Sins of Omission: A Review of the FTC Study of PBM Conflict of Interest

Abstract

On September 6, 2005, the Federal Trade Commission (FTC) released a long awaited study of potential conflicts of interest by independent pharmacy benefit managers (PBMs). Like any good study of alleged wrongdoing, the FTC examined both motive and performance.The FTC’s analysis indicated that it is in PBMs’ own interest to favor mail order generics over brands. This analysis failed on two counts.The FTC failed to realize that potential wrongdoing is limited to situations involving “rebatable” brands and that rebate averages across all brands are significantly less that rebate averages across rebatable brands. They also failed to realize that business segment profitability is due as much to transaction volume as average unit margin. It turns out that mail order generics are a relatively high average margin, but relatively low volume business for PBMs. When these failures are corrected, the result is that PBMs earn more per rebatable transaction and in the aggregate from brand name drugs than mail order generics.