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`Exhibit 1090
`Exhibit 1090
`ARGENTUM
`ARGENTUM
`IPR2017-01053
`IPR2017-01053
`
`Pharmacy Benefit Managers:
`Ownership of Mail-Order Pharmacies
`
`
`
`Federal Trade Commission
`August 2005
`
`000001
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`000001
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`

`

`Federal Trade Commission
`
`DEBORAH PLATT MAJORAS
`THOMAS B. LEARY
`PAMELA JONES HARBOUR
`JON LEIBOWITZ
`
`Chairman
`Commissioner
`Commissioner
`Commissioner
`
`Maryanne Kane
`Charles H. Schneider
`Susan A. Creighton
`Lydia B. Parnes
`Michael Salinger
`William Blumenthal
`Anna H. Davis
`Nancy Ness Judy
`Maureen K. Ohlhausen
`Donald S. Clark
`
`Chief of Staff
`Executive Director
`Director, Bureau of Competition
`Director, Bureau of Consumer Protection
`Director, Bureau of Economics
`General Counsel
`Director, Office of Congressional Relations
`Director, Office of Public Affairs
`Director, Office of Policy Planning
`Secretary of the Commission
`
`Report Drafters and Contributors
`Michael S. Wroblewski, Assistant General Counsel for Policy Studies
`David R. Schmidt, Bureau of Economics
`Patricia Schultheiss, Bureau of Competition
`Karen A. Goldman, Office of General Counsel Policy Studies
`Randall Marks, Bureau of Competition
`Susan DeSanti, Deputy General Counsel for Policy Studies
`Sarah M. Mathias, Office of General Counsel Policy Studies
`Elizabeth Jane Argeris, Bureau of Competition
`Natalie Shonka, Office of General Counsel Policy Studies
`Mahlon Wigton, Bureau of Economics
`
`Inquiries concerning this report should be directed to:
`Michael S. Wroblewski at (202) 326-2155 or mwroblewski@ftc.gov
`
`Acknowledgments:
`
`The FTC staff appreciates the cooperation of all of the companies subject to the
`Special Orders and their timeliness in providing requested additional materials.
`
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`
`
`EXECUTIVE SUMMARY
`
`
`
`
`
`For millions of Americans, breakthroughs in medical research have allowed prescription
`
`drugs to save lives, reduce suffering, and enhance life. But these breakthroughs come with a
`price: increased usage and rising prices have pushed prescription drug expenditures to $179.2
`billion in 2003, or 10.7% of national health expenditures. Prescription drugs are the most rapidly
`increasing component of U.S. health care costs.
`
`
`Against this backdrop, Congress in 2003 added a new benefit to Medicare that provides
`senior citizens and other Medicare beneficiaries with a voluntary prescription drug benefit
`beginning in 2006. The new benefit relies heavily on private sector entities and competition to
`ensure that Medicare enrollees have a choice of prescription drug plans.
`
`Private sector entities that offer medical insurance (“plan sponsors”), such as employers,
`
`labor unions, and managed care companies, also offer prescription drug insurance coverage.
`Plan sponsors often hire pharmacy benefit managers (PBMs) to manage these insurance benefits.
`This Study examines one facet of private sector competition – how PBMs’ use of mail-order
`pharmacies that they own affects their clients’ prescription drug costs.
`
`
`PBMs engage in many activities to manage their clients’ prescription drug insurance
`coverage. PBMs assemble networks of retail pharmacies so that a plan sponsor’s members can
`fill prescriptions easily and in multiple locations by just paying a copayment amount. PBMs
`consult with plan sponsors to decide for which drugs a plan sponsor will provide insurance
`coverage to treat each medical condition (e.g., hypertension, high cholesterol, etc.). The PBM
`manages this list of preferred drug products (the “formulary”) for each of its plan sponsor clients.
`Consumers with insurance coverage are then provided incentives, such as low copayments, to
`use formulary drugs. Because formulary listing will affect a drug’s sales, pharmaceutical
`manufacturers compete to ensure that their products are included on these formularies. They do
`so by paying PBMs “formulary payments” to obtain formulary status, and/or “market-share
`payments” to encourage PBMs to dispense their drugs. These payments are based on the
`quantity of drugs dispensed under the plans administered by the PBM.
