year 2023 Policy and Technical 
Changes to the Medicare Advantage and Medicare Prescription Drug 
Benefit Programs
---------------------------------------------------------------------------
    Moreover, with DIR fee reform proposals being considered by 
policymakers, PBMs have started including contingencies in their 
pharmacy contracts that would allow them to impose upon pharmacies even 
more aggressive rates and less favorable reimbursement terms if 
retroactive DIR fees become prohibited. Case in point, the following 
clause was recently included by a PBM in a take-it-or-leave-it contract 
that was offered to an FMI member. Although it cleverly does not 
reference ``DIR fees,'' that is clearly the focus:

        Change in Law. In the event [guidance is released] that 
        prohibits or materially alters the economics of a Participating 
        Sponsor's Program (the ``Change in Law''), the parties agree to 
        promptly renegotiate the effected provisions of this Schedule, 
        to the extent feasible, in order to preserve the relative 
        economics of the Members, the Participating Sponsor, and 
        Provider to that which existed immediately prior to such Change 
        in Law.

    Although PBMs claim the purpose of DIR fees is to encourage better 
health outcomes by incentivizing pharmacies to perform better, this 
clause clearly demonstrates that DIR fees are being used as a profit 
stream.
    PBM contracts often require the pharmacy to relinquish ownership to 
all data and information sent from the pharmacy to the PBM. The data 
and information transmitted represents essentially the entire record of 
the dispensing event and claim(s) for coverage and reimbursement. This 
not only gives PBMs access to a pharmacy's competitively sensitive 
information, it also enables the PBMs to utilize the information to 
manipulate reimbursements and fees while steering patients to PBM-
affiliated pharmacies.
    In addition, PBMs typically include broad confidentiality language 
in their contracts to prohibit pharmacists from discussing their own 
drug costs, services, business practices, or the undefined term ``other 
information'' contained in the contract or provider manuals with third 
parties.
PBM Practices Are Driving Food Retailers Out of the Pharmacy Business
    Unlike independent pharmacies, FMI members that operate supermarket 
pharmacies are not dependent solely on their pharmacy operations for 
survival. Therefore, PBM abuses may not threaten to force integrated 
food retailers to close their doors. Instead, PBM practices make it 
likely that food retailers will be forced to continue leaving the 
pharmacy business--either by outsourcing their pharmacy operations to 
the biggest players in the market, or worse, by abandoning pharmacy 
operations altogether.
    Neither of these scenarios is merely hypothetical as several FMI 
members have already sold their pharmacy operations to PBM-operated 
chains. The number of pharmacies in supermarkets decreased by more than 
seven percent between 2007 and 2017\3\, while food and mass-market 
retailers accounted for more than 45 percent of the pharmacy closures 
during the year from July 2018 to July 2019.\4\ Supermarket pharmacy 
closures, and abandoned expansions, thus contribute to the overall 
trend of decreased access to pharmacies and ``pharmacy deserts.'' The 
effect of such closures is particularly acute in some rural 
communities, where closures are more prevalent and more detrimental to 
a community's access to health care. The closure of pharmacies in 
recent years has created ``pharmacy deserts'' in some underserved urban 
communities as well.
---------------------------------------------------------------------------
    \3\ Sharon Terlep & Jaewon Kang, The Pharmacist Is Out: 
Supermarkets Close Pharmacy Counters, Wall St. J., Jan. 27, 2020.
    \4\ Xil Consulting, Payers and PBMs Profit from Obscure Pharmacy 
Fees, While Seniors See No Relief in Prescription Costs (Feb. 11, 2020)
---------------------------------------------------------------------------
PBMs' Concentrated Market Power Harms Health Care Plans and 
        Beneficiaries
    As employers that sponsor plans to provide health care coverage to 
their employees, FMI members also see how PBM practices exploit 
inherent conflicts of interest to the detriment of health care plans 
and beneficiaries. For example, PBMs are often responsible for 
developing health care plan formularies, or lists of drugs that a plan 
will cover, and drug companies compete to have their drugs listed on 
those formularies by offering compensation to PBMs in the form of 
rebates. PBMs may be incentivized to obtain more expensive drugs, to 
the extent their rebates correlate with the cost of the drugs they 
include on formularies. FMI members' health plans typically have little 
visibility into these rebates, making it difficult for them to monitor 
whether their contracted PBMs are choosing drugs to reduce plan costs 
or to increase the PBMs' own compensation.
    Additionally, since PBMs own and have financial interests in 
pharmacies, they frequently steer patients to those outlets as the sole 
source for pharmaceuticals. By steering patients to their own 
pharmacies, PBMs reduce competition and have additional incentive to 
provide patients with more expensive drugs. As CMS has recognized, 
``[m]arket competition is best achieved when a wide variety of 
pharmacies are able to compete in the market for selective contracting 
with plan sponsors and PBMs,'' not when PBMs can simply direct patients 
to themselves.\5\
---------------------------------------------------------------------------
    \5\ 83 Fed. Reg. 62,176 (Nov. 30, 2018)
---------------------------------------------------------------------------
Conclusion
    PBMs have been allowed to operate without oversight, shrouded in 
secrecy. Increased regulation and transparency are necessary to help 
curb existing and prevent future abusive practices, while controlling 
consumers' drug costs and preserving their access to supermarket 
pharmacies. Moreover, the Supreme Court's unanimous decision in the 
case of Rutledge v. Pharmaceutical Care Management Association--which 
reaffirmed the states' rights to regulate PBMs--provides a strong vote 
of confidence to achieve greater oversight of PBMs.\6\
---------------------------------------------------------------------------
    \6\ Brief for FMI as Amicus Curiae, p. 9-17, Leslie Rutledge v. 
Pharmaceutical Care Management Association, available at https://
www.supremecourt.gov/DocketPDF/18/18-540/134582/20200302123959805_18-
540%20tsac%20FMI.pdf
---------------------------------------------------------------------------
    Again, FMI thanks the Subcommittee for the opportunity to provide 
input on this critically important topic. If you have questions about 
these comments or would like additional information, please feel free 
to contact me at [email protected] or (202) 452-8444.
            Sincerely,
                                                Peter Matz,
                                  Director, Food and Health Policy.  

