FTC Staff Comment Before the ERISA Advisory Council of the U.S. Department of Labor Regarding Pharmacy Benefit Manager Compensation and Fee Disclosure

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UNITED STATES OF AMERICA
Federal Trade Commission
WASHINGTON, D.C. 20580
Office of Policy Planning
Bureau of Economics
Bureau of Competition
August 19, 2014
Via Electronic Submission
Larry Good
Executive Secretary
ERISA Advisory Council
U.S. Department of Labor, Suite N–5623
200 Constitution Avenue NW, Washington, DC 20210
Dear Mr. Good:
The staffs of the Federal Trade Commission (“FTC or Commission”) Office of Policy
Planning, Bureau of Economics, and Bureau of Competition1 appreciate the opportunity to
highlight information from the FTC that may be useful to the Advisory Council on Employee
Welfare and Pension Benefit Plans (“Council”) as it considers issues related to PBM
Compensation and Fee Disclosure.2 Specifically, the purpose of this letter is to discuss prior FTC
analyses that relate to the Council’s general inquiry and address some of the recent questions
directed to FTC staff. As explained below, FTC staff has examined competition among PBMs
and the types of compensation and disclosure arrangements negotiated by PBMs and plan
sponsors. In addition, the staff has analyzed proposed state regulations imposing PBM disclosure
requirements and raised concerns that such mandates may prevent plan sponsors from
negotiating the level of disclosure that they deem useful and raise plan sponsors’ costs of
providing pharmacy benefits.
A primary focus of the Council’s inquiry is a determination “examining the current status
of the need for and potential scope of compensation and fee disclosures by PBMs under Section
408(b)(2), whether such information is necessary for plan administrators to determine if
reasonable compensation is being paid for PBM services under the statute, and how mandatory
compensation and fee disclosures might impact the provision of prescription drug services to
1 This letter expresses the views of the Federal Trade Commission's Office of Policy Planning, Bureau of
Economics, and Bureau of Competition. The letter does not necessarily represent the views of the Federal Trade
Commission (“Commission”) or of any individual Commissioner. The Commission, however, has voted to authorize
us to submit these comments. Commissioner Brill dissented on authorizing Commission staff to submit these
comments, and she is writing separately to the Council to express her views.
2 Emp. Benefits Sec. Admin., U.S. Dep’t Labor, 171st Meeting of the Advisory Council on Employee Welfare and
Pension Benefit Plans; Notice of Meeting, 79 Fed. Reg. 28555 (May 16, 2014).

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participants and beneficiaries of health care benefit plans and the costs of plan administration.”3
FTC staff has considered related disclosure questions within the context of our analysis of PBM
markets and regulations.
Congress has charged the Commission with preventing unfair methods of competition
and unfair or deceptive acts or practices in or affecting commerce.4 Pursuant to its statutory
mandate, the FTC seeks to identify business practices and regulations that impede competition
without offering countervailing benefits to consumers. For several decades, the FTC and its staff
have investigated the competitive effects of restrictions on the business practices of health care
providers,5 issued reports and studies regarding various aspects of the pharmaceuticals industry,6
and brought numerous enforcement actions against entities in that industry.7
Of particular relevance to the Council’s current inquiry is the Commission’s 2005 study
of PBM industry practices. In response to a 2003 request from Congress, the FTC analyzed data
on PBM pricing, generic substitution, therapeutic interchange, and repackaging practices, and
examined whether PBM ownership of mail-order pharmacies served to promote competition and
lower prescription drug prices for plan sponsors. The FTC found, among other things, that prices
were generally lower at PBM owned mail-order pharmacies than at independent mail-order and
retail pharmacies. To the extent that the plan sponsor’s relationship with the PBM creates
potential conflicts of interest, the study found that competition among PBMs affords plan
sponsors the ability to safeguard their interests through the provisions they negotiate in their
PBM contracts and plan designs.8
The Council asked whether the FTC has conducted further study of the PBM industry
since 2005. Since 2005, FTC staff has analyzed a number of state legislative proposals involving
3 U.S. Dep’t Labor, 2014 Issue Statement for the ERISA Advisory Council, PBM Compensation and Fee Disclosure,
http://www.dol.gov/ebsa/publications/2014issuestatement1.html.
4 Federal Trade Commission Act, 15 U.S.C. § 45.
5 See FED. T RADE COMM ’N, O VERVIEW OF FTC ANTITRUST ACTIONS IN H EALTH C ARE SERVICES AND P RODUCTS
(2013), http://www.ftc.gov/sites/default/files/attachments/competition-policy-guidance/hcupdate.pdf.
6 See, e.g., FED. T RADE COMM ’N, AUTHORIZED G ENERIC D RUGS: S HORT -T ERM E FFECTS AND LONG-T ERM IMPACT:
A REPORT OF THE FEDERAL T RADE COMMISSION (2011),
http://www.ftc.gov/sites/default/files/documents/reports/authorized-generic-drugs-short-term-effects-and-long-term-
impact-report-federal-trade-commission/authorized-generic-drugs-short-term-effects-and-long-term-impact-report-
federal-trade-commission.pdf; Luke M. Olson & Brett W. Wendling, Estimating the Effect of Entry on Generic
Drug Prices Using Hatch-Waxman Exclusivity (Fed. Trade Comm’n, Bureau of Econ. Working Paper No. 317,
2013), http://www.ftc.gov/sites/default/files/documents/reports/estimating-effect-entry-generic-drug-prices-using-
hatch-waxman-exclusivity/wp317.pdf.
7 See FED. T RADE COMM ’N, O VERVIEW OF FTC ANTITRUST ACTIONS IN P HARMACEUTICAL SERVICES AND
P RODUCTS (2013), http://www.ftc.gov/sites/default/files/attachments/competition-policy-guidance/rxupdate.pdf.
8 See FED. T RADE COMM ’N, P HARMACY B ENEFIT M ANAGERS: O WNERSHIP OF M AIL-O RDER P HARMACIES 58 (2005),
http://www.ftc.gov/sites/default/files/documents/reports/pharmacy-benefit-managers-ownership-mail-order-
pharmacies-federal-trade-commission-report/050906pharmbenefitrpt_0.pdf, (noting diverse audit rights and
reporting under PBM contracts) [hereinafter PBM STUDY].