`
`PBMs use mail-order pharmacies to manage prescription drug costs. Many plan sponsors
`
`have encouraged patients with chronic conditions who require repeated refills to seek the
`discounts that 90-day prescriptions and high-volume mail-order pharmacies can offer. Many
`PBMs own their own mail-order pharmacies. These PBMs have suggested that they have greater
`control over the drugs dispensed through mail-order pharmacies and, therefore, can provide
`greater formulary compliance.
`
`
`And this is where the controversy lies. If a plan sponsor’s agreement with a PBM does
`not properly align the plan’s interests with the PBM’s incentives, there could be a conflict of
`interest. Although PBMs are tasked to manage and lower the costs of pharmacy benefits, in
`theory they could have incentives to increase costs and generate additional profits through their
`mail-order pharmacies. Congress requested that the Federal Trade Commission (FTC or
`Commission) determine whether a PBM that owns a mail-order pharmacy acts in a manner that
`
`
`
`
`i
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`

`PHARMACY BENEFIT MANAGERS:
`
`
`maximizes competition and results in lower prescription drug prices for its plan sponsor
`members.
`
`At the request of Congress, the Commission collected aggregate data on prices, generic
`substitution and dispensing rates, savings due to therapeutic drug switches (“therapeutic
`interchange”), and repackaging practices. These data provide strong evidence that in 2002 and
`2003, PBMs’ ownership of mail-order pharmacies generally did not disadvantage plan sponsors.
`Because these data are aggregated, they do not answer whether each plan sponsor has negotiated
`the best deal possible or whether each PBM has fulfilled its contractual obligations due to each
`of its plan sponsor clients. The data also do not indicate whether, in individual instances, a PBM
`might have favored its mail-order pharmacy in ways contrary to a plan sponsor’s interests.
`Nonetheless, these data suggest that competition in this industry can afford plan sponsors with
`sufficient tools to safeguard their interests.
`
`Congressional Request
`
`Congress requested in the Medicare Prescription Drug, Improvement, and Modernization
`
`Act of 2003 (MMA) that the Federal Trade Commission undertake a “Conflict of Interest Study”
`to examine “differences in payment amounts for pharmacy services provided to enrollees in
`group health plans that utilize pharmacy benefit managers,” including:
`
`
`(1) An assessment of the differences in costs incurred by such enrollees and plans
`for prescription drugs dispensed by mail-order pharmacies owned by
`pharmaceutical benefit managers compared to mail-order pharmacies not owned
`by pharmaceutical benefit managers and community pharmacies (Question 1).
`
`(2) Whether such plans are acting in a manner that maximizes competition and results in
`lower prescription drug prices for enrollees (Question 2).1
`
`
`As explained in the Conference Report for the MMA, Congress requested that the
`
`Commission determine whether the use of mail-order pharmacies owned by PBMs that
`administer the Medicare prescription drug benefit would adversely affect Medicare spending, as
`compared to the use of mail-order pharmacies not owned by a PBM. Accordingly, Congress
`asked the FTC to consider the following business practices:
`
`
`(1) whether mail-order pharmacies that are owned by PBMs (or entities that own
`PBMs) dispense fewer generic drugs compared to single source drugs within the
`same therapeutic class than mail order pharmacies that are not owned by PBMs
`(Question 3);
`
`(2) whether mail-order pharmacies that are owned by PBMs (or entities that own
`PBMs) switch patients from lower-priced drugs to higher-priced drugs (in the
`
`
`
`
`1 See Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Pub. L. No. 108-173, tit.
`I, § 110, 117 Stat. 2066, 2174 (2003) (codified at 42 U.S.C. § 1395w-101 (Historical and Statutory Note)).
`
`
`
`ii
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`FEDERAL TRADE COMMISSION, AUGUST 2005
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`
`
`
`
`
`
`
`
`OWNERSHIP OF MAIL-ORDER PHARMACIES
`
`
`absence of a clinical indication) more frequently than mail-order pharmacies that
`are not owned by PBMs (Question 4);
`
`(3) whether mail-order pharmacies owned by PBMs (or entities that own PBMs)
`sell a higher proportion of repackaged drugs than mail-order pharmacies that are
`not owned by PBMs (Question 5a);
`
`(4) whether mail-order pharmacies owned by PBMs (or entities owned by PBMs)
`sell repackaged drugs at prices above the manufacturer’s average wholesale price
`(Question 5b); and
`
`(5) other factors deemed relevant by the FTC.2
`
`
`Finally, Congress requested that the FTC “consider whether competition or drug pricing
`behavior by PBMs would be affected if PBMs were to bear financial risk for drug spending.”
