Generic Drugs . . . a Growing Profit Center for Vertically Integrated PBMs

“Specialty Generic Drugs: A Growing Profit Center for Vertically Integrated Pharmacy Benefit Managers,” Federal Trade Commission

A brief post or commentary on Pharmacy Benefit Managers (PBMs). For the Big 3 PBMs and their affiliated pharmacies during our study period from 2017 through part of 2022 specialty generic drugs represented a growing profit center. FTC analyses found the Big 3 PBMs marked up numerous specialty generic drugs by hundreds and thousands of percent, with the majority of the most highly marked-up drugs dispensed
by the PBMs’ own affiliated pharmacies.108 These drugs are taken by patients with serious conditions, including cancer, multiple sclerosis, HIV, and pulmonary hypertension, among others.

Some Detail on the Findings

Prescription drugs represent a large and growing amount of healthcare spending, increasing from $393 billion in 2016 to $600 billion in 2023. Traditional drugs dispensed through retail and mail order pharmacies account for much of this spending. A disproportionate share of the growth has come from spending on a class of drugs known as specialty drugs. This class of drugs has more than doubled from $113 billion in 2016 to $237 billion in 2023. Historically, specialty drugs were categorized by their need for special handling and administration. This is no longer necessarily the case. There is no standard definition for a specialty drug. Today specialty drugs may be characterized by variety of factors, including their high cost.

This report expands on FTC staff’s initial findings regarding specialty drugs published in a July 2024 staff report entitled “Pharmacy Benefit Managers: The Powerful Middlemen Inflating Drug Costs and Squeezing Main Street Pharmacies.” The First Interim Staff Report provided an overview of the vertically integrated and highly concentrated markets in which pharmacy benefit managers (“PBMs”) operate. It highlighted the increasing importance of specialty drugs to the three largest PBMs, Caremark Rx, LLC (“CVS”), Express Scripts, Inc. (“ESI”), and OptumRx, Inc. (“OptumRx”) [collectively the “Big 3 PBMs”] and their affiliated pharmacies. Among many other findings, the First Interim Staff Report showed:

• Pharmacies affiliated with the Big 3 PBMs received 68% of the dispensing revenue generated by specialty drugs in 2023, up from 54% in 2016.

• The Big 3 PBMs marked up two specialty generic cancer drugs by thousands of percent and then paid their affiliated pharmacies hundreds of millions of dollars of dispensing revenue in excess of estimated acquisition costs for each drug annually.

This staff report relies on additional data and documents to analyze a broader subset of specialty generic drugs. We evaluate all specialty generic drugs dispensed during our 2017-2022 study period8 for members of commercial health plans and Medicare Part D prescription drug plans managed by the Big 3 PBMs for which we have relevant data—which includes 51 drugs comprising 882 National Drug Codes.

Pharmacies affiliated with the Big 3 PBMs received 68% of the dispensing revenue generated by specialty drugs in 2023. This is up from 54% in 2016.

Key Findings

The FTC’s latest interim staff report is part of the Commission’s ongoing study of the PBM industry. This report highlights several key insights gained from data and documents obtained from special orders the FTC issued in 2022 under Section 6(b) of the FTC Act, as well as from publicly available information:

Significant price markups: The Big 3 PBMs imposed markups of hundreds and thousands of percent on numerous specialty generic drugs dispensed at their affiliated pharmacies. This includes drugs used to treat cancer, HIV, and other serious diseases and conditions. The Big 3 PBMs also reimbursed their affiliated pharmacies at a higher rate than they paid unaffiliated pharmacies on nearly every specialty generic drug examined.

Dispensing the most profitable drugs: A larger, disproportionate share of commercial prescriptions for specialty generic drugs marked up more than $1,000 per prescription were dispensed by the Big 3 PBMs’ affiliated pharmacies compared with unaffiliated pharmacies. Dispensing patterns suggest that the Big 3 PBMs may be steering highly profitable prescriptions to their own affiliated pharmacies (and away from unaffiliated pharmacies).

Over $7.3 billion of dispensing revenue in excess of NADAC: The Big 3 PBMs’ affiliated pharmacies generated over $7.3 billion of dispensing revenue in excess of their estimated acquisition cost. (Measured by the National Average Drug Acquisition Cost (NADAC), on specialty generic drugs over the study period). PBM-affiliated pharmacy dispensing revenue in excess of NADAC increased dramatically at a compound annual growth rate of 42 percent from 2017-2021. In the aggregate, the top 10 specialty generic drugs generated $6.2 billion of dispensing revenue in excess of NADAC (85 percent of total). 

Generating additional income via spread pricing: In the aggregate, the Big 3 PBMs also separately generated an estimated $1.4 billion of income from spread pricing (i.e., billing their plan sponsor clients more than they reimburse pharmacies for drugs) on the analyzed specialty generic drugs over the study period.

Specialty generic drugs help drive parent healthcare conglomerates’ operating income: The top specialty generic drugs accounted for a significant share of the relevant business segments reported by the Big 3 PBMs’ parent healthcare conglomerates. Operating income from the Big 3 PBMs’ affiliated pharmacies dispensing of the analyzed specialty generic drugs accounted for 12 percent of the aggregated operating income reported by the parent healthcare conglomerates’ business segments that include their PBM and pharmacy businesses in 2021.

Plan sponsor and patient drug spending increased significantly: In 2021, the last year for which the FTC received full-year data for this study, plan sponsors paid $4.8 billion for specialty generic drugs. Patient cost sharing totaled $297 million. Between 2017 and 2021 plan sponsors and patient payments both increased at compound annual growth rates of 21% for commercial claims, and 14%-15% for Medicare Part D claims.

The results illustrate the increasing financial importance of specialty generic drugs to the Big 3 PBMs, as well as to plan sponsors and patients. The results also reveal the two case study drugs analyzed in our First Interim Staff Report were not isolated examples. This report confirms that the Big 3 PBMs impose significant markups on a wide array of specialty generic drugs.

And the revenue generated?

Figure 5 is a waterfall chart showing dispensing revenue for PBM-affiliated pharmacies (blue bars), NADAC estimated acquisition costs (green bars), and revenue in excess of NADAC (red bars) over the 2017-2021 period. In the aggregate, NADAC decreased slightly over the period (compound annual rate of decline = 4 percent), while pharmacy dispensing revenue experienced significant growth (compound annual growth rate = 24 percent), resulting in the PBM-affiliated pharmacies’ gains in dispensing revenue in excess of NADAC.

Revenue in excess of NADAC generated from commercial claims totaled $5.9 billion during the study period (81 percent of total). For Medicare Part D claims, revenue in excess of NADAC— which has implications for increasing government and beneficiary spending85—totaled $1.4 billion (19 percent of total). Revenue in excess of NADAC grew very significantly between 2017 and 2021 for both commercial (compound annual growth rate = 43 percent) and Medicare Part D (compound annual growth rate = 39 percent) claims.

NADAC is the National Average Drug Acquisition Cost. It is an index of drug acquisition costs based on surveys of invoices voluntarily provided to the Centers for Medicare & Medicaid Services (“CMS”) primarily by small, independent pharmacies. Its calculated cost is based on the retail price survey and focuses on the retail community pharmacy acquisition costs. CMS has mandated that Medicaid pharmacy programs reimburse the actual acquisition cost (AAC) of drugs plus a professional dispensing fee.