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


Commissioner Noah Phillips,
Commissioner Christine Wilson,
Federal Trade Commission,
Washington, DC.

May 5, 2022

Dear FTC Commissioners Noah Phillips and Christine Wilson,

    Pharmacy Benefit Managers (PBMs) work to jack up the price of life-
saving drugs like insulin, steal from community pharmacies until they 
go bankrupt, and turn pharmacy care--one of the most important (and 
often only) sources of health care for rural patients--into a living 
nightmare.
    FTC Commissioner Noah Phillips and Commissioner Christine Wilson, 
please stop blocking efforts to open an investigation into PBMs.
            Signed,
    2,406 of your constituents, including:

Katelyn, C (20002)
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                                 ______
                                 
                                   Federal Trade Commission
                                        Washington, DC, May 5, 2022

Hon. Maria Cantwell,
Chair,
Committee on Commerce, Science, and Transportation,
United States Senate,
Washington, DC.

Hon. Richard Blumenthal,
Chairman,
Subcommittee on Consumer Protection, Product Safety, and Data Security,
Committee on Commerce, Science, and Transportation,
United States Senate,
Washington, DC.

Hon. Roger Wicker,
Ranking Member,
Committee on Commerce, Science, and Transportation,
United States Senate,
Washington, DC.

Hon. Marsha Blackburn,
Ranking Member,
Subcommittee on Consumer Protection, Product Safety, and Data Security,
Committee on Commerce, Science, and Transportation,
United States Senate,
Washington, DC.