`(Question 6)3
`
`The Commission’s Approach to the Conflict of Interest Study
`
`The Commission used a two-stage process to collect the company-specific information
`
`and data necessary to complete the study.4 During the first stage, the Commission identified four
`groups of participants and issued Special Orders that subpoenaed data and documents. The
`Commission included PBMs that owned mail-order pharmacies and those that did not, so that it
`could assess the differences in prices for prescription drugs dispensed by mail-order pharmacies
`owned by PBMs compared to both mail-order pharmacies not owned by PBMs and community
`pharmacies. The Commission also obtained data from four large stand-alone retail pharmacies to
`assess the price differences for customers with insurance and those that paid cash for their
`prescriptions. The four groups of study participants included the following:
`
`
`• Large PBMs: Medco Health Solutions, Inc., Express Scripts, Inc., and Caremark Rx,
`Inc.5
`
`• Small and Insurer-Owned PBMs: Aetna Inc., Cigna Corporation, National
`Medical Health Card Systems, Inc., Prime Therapeutics, Inc., Restat LLC, and
`Wellpoint Health Networks, Inc.
`
`
`
`
`
`
`
`• Retailer-Owned PBMs: Eckerd Health Systems (formerly a subsidiary of Eckerd Corp.),
`PharmaCare Management Services (a subsidiary of CVS Corp.), RxAmerica (a
`
`2 H.R. CONF. REP. NO. 108-391 at 519-520 (2003), reprinted in 2003 U.S.C.C.A.N. 1808, 1891.
`
`3 Id. at 520.
`
` 4
`
`
`
` See FTC, “Pharmacy Benefit Manager Conflict of Interest Study, Public Notice,” (Mar. 26, 2004), at
`http://www.ftc.gov/os/2004/03/040326pnpbm.pdf.
`
`
`5 Caremark completed its acquisition of Advance PCS in 2004. For purposes of this report, the data from
`Caremark and Advance PCS were reported separately.
`
`
`EXECUTIVE SUMMARY
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`PHARMACY BENEFIT MANAGERS:
`
`
`
`subsidiary of Longs Drug Stores Corp.), Walgreens Health Initiative (a subsidiary of
`Walgreen Co.).6
`
`• Stand-Alone Retail Pharmacies: CVS Corp., Longs Drug Stores Corporation,
`Rite Aid Corporation, Wal-Mart Stores, Inc., Walgreen Co., and Argus Health
`Systems, Inc.7
`
`
`
`
`
`
`
`The data and documents subpoenaed included high-level business documents and
`aggregate data for three business practices (generic substitution and dispensing, therapeutic
`interchange, and repackaging practices). The Commission obtained agreements between plan
`sponsors and PBMs to examine how PBMs price their services to their clients. In addition, the
`Commission obtained agreements between pharmaceutical manufacturers and PBMs to examine
`how pharmaceutical manufacturers compete in this area.
`
`These data permitted the Commission to compare differences in business practices based
`
`on three factors: (1) PBM category (i.e., large PBM, small or insurer-owned PBM, retailer-
`owned PBM); (2) dispensing channel (i.e., mail vs. retail); and (3) ownership of the dispensing
`channel (i.e., owned mail, not-owned mail, owned retail, not-owned retail).
`
`In the second round of information collection, the Commission obtained individual
`
`claims data for December 2003 from a subset of the companies listed above. These companies
`included all large independent PBMs, one small or insurer-owned PBM, two retailer-owned
`PBMs, and two stand-alone retailers. These data permitted the Commission to examine PBMs’
`business practices in more depth.
`
`Background on the PBM Business
`
`
`As noted earlier, many health plan sponsors offer their members prescription drug
`insurance and hire PBMs to manage these pharmacy benefits on their behalf. As part of the
`management of these benefits, PBMs assemble networks of retail and mail-order pharmacies so
`that the plan sponsor’s members can fill prescriptions easily and in multiple locations.