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mandatory transparency requirements and their likely effect on competition.9 These FTC staff
comments have highlighted two particular types of concerns:
(1) 	mandatory disclosure requirements may hinder the ability of plans to negotiate
an efficient level of disclosure with PBMs; and
(2) 	if such disclosures publicly reveal previously proprietary and private
information about discounts negotiated with PBMs, disclosure may result in less
aggressive pricing by, or even collusion among, pharmaceutical
manufacturers.10
Additionally, in 2012, the FTC completed two investigations involving PBMs: (1) an
investigation to determine whether some pricing and pharmacy reimbursement practices of
CVS/Caremark constituted unfair methods of competition or unfair or deceptive acts or
practices;11 and (2) an investigation of a proposed merger between two PBMs, Express Scripts
and Medco.12 In connection with the Express Scripts/Medco merger, the Commission observed:
The market for the provision of full-service PBM services to health care benefit
plan sponsors is moderately concentrated and consists of at least ten significant
competitors. Our staff’s investigation revealed that competition for accounts is
intense, has driven down prices, and has resulted in declining PBM profit
margins—particularly in the large customer segment.13
9 See, e.g., Letter from FTC staff to the Hon. James Seward Concerning N.Y. Senate Bill 58 on Pharmacy Benefit
Managers (PBMs) (Mar. 2009), available at
http://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 [hereinafter New
York Comment]; Letter from FTC staff to the Hon. Nellie Pou Concerning N.J. A.B. A-310 to Regulate Contractual
Relationships between PBMs and Health Benefit Plans (Apr. 17, 2007), available at
http://www.ftc.gov/sites/default/files/documents/advocacy_documents/ftc-staff-comment-hon.nelie-pou-concerning-
new-jersey.b.310-regulate-contractual-relationships-between-pharmacy-benefit-managers-and-health-benefit-
plans/v060019.pdf.
10 New York Comment, id. at 4.
11 See In the Matter of CVS Caremark Corp., FTC File No. 112 3210 (Jan. 12, 2012) (consent order settling charges
that CVSC misrepresented the prices of covered Medicare Part D prescription drugs), available at
http://www.ftc.gov/enforcement/cases-proceedings/112-3210/cvs-caremark-corporation; In the Matter of CVS
Caremark Corp., FTC File No. 091 0106, (closing letter sent Jan. 12, 2012), available at
http://www.ftc.gov/sites/default/files/documents/closing_letters/cvs-caremark-
corporation/120112cvsclosingletter.pdf.
12 See Statement of the Fed. Trade Comm’n Concerning the Proposed Acquisition of Medco Health Solutions by
Express Scripts, Inc., FTC File No. 111-0210 (Apr. 2012), available at
http://www.ftc.gov/sites/default/files/documents/closing_letters/proposed-acquisition-medco-health-solutions-
inc.express-scripts-inc./120402expressmedcostatement.pdf. (“The transaction will reduce the number of significant
competitors to nine (plus a fringe of several dozen smaller firms) and give the merged company a market share of
just over 40%.”) [hereinafter “Commission Statement”].
13 Commission Statement , id. at 2; but see Dissenting Statement of Commissioner Julie Brill Concerning the
Proposed Acquisition of Medco Health Solutions by Express Scripts, Inc., FTC File No. 110-0210 (Apr. 2012),
available at http://www.ftc.gov/sites/default/files/documents/public_statements/dissenting-statement-commissioner-
julie-brill/120402medcobrillstatement.pdf.

