FTC Staff Letter to the Honorable Mark Formby, Mississippi House of Representatives, Concerning Mississippi Senate Bill 2445 and the Regulation of Pharmacy Benefit Managers

UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580
Office of Policy Planning
Bureau of Economics
Bureau of Competition
March 22, 2011
The Honorable Mark Formby
Representative, District 108
Mississippi House of Representatives
New Capitol, P.O. Box 1018
Jackson, MS 39215-1018
Dear Representative Formby:
The staffs of the Federal Trade Commission=s Office of Policy Planning, Bureau
of Competition, and Bureau of Economics1 are pleased to respond to your request for
comments on the likely competitive effects of the pharmacy benefit manager (“PBM”)
related provisions of Mississippi Senate Bill 2445 (“SB-2445” or “the Bill”). The Bill,
among other things, would “shift regulatory authority over PBMs from the Insurance
Commissioner to the Board of Pharmacy.” You asked the FTC to examine the Bill to
determine “whether the proposed legislation is anti-competitive and will likely result in
the increased cost of pharmaceutical care for consumers.”2
We are concerned that SB-2445, if enacted as passed by the Mississippi State
Senate, may increase pharmaceutical prices and reduce competition. First, allowing the
Pharmacy Board to regulate PBMs will likely undermine the PBM’s ability to negotiate
lower prices for prescription drugs, which in turn, will raise those prices for both insurers
and consumers covered by insurance. Second, the Bill appears to allow the Pharmacy
Board to obtain from PBMs financial and any other business information it desires and to
provide that information to third parties.3 If pharmaceutical manufacturers, pharmacists,
and pharmacies gain access to whatever information the Pharmacy Board requires the
1 This letter expresses the views of the Federal Trade Commission’s Office of Policy Planning, Bureau of
Competition, and Bureau of Economics. The letter does not necessarily represent the views of the Federal
Trade Commission (Commission) or of any individual Commissioner. The Commission has, however,
voted to authorize us to submit these comments.
2 Letter from Hon. Mark Formby to Jon Leibowitz, Chairman, Federal Trade Commission (March 1, 2011).
This comment addresses SB-2445, as requested, but staff notes that similar legislation was passed by the
Mississippi House of Representatives on March 3, 2011. It is our understanding that the two bills will be
considered and reconciled by a conference committee and that these comments are being requested for the
purpose of informing those discussions.
3 SB-2445, Section 73-21-157 (2)(a-b).

PBMs to produce, they could have access to competitively sensitive information,
potentially facilitate collusion, and increase prescription drug prices. Third, SB-2445
would change current law to require nonresident pharmacies that deliver prescription
drugs to Mississippi residents to have a Mississippi-licensed pharmacist-in-charge.4 This
requirement would add to out-of-state pharmacies’ expenses the fees and other costs
associated with licensure, continuing education, and registration of a pharmacist in
Mississippi, in addition to the costs imposed by requirements for pharmacists in the state
in which the nonresident pharmacies operate.5 These additional costs would likely be
passed on to Mississippi consumers and health plans.
Interest and Experience of the Federal Trade Commission
Congress has charged the Federal Trade Commission (“FTC” or “Commission”)
with preventing unfair methods of competition and unfair or deceptive acts or practices in
or affecting commerce.6 Pursuant to its statutory mandate, the FTC seeks to identify
business practices and regulations that impede competition without offering
countervailing benefits to consumers. For several decades, the FTC and its staff have
investigated the competitive effects of restrictions on the business practices of health care
providers,7 issued reports and studies regarding various aspects of the pharmaceutical
industry,8 and brought numerous enforcement actions in the pharmaceutical industry.9
The Commission has significant expertise in the competitive issues surrounding
PBMs. Of particular relevance to SB-2445 is the Commission’s “Conflict of Interest
Study” regarding PBM practices. In response to a Congressional directive in 2003, the
FTC analyzed data on PBM pricing, generic substitution, therapeutic interchange, and
repackaging practices. The study examined whether PBM ownership of mail-order
pharmacies served to maximize competition and lower prescription drug prices for plan
sponsors. In its 2005 report based on the study (“PBM Study”), the FTC found, among
other things, that the prices for a common basket of prescription drugs dispensed by
PBM-owned mail order pharmacies were typically lower than the prices charged by retail
pharmacies.10 The study also found competition affords health plans substantial tools
with which to safeguard their interests. Consumers benefit as a result.
4 SB-2445, Section 73-21-106.
5 The current law requires, among other things, registration of the non-resident pharmacy, which is
generally a less-restrictive alternative to duplicative professional licensure.
6 Federal Trade Commission Act, 15 U.S.C. ' 45.
7 See Federal Trade Commission, FTC Antitrust Actions in Health Care Services and Products (Oct. 2003),
available at http://www ftc.gov/bc/hcupdate031024.pdf.
8 See Federal Trade Commission, G ENERIC D RUG ENTRY P RIOR TO P ATENT EXPIRATION (July 2002);
D AVID R EIFFEN AND MICHAEL R. W ARD, GENERIC D RUG I NDUSTRY D YNAMICS , Federal Trade
Commission Bureau of Economics Working Paper No. 248 (Feb. 2002), available at
http://www ftc.gov/be/econwork htm.