`
`When a consumer fills a prescription at a local pharmacy, the pharmacist usually asks
`whether the consumer has insurance to cover the prescription=s cost. If there is coverage, the
`consumer provides the insurance card to the pharmacist. While the pharmacist fills the
`prescription, sophisticated computer interactions between the pharmacy and the PBM ensure that
`the prescription is filled according to the insurance coverage provided by the plan sponsor. The
`consumer usually is unaware of these processing interactions, and the consumer’s only additional
`responsibility is to pick up the filled prescription and pay the retail pharmacy the copayment that
`is due.
`
`
`6 In 2004, CVS completed its acquisition of Eckerd. For purposes of this report, the data from PharmaCare
`and Eckerd Health Systems (EHS) were reported separately.
`
`
`7 Argus Health Systems processes third-party claims for PBMs. Unlike the stand-alone retailers in this
`group, Argus did not provide data for cash-paying customers.
`
`
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`OWNERSHIP OF MAIL-ORDER PHARMACIES
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`
`
`Other services a PBM may perform as the pharmacist fills the prescription include,
`among other things, automatic checks on whether: (a) there will be interactions with other
`pharmaceutical products the consumer may be taking, (b) a generic version of the prescribed
`drug is available, and (c) enough days have passed before a prescription can be refilled. These
`claims adjudication and other more sophisticated services are often referred to as the
`management and design of pharmacy benefits that PBMs provide to their clients.
`
`
`A PBM’s clients include entities that provide prescription drug insurance to their
`enrollees or members. These entities generally include, for example, Health Maintenance
`Organizations (HMOs), self-insured employers, labor union plans, and other entities that have
`“carved out” the administration of pharmacy benefits from other health or medical benefits.
`Many large insurers, however, offer “in-house” PBM services to their plan sponsors.
`Throughout this report, a PBM’s clients are referred to as “plan sponsors” or “plans” and a plan’s
`enrollees are referred to as “members.”
`
`
`Approximately 40 to 50 PBMs operate in the United States today.8 The relative size and
`ranking of PBMs vary according to the measure used, i.e., annual prescription expenditures,
`prescriptions per year, or the number of enrollees covered by a plan (i.e., “covered lives”).9
`Approximately 12 PBMs have more than five million covered lives.10 The market share figures,
`as well as the documents of almost all of the study participants, described an industry in which
`the three large PBMs (all of which are study participants) are the major players, and several
`insurer-owned PBMs and retailer-owned PBMs have a substantial market presence.
`
`PBM Ownership of Mail-Order Pharmacies
`
` A PBM that owns a pharmacy (whether retail or mail) is considered vertically integrated.
`
`A vertically integrated PBM may have a greater ability to influence which drugs are dispensed
`under the plans it administers than a non-vertically integrated PBM. If plan sponsor contracts
`with PBMs do not properly align the incentives of PBMs with those of the plans, this lack of
`alignment could create a conflict of interest. Potential conflicts of interest should be rare,
`however, if competition among PBMs provides plan sponsors with alternative choices.
`
`
`The economic literature on vertical integration suggests that it can lower costs. First,
`integration can reduce transaction costs. In addition, it also avoids double markups (or what
`economists call “double marginalization”) in which two independent, vertically related firms
`each have some ability to charge above marginal cost. A PBM that owns a mail-order pharmacy
`may have an incentive to charge a lower overall price for the product than two independent
`entities setting prices optimally.
`
`8 Robert F. Atlas, The Role of PBMs in Implementing the Medicare Prescription Drug Benefit, 2004
`HEALTH AFFAIRS (Web Exclusive), W4-504, 506, at
`http://content.healthaffairs.org/cgi/content/abstract/hlthaff.w4.504.
`
`9 Atlas, supra note 8, at 506.
`
`10 Id.
`
`
`
`EXECUTIVE SUMMARY
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`PHARMACY BENEFIT MANAGERS:
`
`
`
`
`Nonetheless, some have alleged that a conflict of interest arises when PBMs both
`administer the pharmacy benefits for a client and sell drugs to a client’s members via the PBM’s
`owned mail-order pharmacy. These “self-dealing” arrangements purportedly would provide
`PBMs an opportunity to manipulate drug dispensing at their mail-order pharmacies to enhance
`their own profits at the expense of plans and members through the three business practices
`discussed above (lack of generic substitution and dispensing, interchange to more expensive
`brand products, and repackaging of drugs into more expensive units). One study concluded on
`the basis of high level data and theoretical calculations that self-dealing could cost the U.S.
