FTC Puts Pharmacy Benefit Managers, Private Equity in the Crosshairs

— "There's no doubt that we definitely punch above our weight," says FTC Chair Lina Khan

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    Jeremy Faust is editor-in-chief of ľֱ, an emergency medicine physician at Brigham and Women's Hospital in Boston, and a public health researcher. He is author of the Substack column Inside Medicine.

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    Emily Hutto is an Associate Video Producer & Editor for ľֱ. She is based in Manhattan.

In Part 2 of this exclusive video interview, ľֱ editor-in-chief Jeremy Faust, MD, and Lina Khan, JD, chair of the Federal Trade Commission (FTC), discuss the agency's role in healthcare, including its actions on pharmacy benefit managers (PBMs) and private equity in medicine.

Watch Part 1 of this interview here.

The following is a transcript of their remarks:

Faust: We have a system, the free market, that rewards these companies for doing research and development, and then they have a patent where they can make a lot of money. There's the research side, there's the development side, and then there's the market side.

Do you ever worry that for a non-blockbuster drug some of these things could disincentivize companies from pursuing something a little risky? [Like] a drug that isn't targeted at a condition as prevalent as obesity. So what they're going to end up doing is saying, "Fine, we'll make some new version of this drug, we'll patent that. But we're certainly not going to risk it on a drug for cystic fibrosis or sickle cell anemia that doesn't affect as many people."

Khan: We're certainly aware of the ways that promoting the rules of open, fair competition is actually a key ingredient for allowing those incentives to basically be aligned with what's good for the public.

Just to give you an example here, last year the from getting exclusive access to Maze's drugs for Pompe disease. Pompe disease is a really awful disease that affects a whole set of Americans that end up being dependent on a particular drug. Right now, Sanofi has had a monopoly on these Pompe disease drugs. Americans are routinely charged hundreds of thousands of dollars for a course of treatment.

Maze was a company that has had in development a drug that people would be able to take orally, rather than having to hook up to an IV twice a week, and could dramatically bring down both the cost and make it just more convenient and manageable for patients that are living with this awful disease.

We wanted to make sure that Maze is able to actually bring its products and its drugs to market. We worried that if, instead, the existing monopolist was allowed to get exclusive access to these drugs, that monopolists would have an incentive to not have this new drug cannibalize its existing, very lucrative sales. So that's why we blocked that merger, to make sure that Maze is still able to come to market and make sure the patients are ultimately able to benefit from that.

It's really about making sure that the incentives that companies are facing in the market are lining up with what is best for the public. Oftentimes, having different channels of access to the market is critical. We just wanted to make sure that Sanofi wasn't going to spike a new drug to protect its own monopoly, and so the antitrust laws were really focused on promoting innovation and promoting more innovative drugs coming to market.

Faust: Alright, that makes sense. You're trying to basically uphold antitrust. I'm not a lawyer, but I understand what that means.

But there are still situations, and this has been an area where you've spent some of your attention, where there is not a monopoly per se, but there are perhaps untoward practices on the ground. Pharmacy benefit managers or the GPOs -- the group purchasing organizations -- that really make the decisions on what drug you're going to get as a patient -- can you tell the audience what that is? Because a lot of people don't even know what that is and how the FTC is starting to pursue some changes in these relationships.

Khan: The FTC has been scrutinizing the pharmacy benefit managers. We're aware that this is a pretty opaque set of players in the supply chain, but they can have a pretty significant role in effectively determining which drugs Americans can or cannot access when they go to the pharmacy.

We've heard primarily two sets of concerns about these PBMs. One is a concern [regarding] the rebate system between the PBMs and the drug manufacturers, where the drug manufacturers have to pay rebates to the PBMs to get access to certain formularies. There's a concern that those rebates could be effectively incentivizing the PBMs to put on the formulary the drugs that are most lucrative, which may be high-cost, branded drugs rather than generics.

And so, again, even if the patent system is working so that you're getting generics ultimately onto the market, if Americans can ultimately not access those generics because the PBM is getting a bigger rebate on a branded drug, that's a problem. So we're scrutinizing those sets of practices.