9 See Federal Trade Commission, FTC Antitrust Actions in Pharmaceutical Services and Products (Oct.
2005), available at http://www ftc.gov/bc/0310rxupdate.pdf.
10 See Federal Trade Commission, PHARMACY BENEFIT M ANAGERS : O WNERSHIP OF MAIL-O RDER
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This 2005 PBM study continued the FTC’s ongoing experience with PBMs.
PBM practices were a particular focus of hearings on health care markets jointly
conducted by the FTC and the Department of Justice Antitrust Division (“DOJ”) in 2003
(“Health Care Hearings”).11 In 2004, the FTC and DOJ issued a report based on the
hearings, a Commission-sponsored workshop, and independent research.12 In addition,
FTC staff have analyzed and commented on proposed PBM legislation in several states.13
Background on PBMs
PBMs contract with health plans to manage the cost and quality of the plans’ drug
benefits. They act as clearinghouses for health plans, covered individuals, and retail
pharmacies, and may provide a variety of related services. These include: 1) developing
networks of local pharmacies; 2) providing access to mail order pharmacies; 3)
developing drug formularies and negotiating discounts and rebates from drug companies
in exchange for preferential placement in the formulary;14 4) providing analysis of
physician prescribing patterns; and 5) providing treatment information and monitoring of
covered individuals with certain chronic diseases.
Of particular relevance to SB-2445, PBMs negotiate drug prices with pharmacies
participating in the PBMs’ networks and payments for prescription drugs and services
with health plan sponsors. In addition, contracts with health plan sponsors specify how
the plan will share in any rebates or discounts the PBM obtains from pharmaceutical
manufacturers.15
P HARMACIES , 23 (Aug. 2005) (“PBM S TUDY”), available at
http://www ftc.gov/reports/pharmbenefit05/050906pharmbenefitrpt.pdf.
11 See Hearings on Health Care and Competition Law and Policy, June 26, 2003, available at
http://www ftc.gov/ogc/healthcarehearings/030626ftctrans.pdf. (“Health Care Hearings”) Subsequent
references to the hearings will identify a panelist, affiliation (as of hearing date), and transcript page.
12 See F EDERAL TRADE C OMMISSION AND D EPARTMENT OF J USTICE, I MPROVING H EALTH CARE: A D OSE OF
COMPETITION (2004), available at http://www.ftc.gov/reports/healthcare/040723healthcarerpt.pdf.
13 See, e.g., Letter from FTC staff to New York Senator James L. Seward (March 31, 2009), available at
http://www ftc.gov/os/2009/04/V090006newyorkpbm.pdf; Letter from FTC staff to New Jersey
Assemblywoman Nellie Pou (Apr. 17, 2007), available at http://www ftc.gov/be/V060019.pdf; Letter from
FTC staff to Virginia Delegate Terry G. Kilgore (Oct. 2, 2006), available at
http://www ftc.gov/be/V060018.pdf.
14 A formulary is a list of approved or preferred drugs for the plan.
15 These payments are paid to the plan sponsor, retained by the PBM, or shared between them depending on
the specifics of the contract between these parties. See PBM S TUDY , supra note 10, at 59-60; John
Richardson, Health Strategies Consultancy, Health Care Hearings, supra note 11, at 23-24 (PBMs “can be
paid through administrative fees, share of rebates, or some combination.”); Thomas M. Boudreau, Express
Scripts, Health Care Hearings, supra note 11, at 124. Typically, contracts also specify a plan’s audit rights
with respect to formulary and payment sharing. See PBM STUDY, supra note 10, at 58.
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PBMs negotiate lower pharmacy costs by forming a preferred or exclusive
network of retail pharmacies.16 Retail pharmacies offer discounts to PBMs depending on
the type and number of health plans covered by the PBM and the exclusivity of the
network — the more exclusive the network, the higher the discount. This mechanism can
make customer volume respond very strongly to prices, creating an incentive for
pharmacies to bid aggressively on prescription drug prices and potentially reducing the
prices that public and private health plans and consumers pay for pharmaceuticals.17
PBMs also use mail-order pharmacies to manage prescription drug costs. Many
PBMs own mail-order pharmacies. Plan sponsors sometimes encourage patients with
chronic conditions who require repeated refills to seek the discounts that 90-day
prescriptions and high-volume mail-order pharmacies can offer. Mail-order pharmacies,
including those owned by PBMs, compete directly with retail pharmacies.18
PBMs also establish relationships with pharmaceutical manufacturers, who
compete to have their drugs placed on a PBM’s formulary by offering discounts or
rebates.