`Government and Medicare beneficiaries up to $30 billion during the period 2004-2013.11
`
`The actual data from the study participants on the business practices Congress requested
`the FTC to study revealed that these allegations are without merit. The following discussion
`provides a summary of the data and information produced by the study participants to answer the
`six questions in the MMA and its Conference Report.
`
`Question 1: Assessment of Price Differences in Payment Amounts Incurred by Plans and
`their Members for Prescription Drugs Dispensed by Mail-Order Pharmacies Owned by
`PBMs Compared to Non-Owned Mail-Order Pharmacies and Retail Pharmacies.
`
`
`Background on How the Commission Collected Price Data: The Commission collected
`2002 and 2003 price data for three types of drug products (single-source brand (SSB), multi-
`source brand (MSB), and generic (G) drugs) from each study participant.12 The price data
`included the total amounts that members and plans paid, regardless of how various PBMs and
`plan sponsors labeled those outlays. Member prices included the sum of copayment, deductible,
`and any coinsurance amounts. Plan prices included the sum of ingredient costs (the portion of
`the dispensed drug for which the plan pays), dispensing fees, and any pharmaceutical payments
`shared with the plan that reduced the prices plan sponsors paid. For purposes of this report,
`“total price” equals the sum of “member price” and “plan price.”
`
`
`Answer -- Differences in average total 2002 and 2003 prices at owned mail-order
`pharmacies versus not-owned mail-order pharmacies for each drug type:
`
`
`• For large PBMs, average total prices at owned mail-order pharmacies typically were
`lower than at mail-order pharmacies not owned by the large PBMs.
`
`
`11 See JAMES LANGENFELD & ROBERT MANESS, THE COST OF PBM “SELF-DEALING” UNDER A MEDICARE
`PRESCRIPTION DRUG BENEFIT 30-31 (2003) [hereinafter SELF-DEALING STUDY], at
`http://www.mpaginc.com/news/pbmreport.pdf. This study, financed by several retail pharmacies, concluded on the
`basis of aggregate data and numerous simplifying assumptions that self-dealing would cost the U.S. Government
`and Medicare beneficiaries billions of dollars during the period 2004-2013. See Carol Ukens, PBM Mail Order
`Would Up Medicare Rx Cost, Study Finds, DRUG TOPICS, Oct. 6, 2003, at 34, at
`http://www.drugtopics.com/drugtopics/article/articleDetail.jsp?id=111109.
`
`
`12 The biggest difference between single-source and multi-source brand drugs is that single-source brand
`drugs do not have a generic alternative, whereas multi-source brand drugs do. For example, as of August 2005
`among antidepressants, Zoloft is a single-source brand drug. Prozac is a multi-source brand drug, and fluoxetine
`(the active ingredient in Prozac) is a generic drug.
`
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`OWNERSHIP OF MAIL-ORDER PHARMACIES
`
`
`• Retailer-owned PBMs charged lower total average prices for generic and MSB drugs, but
`not for SSB drugs, at their owned mail-order pharmacies compared to not-owned mail-
`order pharmacies.
`
`
`The data showed that mail prescriptions are typically three times as large as retail prescriptions
`(e.g., 30 days at retail and 90 days at mail).13 Moreover, the mix of drugs dispensed varies
`substantially across dispensing channels – mail-order pharmacies dispense a higher proportion of
`maintenance drugs for chronic conditions.
`
`
`Answer -- Differences in average total prices at owned mail-order pharmacies versus
`not-owned retail pharmacies for each drug type:
`
` •
`
` •
`
` For a common basket of drugs dispensed in December 2003 with the same-sized
`prescriptions, retail prices typically were higher than mail prices at both large PBMs and
`retailer-owned PBMs.
`
` One reason for these differences can be seen in the contractual agreements that govern
`the relationship between the plan sponsor and the PBM. In the 26 PBM-plan sponsor
`contracts reviewed by the Commission staff, plan sponsors often secured more favorable
`pricing for mail dispensing than for retail dispensing. In other words, plan sponsors
`obtained larger discounts off the same reference drug price for prescriptions dispensed at
`mail than at retail.
`
`
`Question 2: Whether Plans are Acting in a Manner that Maximizes Competition and
`Results in Lower Prescription Drug Prices for Enrollees.
