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Download full paper click here 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 complaint 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 case based on a bevy of anecdotes comparing only net unit prices will fail due to complexities in the winner’s determination equation.

About the author: Lawrence W. Abrams I have a B.A. in Economics from Amherst College and a Ph.D. in Economics from Washington University in St. Louis. Emails welcome: labrams@gmail.com ​ 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 feet 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 wrote the following three papers in 2002 and 2003 and created an early Wordpress website and made them accessible via .pdfs for free: 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 to quantify 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