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Second, the Commission noted that the amount of transparency in the plan design is one
dimension upon which PBMs compete for accounts:
There are also several standalone PBMs that are substantially smaller than the Big
Three but have had recent success winning significant employer business,
including large employer accounts. These PBMs usually compete by trying to
differentiate themselves from the Big Three and health plan-owned PBMs by
emphasizing a transparent pricing model, providing more individualized account
management support, and offering customized PBM offerings.14
Many of the economic principles and market characteristics that the FTC’s 2005 study
identified as important determinants of competition continued to be significant in 2012,
notwithstanding evolution in the marketplace over this seven-year period. For example, when
plan sponsors negotiate with PBMs, plan design is an important determinant of the pricing.
Designs can vary significantly across plans in many dimensions depending on the coverage the
plan sponsor wishes to provide and the costs it is willing to incur. One aspect of plan design
highlighted in the 2005 study is the extent to which indirect payments from pharmaceutical
manufacturers are to be passed through to the plan sponsor, which can vary considerably across
plans.15 Plan sponsors can also choose varying levels of disclosure. If a standard level of
disclosure is imposed on all plans, thus denying plan sponsors the ability to negotiate their
preferred level of disclosure, plans will be unable to use the level of disclosure as one element of
a negotiating strategy. FTC staff notes that the agency has not undertaken any systematic
examination of the PBM market since its ESI/Medco merger investigation in 2012. While staff is
not aware of more recent evidence contradicting these observations, the Council may want to
assess available evidence about the current state of the market.
Furthermore, rebates paid by drug manufacturers vary depending on certain
characteristics of the plans. For instance, plans with relatively restrictive formularies often
receive higher rebates.16 When plan sponsors can choose among varying levels of disclosure –
and other contract terms that may be associated with those levels of disclosure – then
manufacturers can adjust the rebates they are willing to offer based on the plan design. If
manufacturers tend to bid less aggressively when competitors and other plan sponsors can
observe rebate levels and other terms, only sponsors seeking that level of transparency will pay
the associated cost. A plan sponsor who values transparency may be willing to make this
tradeoff. When the level of disclosure is mandatory, however, that tradeoff will be imposed on
all plan sponsors, regardless of the value they place on transparency.17
14 Commission Statement , supra note 12, at 4.
15 PBM STUDY, supra note 8, at 57-58. This section of the study also discusses a trend at that time toward plans
specifying higher levels of rebate pass through than had been negotiated in the past. The Advisory Council posed a
question to us about the connection between pass-through pricing and transparency. Higher levels of pass-through,
even up to 100%, do not necessarily imply higher levels of information disclosure. To verify a PBM’s performance
of their contract, a plan sponsor entitled to 50% of the rebates generated by its claims would require exactly the
same information as a plan sponsor entitled to 100% pass-through.
16 PBM STUDY, supra note 8, at 51-52.
17 New York Comment, supra note 9, at 4.

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In sum, we encourage the ERISA Advisory Council to consider whether harm may result
if plan sponsors are denied the ability to choose the level of transparency that best suits them,
within the context of their overall plan design. If the Council determines that additional
transparency may be desirable, we urge the Council to consider whether and how mandatory
disclosure requirements might be tailored narrowly to present useful and meaningful information
to plan administrators while mitigating the risk of competitive harm.
We appreciate your consideration of these issues, and we hope this information will be
helpful in your deliberations.
Respectfully submitted,
Andrew I. Gavil
Director
Office of Policy Planning
Martin S. Gaynor
Director
Bureau of Economics
Deborah Feinstein
Director
Bureau of Competition