`
`
`Background on Prescription Drug Competition: One aspect of competition in the PBM
`industry is how pharmaceutical manufacturers’ payments to PBMs affect the prices that plan
`sponsors and members pay for drugs dispensed under the plans administered by the PBMs. This
`inquiry often focuses on how much of these payments PBMs share with their plan sponsors to
`lower the plan sponsors’ drug spending. A sole focus on the explicit contract terms governing
`sharing of manufacturer payments with plan sponsors, or the data showing the actual sharing of
`these payments, however, does not provide a basis for valid inferences regarding prescription
`drug competition or an alleged conflict of interest.
`
`Answer: Manufacturer payments to PBMs can be passed on to plan sponsor clients
`through a complex array of adjustments in the prices for the services that PBMs provide to their
`plan sponsor clients. For example, plan sponsors and their members pay several types of fees for
`the services that PBMs render (e.g., plan sponsors pay dispensing fees and ingredient costs for
`drugs dispensed and members pay copayments). Moreover, these fees are based on the full
`scope of services provided by the PBM, such as the broadness of the retail and mail-order
`pharmacy networks where members can fill their prescriptions at low prices, and the range of
`
`13 Retail dispensing includes all prescriptions dispensed at retail, regardless of whether the retail pharmacy
`is a chain pharmacy or an independent community pharmacy.
`
`
`
`EXECUTIVE SUMMARY
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`PHARMACY BENEFIT MANAGERS:
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`
`formulary drugs in each therapeutic class for which members pay lower copayments (i.e., the
`formulary’s “restrictiveness”). Thus, a high sharing level of pharmaceutical payments could be
`offset by high dispensing fees or high member copayments. Conversely, a low sharing level
`could be offset by low dispensing fees or low member copayments.
`
`To shine further light on this aspect of competition, the Commission requested data from
`the study participants about their relationships with pharmaceutical manufacturers. The
`Commission also reviewed the contractual agreements between each PBM study participant and
`a common set of 11 pharmaceutical manufacturers. This report does not offer observations on or
`analysis of whether these agreements comply with federal and state anti-kickback laws, which
`generally prohibit an entity from knowingly and willingly offering, paying, soliciting, or
`receiving any remuneration to induce the referral of individuals or the purchase of items or
`services for which payment may be made under Medicare, Medicaid, or other federal or state
`health programs.
`
`Importance of the Formulary: Pharmaceutical manufacturers recognize that having their
`drugs listed on the formulary or in a preferred spot on the formulary (as compared to competing
`drug products) will likely increase the drug products’ sales. As noted earlier, pharmaceutical
`manufacturers use “formulary payments” to obtain formulary status, and/or they use “market-
`share payments” to encourage PBMs to dispense their drugs. Both payments are often specified
`as a percentage of the drug’s wholesale price (e.g., a percentage level of 10% means the
`manufacturer will pay the PBM 10% of a measure of the drug’s wholesale price multiplied by
`the quantity dispensed).
`
`Most industry members refer to these payments as “rebates,” and they refer to the
`percentage level as the “rebate level.” For purposes of this report, the term “pharmaceutical
`payments” will be used to describe these payments, and the term “allowance” will be used to
`describe the percentage level.
`
`In addition to these two types of payments, pharmaceutical manufacturers pay PBMs fees
`to administer these formulary access programs on behalf of the manufacturer (“administrative
`fees”) and to provide other services, including therapeutic interchange and compliance programs.
`This report uses the term “total payments” to refer to all four payments combined; otherwise, the
`report refers to each payment type individually to provide greater specificity and clarity rather
`than using the general term “rebates.”
`
`The data and information obtained by the Commission support the following findings
`
`about pharmaceutical manufacturer payments:
`
`
`• On average, PBM study participants received total payments of $5.22 per normalized
`prescription of a brand drug dispensed in 2002.14 The average increased 21.5% to $6.34
`in 2003.
`
`
`
`
`14 Normalized prescriptions account for the differing size of mail and retail prescriptions – each mail
`prescription is counted three times when counting the number of normalized prescriptions.
`
`
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`OWNERSHIP OF MAIL-ORDER PHARMACIES
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`• PBMs received the majority of their total payments for a limited number of single-source
`brand drugs. In 2003, each study participant’s top 25 brand drugs (in terms of total
`payments received) accounted for approximately 71% of the participant’s total payments
`received, on average. Single-source brand drugs were the most expensive drugs, and they
`generally accounted for over 50% of the drugs dispensed to plan members.