Dear Chair Cantwell, Ranking Member Wicker, Chairman Blumenthal, and 
Ranking Member Blackburn:

    I write to express my strong support for the Senate's ongoing work 
and upcoming hearing on pharmacy benefit managers (PBMs) entitled, 
``Ensuring Fairness and Transparency in the Market for Prescription 
Drugs.'' \1\
---------------------------------------------------------------------------
    \1\ Ensuring Fairness and Transparency in the Market for 
Prescription Drugs: Hearing Before the Subcomm. on Consumer Protection, 
Product Safety, and Data Security of the S. Comm. on Commerce, Sci., 
and Trans., 117th Cong. (May 5, 2022), https://www.commerce.senate.gov/
2022/5/ensuring-fairness-and-transparency-in-the-market-for-
prescription-drugs.
---------------------------------------------------------------------------
    I believe that PBMs play a critical and under-examined role in 
determining the price and availability of prescription drugs to 
patients at the pharmacy counter and clinic, and I am concerned that 
certain incentives and the surrounding lack of transparency means that 
PBMs' interests may not always align with patients and others who pay 
for prescription drugs. I am also concerned that PBMs' vertical 
integration and dominant market position may allow them to under-
reimburse independent pharmacies and steer business to PBM-owned mail-
order and specialty pharmacies, which may threaten the long-term 
viability of independent pharmacies in both urban and rural 
communities.
    Addressing dominant intermediaries such as PBMs has been a top 
priority during my tenure at the FTC.\2\ In line with this priority, 
FTC staff has been working since last year to use the FTC's 6(b) 
authority to conduct an inquiry into PBMs, and I am hoping that the 
Commission will vote to initiate a study as soon as possible.\3\ Given 
the life-and-death stakes of this work, I believe the FTC has a moral 
imperative to act swiftly.
---------------------------------------------------------------------------
    \2\ Memorandum from FTC Chair Lina M. Khan to Commission Staff and 
Commissioners Regarding Vision and Priorities for the FTC, at 3 (Sept. 
22, 2021), https://www.ftc.gov/system/files/documents/
public_statements/1596664/agency_priorities_memo_from_chair_lina_m_khan
_9-22-21.pdf (``The second area I'd like us to prioritize addressing is 
dominant intermediaries and extractive business models.'').
    \3\ Remarks of Chair Lina M. Khan Regarding the 6(b) Study on 
Pharmacy Benefit Managers (Feb. 17, 2022), https://www.ftc.gov/news-
events/news/speeches/remarks-chair-lina-m-khan-regarding-6b-study-
pharmacy-benefit-managers.
---------------------------------------------------------------------------
    As part of this effort, the FTC has issued and recently extended a 
Request for Information seeking public comments on PBM business 
practices.\4\ Hundreds of unique comments have been submitted to date 
on how PBMs are impacting patients, doctors, and pharmacists. The 
comments touch on a range of issues, including Direct and Indirect 
Remuneration (DIR) fees, inadequate pharmacy reimbursements, 
unnecessary prior authorizations and step therapy requirements, 
detrimental formulary exclusions, and the steering of patients to PBM-
owned pharmacies.\5\
---------------------------------------------------------------------------
    \4\ Solicitation for Public Comments on the Impact of Prescription 
Benefit Managers' Business Practices, FTC-2022-0015, https://
www.regulations.gov/docket/FTC-2022-0015/comments (last visited May 5, 
2022).
    \5\ Id.
---------------------------------------------------------------------------
    While the FTC will continue its work in this important area, I also 
welcome legislative action on PBMs, including efforts to ensure that 
these intermediaries are serving the interests of American patients and 
contributing to a fair and accountable prescription drug system.
            Sincerely,
                                              Lina M. Khan,
                                                             Chair,
                                              Federal Trade Commission.
                                 ______ 
                                 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
                                 