We've also heard concerns that independent pharmacies that are oftentimes having to do business with these PBMs may be subject to all sorts of fees and potentially arbitrary practices that are squeezing them and potentially contributing to their going out of business. We've also seen over the last couple of decades that the PBMs both horizontally concentrate and vertically integrate. So some of these PBMs have, for example, their own mail-order pharmacy. We hear concerns from independent pharmacists that there may be some steering or some conflicts of interest embedded in this vertically-integrated structure.

Those are some of the practices that we've publicly shared we're looking at.

Faust: Alright. I do want to touch on some of the work related to private equity and private equity's interplay with the healthcare sector in particular.

There's been a lot of coverage about the FTC suing over anesthesia-related monopolies, and we could talk about that, but I'm wondering if you've spent a lot of time thinking about the nursing home industry. This seems like an area where there is room for improvement. Just in terms of best practices, I wouldn't say collusion, but just a sense that there's not really a race to the top, sometimes it feels like there's a race to the bottom. Is this on your radar?

Khan: I'm so glad you raised this, because we've heard a ton of concern from healthcare workers about the incursion of private equity into all sorts of areas within healthcare. We've also seen a whole set of empirical research studying what's happened when private equity has entered some of these specialties.

There was this famous paper that found that after private equity entities bought out nursing homes, the mortality rate actually increased, resulting in thousands of excess deaths that correlated with private equity entering. So, that's concerning.

We also have heard concerns from doctors about how after private equity has entered that they impose all sorts of quotas and all sorts of financial metrics that have resulted in doctors not being able to best serve their patients, and has actually led to the degradation of healthcare for patients. That's something that we're concerned about.

We are also looking at serial acquisitions -- instances where you see private equity companies making a whole set of acquisitions, each one of which may be relatively small, but in the aggregate, they can roll up a market. So the lawsuit that the FTC filed last year against U.S. Anesthesia Partners found that basically this private equity firm, Walsh Carson, had gone and bought out some of the largest anesthesiology providers in Texas, and then after consolidating that power jacked up the price. So you had Texas patients and businesses paying millions and millions of dollars more for anesthesiology after these roll-ups.

There's no doubt that private investment can be an important source of capital, but we need to make sure we're understanding what are the underlying incentives. Is this private equity firm [making] an investment that's going to be contributing to the competitive health and make more competitive some of these underlying assets? Or is this a firm that's focused on the strip-and-flip type model where you're buying out these assets, stripping them of value, and making them less competitive over the long-term in ways that's going to be bad for healthcare workers and patients alike?

Faust: The FTC is not really the largest federal agency out there. It's kind of scrappy. It's got a thousand employees or so. Is your approach here like, "OK, let's file some lawsuits and hope people go away"? I mean, how can you walk and chew bubblegum this many times? What's the strategy to take on all of this plus everything else you're doing outside of healthcare?

Khan: There's no doubt that we definitely punch above our weight. Our focus is really on: what are the biggest pain points for the American people, and where do we see the most harm?

There's no doubt that healthcare is a major area where all too often people feel like they're not getting a fair shake. The stakes of illegal business practices in healthcare are as high as they come, right? Some of these business practices can have life or death consequences. So if you have Americans who can't afford life-saving medicines, Americans who are having to drive 200 miles instead of 20 miles after hospitals merged and shut down local facilities, these are really material impacts on people.

As you know, sometimes the FTC gets tagged as being primarily focused on high tech markets and digital markets, but healthcare is really the top of our agenda, and it's been a big area of focus for me to hear directly from people in the field.

I've had the chance to sit down with ER doctors, had the chance to sit down with nurses, had the chance to sit down with healthcare workers across a range of specialties to make sure we're understanding what's actually happening in the trenches for people who are devoting their lives to serving patients. What in the market is preventing them from being able to do that?

Oftentimes, we hear that it's these middlemen that have now gained so much power that they're actually imposing decisions and hurting the ability of medical professionals to use their own best judgment. That's been a really interesting theme across the board, be it concerns about PBMs or private equity.

Faust: Alright, last thing. Why is Amherst College such a terrible school, and why is Williams such a superior academic institution?

Khan: Look, in this job I believe in competition. And so I encourage the healthy rivalry.

Faust: Alright, go Ephs. Chair Khan, thank you so much for sharing your views on ľֱ. Thanks so much.

Khan: Thank you.