Pharmacy Benefits Managers (PBMs)
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A Discovery Plan for Pharmacy Benefit Managers' Collusion - November 2024
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The Federal Trade Commission (FTC) has recently filed an administrative complaint against the Big 3 pharmacy benefit managers (PBMs) claiming they engaged in "unfair" conduct in violation of Section 5 of the FTC Act, 15 U.S.C. § 45. They never used the word "collusion" in the lawsuit and chose not to sue under The Sherman Act, Section 1. We view this as a novel case of market design collusion rather than a case of price collusion. The Big 3 PBMs are conceptualized as auctioneers soliciting rebate bids off list prices in exchange for favored positions on formularies.
We will show how the fairness standard of the FTC Act can be made operational by judging fairness against economic theories of good auction design. Discovery is focused on finding explicit communication among the Big 3 PBMs in 2012 to change the so-called “winner’s determination equation” of this auction, adding high gross rebates as a basis for formulary position assignments. On the other hand, we will argue that a discovery plan based on a bevy of anecdotes comparing only net unit prices will fail due to nuances in the winner’s determination equation
When Are Exclusionary Formulary Rebates Anticompetitive?
Forthcoming: January 2025
The Wyden-Grassley 2019 Senate Staff Report confirms that rebate contracts between pharmaceutical companies (Pharma) and the Big 3 pharmacy benefit managers (PBMs) feature a combinatorial bid-menu for formulary positions with both exclusive and shared positions. Pharma bid-menus often include a separate bid option for “an incremental base rate” if the PBM outright excludes a named competing drug.
The report confirms that the standard basis for rebate bids is a % off unit list price. In passing, the report provided email evidence of secretive discussions between Pharma and PBMs involving deviations from this standard in the form of lump sum and bundled rebates.
The purpose of this paper is to apply auction design theory to provide a test for when these incremental exclusionary rebates are anticompetitive. The key to our case is the conceptualization of this option as “rent-shifting” liquidated damages, a bargaining theory concept introduced by Aghion and Bolton twenty-seven years ago. We will argue that the rule of reason applies for unit rebate liquidated damages, but secretive lump sum and bundled rebates are presumptive gross overestimates and anti-competitive.
The Meta of Market Design in the Google - Apple Antitrust Case
Forthcoming: February 2025
Today private sector digital marketplaces or ecosystems monopolize interest in market design economics. These marketplaces are at the center of business models of the largest and most powerful companies in the United States today -- Google, Microsoft, Apple, Amazon, and Facebook. A decade ago, market design was focused on social-welfare public sector auctions and matchings in such areas as spectrum bandwidth, electricity, kidney exchanges, and school choice.
The purpose of this paper is to present a case study of how a monopolization of thought led to a neglect of a more comprehensive market design consideration of gateway assignments within the ecosystem . In other words, there is a “meta” to this story.
This monopolization of market design economics has caused its leading market designer Google to ignore market design principles when it bargained with Apple to be its default search engine on Apple devices. This blindness caused Google to lose a recent monopolization lawsuit.
Google should have structured the negotiations and contracts to reflect a combinatorial position auction with a bid menu of exclusive vs side-by-side shared positions with alleged substantial sub-additive value. Google and Apple should have included an explicit liquidated damage clause, stipulating that the contract would be renegotiated yearly to see if a new bid justified “an efficient breach” switch to a side-by-side shared position.
Apple could have obtained market-based estimates of the sub-additive value of shared search engines on its devices. Google and Apple could have even allowed a two year experiment with Microsoft of side-by-side assignment to get an empirical test of sub-additive values. Had Google and Apple done this, they may have prevailed in a recent Department of Justice antitrust monopolization lawsuit against Google, whose impending remedy could cripple this $2.4 Trillion company.
Table of Contents: List of Paper URLs
Section 1: The PBM Business Model (click on titles to download .pdf)
Section 2: PBM Rebates and Formularies (click on titles to download .pdf)
Pharmacy Benefit Managers as Bargaining Agents --Paper presented at the Western Economic Association
International, 8th Annual Conference, July 2005
The Effect of Corporate Structure on Formulary Design: The Case of Large Insurance Companies Poster Presentation, ISPOR 10th Annual Meeting, Washington DC, May 2005
Section 3: PBM Policy and Law (click on titles to download .pdf)
Practical Issues With PBM Full Disclosure Laws Originally Published in FDLI Update Magazine, Issue 4, 2004.
About the author:
I have a B.A. in Economics from Amherst College and a Ph.D in Economics
from Washington University in St. Louis.
I post often on twitter @larrywabrams on issues relating to PBMs, biosimilars
investing in biotech stocks in my portfolio and issues relating to Monterey
County, California where I reside.
My writings are at the intersection of economics, accounting, financial
analysis, and high tech. I have received no remuneration for these articles
and have no financial relation with any company discussed in these articles.
In 2002, I started looking at the 10-Qs and 10-Ks of the drug store chains and pharmacy benefit managers
after an "aha moment" in a Mountain View CA. Longs Drug store (later bought out by CVS).
I had gone there to to pick-up my renewal Rx of Type 2 diabetes drug Glucophage.
Several things happened that night piqued my interest in PBMs and big drug store chains.
First, I found out my Rx for Glucophage was now an Rx for Metformin without my prior knowledge.
I asked the pharmacist what was going on. He mentioned that my Rx now had a cheaper generic available
and my drug benefit plan manager made the switch automatically.
That night I was also struck by the fact that here was a 12,000 square foot store and all the customers were lined up
at the pharmacy counter in the back. I asked myself, "Could it be that hole in the wall in the back generated
all the profits while the front store was just a relic of the bygone days of lunch counters and shopping on Main Street?
The question of relative source of pre-tax profits -- pharmacy vs front store -- piqued my interest all the more
as I compared the pathetic merchandising I saw in this big drug store chain versus the amazing health product
merchandising I saw a week earlier at the first Whole Foods store on the West Coast in downtown Palo Alto, CA.
Based on that "aha moment", I created an early Wordpress website https://nu-retail.com
to host the following 3 papers that embody that moment:
Nu-Retail: A Counter to the Web 2002
The Next Tom's of Maine - 2002
Walgreen's Transparency Issue - November 2003
In addition, I was an early adopter of PBM as acronym for pharmacy benefit managers and
I published the first publicly available papers that quantified the PBM business model and retained rebates.
Quantifying Medco's Business Model - April 2005
Estimating the Rebate Retention Rate of Pharmacy Benefit Managers - April 2003