                                                                  
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Marsha Blackburn to 
                             Robin Feldman
    Question 1. Can you elaborate on how PBMs' consolidation within the 
pharmaceutical supply chain has been able to go unchecked?
    Answer. Markets should be fair, open, and efficient. Unfortunately, 
the PBM market lacks these essential qualities. The level of 
concentration within the market is concerning, with just three PBMs 
controlling 80 percent-85 percent of the market.\1\
---------------------------------------------------------------------------
    \1\ Neeraj Sood, Dana P. Goldman, & Karen Van Nuys, Follow the 
Money to Understand How Drug Profits Flow, STAT (Dec. 15, 2017), 
https://www.statnews.com/2017/12/15/prescription-drug-profits-pbm/ 
(``The top three pharmacy benefit managers, which negotiate drug prices 
on behalf of insurers and self-insured employers, dominate 85 percent 
of their market.''). See also Neeraj Sood, Transcript of Understanding 
Competition in Prescription Drug Markets: Entry & Supply Chain Dynamics 
Workshop (Nov. 8, 2017), https://www.ftc.gov/system/files/documents/
videos/understanding-competition-prescription-drug-markets-panel-2/
ftc_understanding_competi
tion_in_prescription_drug_markets_-_transcript_segment_3.pdf.
---------------------------------------------------------------------------
    Competition issues also arise regarding consolidation between PBMs 
and other players in the pharmaceutical supply chain, such as PBMs 
merging with pharmacy chains and specialty pharmacies. A discussion of 
a variety of competition concerns when PBMs merge with pharmacies can 
be found in my most recent book,\2\ but as one example, PBMs can drive 
patients towards their own pharmacies. Specifically, some health plan 
formularies restrict patients from purchasing a 90-day supply of 
medicine from any pharmacy other than the one owned by a particular 
PBM--and, of course, it's the PBM that helped write the formulary. 
Activities such as these can dampen competition at other parts of the 
pharmaceutical supply chain, as well as reducing patient choice and 
harming access to medicine.
---------------------------------------------------------------------------
    \2\ See Robin Feldman, Drugs, Money, & Secret Handshakes: The 
Unstoppable Growth of Prescription Drug Prices 46-50 (Cambridge 2019).
---------------------------------------------------------------------------
    The negative impact of concentration at many levels of the supply 
chain for medicine has various causes, but governmental gaps and 
failures have certainly allowed concentration to go unchecked. These 
include: 1) the need for regulatory enforcers to take a ``second look'' 
post-merger to determine if their competitive predictions proved 
accurate, take appropriate measures, if not, and to adjust future 
merger and acquisition protocols accordingly; 2) the failure of 
insurance regulators and legislators to protest that PBMs have breached 
their duty to act in the best interest of health plans and, by 
extension, plan enrollees; and 3) the failure of insurance plans, 
regulators, and courts to push back against PBMs' baseless reliance on 
trade secret law to shield their pricing data from public and 
regulatory scrutiny.\3\
---------------------------------------------------------------------------
    \3\ See Robin Feldman & Charles Tait Graves, Naked Price & 
Pharmaceutical Trade Secret Overreach, 22 Yale J.L. & Tech. 61 (2020) 
(examining PBM efforts to assert that pricing arrangements should be 
considered trade secrets).

      Is the consolidation in the PBM market ultimately working 
to lower drug prices for patients?
    Answer. A heavily consolidated market is rarely in the interests of 
consumers. In the PBM market, the Big Three tend to offer the same 
terms, preventing the customers of those three from having meaningful 
options and avoiding the challenge of true competition. None of this 
has been helpful for lowering drug prices for patients.

      What would a competitive PBM market do for the consumer 
at the counter?
    Answer. A PBM's job is to negotiate better prices for the benefit 
of patients. However, the perverse incentives operating in the PBM 
market have helped to inflate profits for PBMs instead of appropriately 
driving down prices for consumers. Although there are many contributors 
to rising prices, true competition in the PBM market could help drive 
down the prices that consumers pay at the pharmacy counter, as well as 
the dollars they pay for insurance plan premiums.

      What are some ways we can spur innovation within the PBM 
market?
    Answer. As noted above, markets should be fair, open, and 
efficient. To spur competition and innovation in the PBM market, I 
would recommend four key approaches related to Fiduciary Duty, 
Transparency, and Concentration:

  1)  First, clarify that PBMs have a fiduciary duty, certainly to the 
        health plan if not the patients, themselves.

  2)  Second, clarify that price and price terms in this context are 
        not trade secrets.

  3)  Third, ensure that competition agencies have the proper tools to 
        reduce concentration in the PBM and related industries. We 
        won't see price improvements until we improve competition.

  4)  Fourth, encourage regulators to adopt a robust ``Second-Look'' 
        policy. Rather than relying on crystal-ball predictions of what 
        will happen after a merger or acquisition, competition agencies 
        should establish a system of post-merger review to ensure past 
        decisions had the intended results and to improve future 
        evaluations.