`
` The pharmaceutical manufacturer-PBM agreements showed that manufacturers readily
`raised and lowered allowance levels for each of their drug products as competition
`developed in the drug’s therapeutic class.
`
` •
`
`• Allowance levels were higher for drugs on restrictive formularies and when there were
`several competing drugs in a therapeutic class.
`
`• With few exceptions, the contracts did not provide higher allowance levels for drugs
`dispensed through PBM-owned mail-order pharmacies as compared to retail pharmacies.
`
`• Most PBMs did not receive higher allowance levels for including a “bundle” of a
`manufacturer’s drugs on their formularies. In the few cases in which a PBM did receive
`higher allowance levels, the bundle was a small subset of the manufacturer’s drug
`products.
`
`• Administrative fees that pharmaceutical manufacturers paid to PBMs to administer the
`formulary access programs on the manufacturers’ behalf were approximately 3% of the
`wholesale price of the manufacturers’ drugs.
`
`• Plan sponsors often contract with PBMs for prescription compliance programs, preferred
`drug management programs, therapeutic interchange services, or similar activities to
`better control their prescription drug costs. A small number of the manufacturers paid
`PBMs in this study for these additional services and programs. Most of the drugs in these
`programs were in frequently prescribed therapeutic classes with competing drugs. In the
`few cases in which manufacturers paid PBMs for these specific programs, they paid
`separate fees for each communication with a patient or physician; total fees were capped
`between $100,000 to $1,000,000 per drug per year.
`
` The extent to which contracts between PBMs and their plan sponsor clients included
`explicit terms for the PBMs to share “formulary” and “market share” payments with plan
`sponsors varied among plans. The Commission staff examined 26 plan sponsor contracts
`with 3 large PBMs. Most of these contracts included provisions for the sharing of these
`payments between the PBM and the plan sponsor. Some of the contracts provided for the
`PBM to share varying percentages of the payments received from manufacturers. Other
`contracts provided for the PBM to share these payments by guaranteeing a certain dollar
`amount per eligible prescription. The data obtained from study participants did not reveal
`a consistent relationship between the type of PBM (i.e., large PBM, small or insurer-
`owned PBM, and retailer-owned PBM) and the contractual sharing percentage. Plan
`sponsors generally have audit rights that allow them to verify whether they receive the
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`EXECUTIVE SUMMARY
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`PHARMACY BENEFIT MANAGERS:
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`payments for which they contract. The extent of these audit rights varied among the
`study participants.
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`Question 3: Whether Mail-Order Pharmacies that Are Owned by PBMs (or Entities that
`Own PBMs) Dispense Fewer Generic Drugs Compared to Single-Source Drugs within the
`Same Therapeutic Class than Mail-Order Pharmacies that are Not Owned by PBMs
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`Background on Generic Drug Prices: Retail and mail-order pharmacies that dispense
`generic drugs lower overall prescription drug costs, because generic drugs are substantially less
`expensive than their brand drug counterparts. Generic drugs are bioequivalent to brand drugs,
`that is, they contain the same active ingredient(s) of the brand drugs and are, among other things,
`chemically identical in strength, concentration, dosage form, and route of administration.
`Pharmacists generally can substitute a generic drug for a multi-source brand drug without prior
`physician authorization when a consumer presents a prescription for a brand drug. The “generic
`substitution rate” (GSR) measures how often generic drugs are substituted for brand drugs when
`a generic drug is available.15 The “generic dispensing rate” (GDR) measures the frequency of
`generic drug dispensing compared to the dispensing of all drugs (brand and generic), regardless
`of the extent to which generic drug substitutes are available for the brand drug dispensed.16
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`Answer – Generic Dispensing Rate (GDR) for Owned Mail v. Not-Owned Mail: For
`prescriptions dispensed in December 2003, the data showed that, for plans administered by large
`PBMs, mail-order pharmacies dispensed the same ratio of generic drugs compared to all drugs
`within the same therapeutic class regardless of the ownership of the mail-order pharmacy (owned
`mail weighted average GDR of 35% compared to not-owned mail GDR of 36%). For plans
`administered by retailer-owned PBMs in December 2003, owned mail-order pharmacies
`dispensed a slightly smaller ratio of generic