As we previewed in a prior Legal Update, on June 16, 2022, the Federal Trade Commission (“FTC” or “Commission”) unanimously approved issuance of a policy statement on rebates and fees in exchange for excluding lower-cost pharmaceuticals. Although the policy statement comes on the heels of another high-profile Commission action in the pharmaceutical industry—authorizing a study of the pharmacy benefit management (PBM) industry—the policy statement does not itself create new obligations or purport to reinterpret existing authorities. But drug companies should be on notice that the FTC will be scrutinizing their agreements with PBMs, possibly using legal authorities the FTC has not used for many years.
FTC’s Chief Concern
According to the statement, the Commission’s chief concern is that rebates may steer patients to higher-cost drugs and insulate the more expensive drugs from competition. To be clear, the agency states that “nothing prevents drug manufacturers, PBMs, and health plans from negotiating good-faith rebates and fees for legitimate services that increase value to payers and patients.” But the FTC distinguished this scenario from unlawful conduct that “stifles” or “forecloses” competition from less-expensive drugs.
The policy statement and accompanying press release laid out briefly the legal authorities the FTC might use to prosecute rebate fees that it deems to be anticompetitive:
- Exclusionary rebates that foreclose competition from lower-cost medicines may constitute unreasonable agreements in restraint of trade under Section 1 of the Sherman Act; unlawful monopolization under Section 2 of the Sherman Act; or exclusive dealing under Section 3 of the Clayton Act.
- Inducing prescription drug middlemen to place higher-priced drugs on formularies instead of lower-cost alternatives in a manner that shifts costs to payers and patients may violate the prohibition against unfair methods of competition or unfair acts or practices under Section 5 of the FTC Act.
- Paying or accepting rebates or fees in exchange for excluding lower-cost drugs may violate Section 2(c) of the Robinson-Patman Act.
Noteworthy Aspects of the Announcement
Some aspects of this announcement are particularly noteworthy.
First, the suggestion that unlawful conduct in this space could violate Section 5 of the FTC Act earned all five commissioners’ votes. In the unanimously approved policy statement, the Commission stated that Section 5 can address unfair methods of competition beyond those covered by the Sherman Act, citing the FTC’s power under Section 5 to challenge invitations to collude as an example.
Second, this appears to be the first time that the Commission has indicated that it would use its authority against unfair acts or practices in this way. As Commissioner Rebecca Kelly Slaughter noted in her oral comments, she had previously suggested using this authority in connection with a 2020 enforcement action in the pharmaceutical space. In that prior statement, Commissioner Slaughter explained how unreasonably high drug prices might satisfy the three-part test for unfairness laid out in Section 5(n) of the FTC Act:
First, the conduct as alleged in our complaint causes substantial injury to consumers, in the form of higher drug prices and delay in obtaining life-saving medication. Second, the injury is not reasonably avoidable because [the drug at issue] is the gold standard treatment [and] patients cannot choose to go without this life-saving treatment …. Finally, I believe that the injury is not outweighed by countervailing benefits to consumers or competition; while price increases normally induce competitive entry, the defendants ensure that such entry is incredibly difficult and substantially delayed—even for a drug that had been off-patent for nearly half a century—largely because as we have alleged, the defendants are actively preventing competition.
Third, the commissioners unanimously suggested that this conduct could violate Section 2(c) of the Robinson-Patman Act. In a separate statement, Commissioner Alvaro M. Bedoya explained his view: “If buyers (say, an insurer and their insured customers) use an agent (say, a PBM) to negotiate on their behalf, and that agent takes payment from the seller (say, a drug manufacturer), this may create a conflict of interest. It may also be commercial bribery violating Robinson-Patman.” Although the statute has been on the books for nearly a century, the FTC has not brought a case under it in several decades, and Commissioner Christine S. Wilson recognized that some readers would be “surprised” to see it invoked here. She made clear that although she opposed using the Robinson-Patman Act “in ways to elevate protection of rivals over benefits to competition,” she supports using it to “protect competition and consumers.”
The policy statement does not carry the force of law and creates no new legal obligations. But the issuance of the statement shows that the pharmaceutical industry is in the FTC’s crosshairs, and companies should take note. Indeed, it is likely that FTC staff will have this policy statement front of mind when they review forthcoming production from the six PBMs targeted in the PBM study authorized earlier this month: CVS Caremark; Express Scripts, Inc.; OptumRx, Inc.; Humana Inc.; Prime Therapeutics LLC; and MedImpact Healthcare Systems, Inc.