    Question 2. What is your view of copay accumulators that prevent 
patient support from counting toward a patient's deductible or maximum 
out-of-pocket costs. Do you know where these revenues are going?
    Sometimes, a gift is a Trojan horse. It seems like a wonderful 
offering--even a blessing--but, beware of what lies within. That can be 
the case with patient assistance programs. And, as I will describe 
below, the patient is always the one who loses out.
    For patients who are struggling to afford tremendously expensive 
medication, providing a coupon seems heaven-sent. Even more so if the 
coupon pays for a life-saving drug. But the costs to the patient, not 
to mention the health care system, are carefully camouflaged.
    With a coupon, or other form of patient assistance program, the 
brand-name company agrees to pay all, or a signiﬁcant portion, of 
the patient's out-of-pocket costs. Thus, the patient sees tremendous 
relief in the form of out-of-pocket costs. But it can be an illusion. 
The health insurance plan pays for the more expensive, brand-name drug, 
rather than a less expensive competitor. The extra amount that the plan 
pays for the drug is then reflected in the cost of the annual premium 
patients pay. If this happens enough, premiums can rise for everyone in 
the plan, including the specific patient.
    In 2020, a U.S. House Oversight Committee report provided an inside 
view of how pharma companies themselves think about patient assistance 
programs. The report examined reams of documents from Novartis, 
relating to its blockbuster oncology drug Gleevec. The company's 
documents showed that co-pay assistance programs were a crucial piece 
of its strategy to encourage patients to stay with the brand-name drug 
after generics entered the market. The company even calculated that 
beefing up the strategy 6 months before generics entered the market 
would be the timing that provided the greatest return on investment by 
keeping the maximum number of patients attached to the drug before the 
generics made it to market.
    The return on the company's investment was impressive. Company 
documents showed that the company's patient assistance on the drug 
provided a return on investment of $8.90 for every dollar spent on the 
program. When a company is making nine additional dollars for every 
dollar it hands out with a coupon, the company is not acting out of the 
goodness of its heart.
    In response, health plans have created policies that prevent such 
programs from counting towards a patient's deductible or out-of-pocket 
maximum. Their theory is that the patient did not pay that amount out-
of-pocket; the pharma company did. These health plan limitations are 
being called co-pay accumulators or co-pay maximizers. They are 
intended to save money for the plan which, in the best of 
circumstances, would flow through to keep the premiums lower for 
patients. I have not studied, however, whether that actually happens. 
Nor am I aware of academic studies concluding that these savings do, 
indeed, flow through to create lower premiums for patients.
    In the process of handing out patient assistance, of course, brand 
companies purchase brand loyalty.\4\ The patient--who is now wedded to 
an expensive brand-name drug, rather than a generic, biosimilar, or 
less expensive alternative--may be reluctant to change. When the 
maximum value of the company's coupon is reached, the patient is socked 
with the extremely high out-of-pocket cost of the drug. That is, yet 
again, another hidden price that patients must pay.
---------------------------------------------------------------------------
    \4\ Studies show that these patient assistance programs increase 
brand-name drug sales by 60 percent, mostly by reducing sales to 
generic competitors. See Leemore Dafny, Christopher Ody & Matt Schmitt, 
When Discounts Raise Costs: The Effect of Copay Coupons on Generic 
Utilization, 9 Am. Econ. Jl.: Econ. Policy 91, 93 (2017).
---------------------------------------------------------------------------
    As always, the patient is caught in the middle of the struggle, and 
no matter what, the patient seems to lose out.

    Question 3. I am concerned that copay accumulators may negatively 
impact prescription drug access for vulnerable patients. How can we 
best address this issue to help patients and caregivers?
    Answer. As noted in my response to the prior question, the patient 
is always the one who loses in these struggles. In particular, brand 
companies can begin handing out copay coupons before the generic or 
biosimilar has arrived on the market--an effective method for ensuring 
that patients have continued loyalty when the generic or biosimilar 
does arrive.\5\
---------------------------------------------------------------------------
    \5\ See U.S. House of Representatives, Staff Report: Committee on 
Oversight and Reform, Drug Pricing Investigation: Novartis--Gleevec 
Selected Investigation Documents (2020) (finding that Novartis made 
significant changes to its copay assistance program for the blockbuster 
oncology drug Gleevec six months before generics entered the market, 
offering patients the allure of steep reductions in out-of-pocket 
payments, a strategy that convinced patients to stick with Gleevec once 
generics were on the market).
---------------------------------------------------------------------------
    If the health plan and the brand company truly wanted to help a 
vulnerable patient, the drug could be provided to the patient's health 
plan at a severely reduced cost with the agreement that the particular 
patient would enjoy a low out-of-pocket cost. Congress could help by 
clearing any regulatory hurdles in the way. Moreover, programs such as 
these should be designed so that they provide a long-term benefit for a 
vulnerable patient, rather than as a limited-time offering of free 
samples that reel in a patient, who will then be stuck paying large 
sums for a long time.
    And, of course, the best help for vulnerable patients--as well as 
access to medicine for all patients--would be to inject transparency 
and competition into the PBM system. I am heartened to see the 
Subcommittee's work on these important issues.
                                 ______
                                 
 Response to Written Question Submitted by Hon. Richard Blumenthal to 
                        Juan Carlos ``JC'' Scott
    Question. As you know, the dynamics of the 340B program are always 
complicated. There has been a lot going on over the last couple of 
years with respect to contract pharmacy, and I am hearing often from 
South Dakotans with concerns about actions taken by both PBMs and 
manufacturers. At the end of the day, these actions are harmful to the 
program that is meant to help our hospitals support their communities. 
Resolving these issues will take some time, so I just ask for your 
commitment to be willing to be part of the conversation.
    Answer. Thank you for taking the time to share your concerns about 
the 340B program. I appreciate the opportunity to respond, and I am 
always willing to contribute to the discussion. While PCMA is neutral 
on the 340B program, we are aligned fully with the program's goal of 
helping safety-net entities provide better care to vulnerable 
populations. Our members process claims in support of the program, but 
PBMs cannot always determine when a claim is related to a 340B 
transaction, which causes complications for PBMs, pharmacies, 
manufacturers, and individuals paying for health insurance. To maintain 
eligibility to sell drugs to state Medicaid programs, manufacturers 
must agree to participate in 340B. While Medicaid eligibility and 340B 
participation are linked, the programs are separate, and Federal law 
prohibits duplicate discounts--mandated Medicaid rebates do not apply 
to drugs obtained at 340B pricing. To support efforts to avoid 
duplicate discounts for 340B pharmaceuticals, claims modifiers, like 
those used in the Medicaid program, are needed to better understand 
which drugs are 340B and which are not. PCMA welcomes the opportunity 
to continue working on this and other issues in the 340B program to 
ensure fairness and transparency in the prescription drug marketplace.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Marsha Blackburn to 
                        Juan Carlos ``JC'' Scott
    Question. (Blackburn) I would like to know what you would see a 
competitive marketplace be. We know there have been consolidations. Mr. 
Scott says there are 70 PBMs, but we know we have very few players in 
this area. So, in a perfect world, how would you structure a 
competitive PBM marketplace that would, indeed, yield our Medicare 
enrollees a lower cost? (Blumenthal) I would invite each panelist to 
respond to that question in writing. It is a big question and at the 
heart of what we are doing here today.
    Answer. To foster a more competitive market for prescription drugs, 
Congress should focus on increasing competition to promote consumer 
accessibility and affordability and enhance the value of dollars spent 
on health care. Last year, PCMA announced a three-part policy platform 
focused on lowering prescription drug costs by updating Medicare Part 
D, increasing competition, and moving consumers toward a more value-
driven health care system.\1\ Our policy platform outlines concrete 
policy steps to make prescription drugs more affordable for all 
consumers, and the PBM industry's vision for a health care system that 
delivers more value to all Americans. If fully implemented, PCMA's 
policy platform would reduce prescription drug costs, make 
pharmaceutical care more accessible to all Americans, and save 
taxpayers $257.5 billion to $398.7 billion over ten years.\2\
---------------------------------------------------------------------------
    \1\ PCMA. The Critical Path Forward: Rx Policies to Reduce Patient 
Costs, Improve Access. June 2021. Available at https://www.pcmanet.org/
pbms-solutions-to-lower-patient-rx-costs-improve-access/.
    \2\ PCMA. PCMA's The Critical Path Forward Will Save Taxpayers 
$255.5 Billion Over 10 Years. July 2021. Available at https://
www.pcmanet.org/wp-content/uploads/2021/07/pcma_criticalpathforward_7-
6-21.pdf.
---------------------------------------------------------------------------
    The first set of policies propose modernizing Medicare Part D. PCMA 
suggests specific policy options to make Medicare Part D more 
affordable, including capping out-of-pocket costs, eliminating 
misaligned incentives that keep drug prices artificially high, building 
on Part D's record of choice and competition, allowing plan sponsors 
access to additional tools for managing costs, repealing the rebate 
rule to protect seniors by preventing significant premium increases, 
and preventing taxpayers from paying substantially more for Part D. 
Additionally, we support enhancing manufacturer liability throughout 
all phases of the benefit to ensure that manufacturers bear a fair 
share of the responsibility to provide American seniors with high-
quality coverage.
    The second set of policies would prevent patent abuses like patent 
thickets, evergreening, product hopping, and misuse of citizen 
petitions that drug manufacturers use to prevent fair competition from 
generic and biosimilar drugs. As we work together to bring greater 
savings to Medicare beneficiaries, we must also focus on real solutions 
to lower drug costs for everyone. Consequently, PCMA supports policies 
aimed at reducing market distortions, like those aimed at limiting 
patent and exclusivity abuses that stifle competition and keep drug 
prices high. We also need solutions to ensure drugs compete fairly, 
including the production of more cost-effective generics and 
biosimilars.
    The third and final set of policies would foster broader adoption 
of value-based purchasing and the acceleration of consumer-focused 
pharmacy care. More health care spending does not automatically result 
in better outcomes. To promote the use of high-value treatments and 
reduce the use of those which do not provide the necessary or expected 
benefit to patients, PCMA proposes policies to accelerate value-based 
and consumer-centered care. We also support bringing the same value-
driven tools used by employers to Medicare and Medicaid and promote the 
production and use of rigorous evidence of drug performance in the real 
world. Improving health outcomes requires the treatment of patients 
based on their individual needs. Therefore, PCMA supports driving a 
concerted effort to reduce health care disparities and inequities. 
Value-based care arrangements for consumers would be made possible by 
granting Part D drug plans access to Medicare Parts A and B claims 
data, establishing safe harbors for value-based contracting, and 
allowing Part D and state Medicaid plans greater flexibility to adopt 
private-sector formulary management techniques.

    Question. I have been hearing about new PBM programs called copay 
accumulators that impact certain patients in high-deductible health 
plans. These programs prevent patient support from counting toward a 
patient's deductible or maximum out-of-pocket costs. As a result, 
patients face sudden and often unexpected higher out-of-pocket costs 
when their patient assistance runs out, and they discover their 
deductible has not been met. Can you please explain to me how these 
programs impact patients?
    Answer. Copay accumulator programs are health-plan programs 
designed to prevent drug manufacturers from using copay coupons to 
steer or coerce employers, unions, and government programs to pay for 
expensive, unnecessary brand medications. Under Federal law, the use of 
copay coupons to obtain healthcare services under Medicare and Medicaid 
is prohibited as marketing tools to induce a consumer to purchase a 
particular brand they might not otherwise purchase. Similarly, copay 
coupons for prescription drugs are an inducement to obtain a particular 
drug even when a lower-cost therapeutic alternative is available. 
Therefore, legislation seeking to stop payers from managing their costs 
by prohibiting the use of accumulator programs would eliminate a 
crucial tool in their fight against rising drug costs. If drug 
companies are concerned about patients accessing medications, they 
should simply lower their prices; this is the simplest, most effective 
way to reduce patient costs for drugs.

                                  [all]