Likely Effects of SB-2445
Several provisions of the Bill could harm competition and consumers. First, the
bill empowers the Pharmacy Board to regulate PBMs and may impede PBMs’ ability to
negotiate effectively contracts with pharmacies that save money for Mississippi health
plans and consumers. Second, the Pharmacy Board would have vague and potentially
unlimited authority to demand disclosures of sensitive PBM business information,
without any confidentiality protections, which could restrict PBMs’ ability to negotiate
contracts with pharmaceutical manufacturers and pharmacies to provide the best
prescription drug programs and prices for Mississippi consumers. Third, changing the
law to require an out-of-state pharmacy to have a Mississippi licensed pharmacist-in-
charge if it wants to sell prescription drugs to Mississippi consumers could raise the costs
of doing business without any countervailing benefits. Collectively, these requirements
may increase the prices that both public and private health plans, and ultimately
Mississippi consumers, pay for prescription drugs.
(a) 	Shifting Regulatory Authority of PBMs from the Insurance
Commissioner to the Pharmacy Board
16 A PBM may have several networks that differ in degree or scope of exclusivity.
17 See PBM S TUDY, supra note 10, at 3; General Accounting Office, Effects of Using Pharmacy Benefit
Managers on Health Plans, Enrollees, and Pharmacies at 11 (Jan. 2003) (“GAO Report”), available at
http://www.gao.gov/cgi-bin/getrpt?GAO-03-196 (noting when Blue Cross Blue Shield introduced a plan
with a smaller network of retail pharmacies, it included deeper discounts in its retail pharmacy payments);
Letter from FTC staff to Patrick C. Lynch, Rhode Island Attorney General and Juan M. Pichardo, Rhode
Island Deputy Senate Majority Leader, State of Rhode Island and Providence Plantations (Apr. 8, 2004),
available at http://www ftc.gov/os/2004/04/ribills.pdf (discussing these issues more extensively).
18 See PBM S TUDY, supra note 10, at i, 18-19.
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The current law places regulatory authority over PBMs with the Insurance
Commissioner, who has discretion over what information PBMs must provide on their
annual financial statements and reports. The Pharmacy Board currently receives copies
of those annual reports. SB-2445 would shift the regulatory authority and power to the
Pharmacy Board, which consists of seven members, all of whom must be pharmacists.
Thus, pharmacists, who negotiate retail prescription drug prices with PBMs and compete
against PBM-owned mail-order pharmacies, would now be regulating PBMs.
Although we offer no specific recommendations on the ideal structure for
regulating PBMs,19 it is our understanding that no other state has placed PBMs under the
regulatory control of its pharmacy board.20 Because pharmacists and PBMs have a
competitive, and at times, adversarial relationship, we are concerned that giving the
pharmacy board regulatory power over PBMs may create tensions and conflicts of
interest for the pharmacy board.21 Indeed, the antitrust laws recognize that there is a real
danger that regulatory boards composed of market participants may pursue their own
interests rather than those of the state.22 We urge the Mississippi legislature to consider
19 We note that most professions, including medical professions, have self-regulatory boards whose
principal function is to regulate the activities of their own profession. In many cases, the membership of
these boards also includes members from outside the profession to represent the public interest, including
consumers’ interests. See, e.g., HHS, BUREAU OF HEALTH PROFESSIONS, HEALTH RESOURCES
AND SERVICES ADMINISTRATION THE PROFESSIONAL PRACTICE ENVIRONMENT OF
DENTAL HYGIENISTS IN THE FIFTY STATES AND THE DISTRICT OF COLUMBIA, 2001 at 80-81
(2004), available at ftp://ftp.hrsa.gov/bhpr/workforce/dentalhygen.pdf (“Dental hygiene is idiosyncratic in
that most health professions are self-regulated. Dental hygiene is largely under the purview of dentistry.
This is not true for similarly situated medical professionals who are principally self-regulated. Only the
physician assistant (PA) profession is, to some extent, governed by Boards of Medicine.”). [Hereinafter
HHS Dental Hygienists Report].
20 See generally Richard Cauchi, National Conference of State Legislatures, Background Brief - 2007
State Legislation Affecting Pharmaceutical Benefit Managers (PBMs) (Feb. 5, 2007) (summarizing PBM
legislation); National Conference of State Legislatures, Prescription Drug 2009 Enacted State Laws (Jan. 4,
2010), available at: http://www ncsl.org/default.aspx?tabid=18909 (same); National Community
Pharmacists Association, LAWS THAT P ROVIDE REGULATION OF THE BUSINESS P RACTICES OF P HARMACY
BENEFIT MANAGERS, available at:
http://www ncpanet.org/pdf/leg/leg pbm business practice regulation.pdf (same).
21 See Drug Topics: The Newsmagazine for Pharmacists, “Independent pharmacies must unify to fight
PBM industry”, Drug Topics E-News, Feb. 22, 2011, at
http://drugtopics.modernmedicine.com/drugtopics/Modern+Medicine+News/Independent-pharmacies-
must-unify-to-fight-PBM-ind/ArticleStandard/Article/detail/708606 (discussing what pharmacists must do
to fight PBM industry and citing the Mississippi bill, which “proposes to move the regulatory authority
(over PBMs) from the Department of Insurance to the State Board of Pharmacy, which will be responsible
for overseeing and issuing permits to every PBM. Fortunately, the State Board of Pharmacy understands
the industry and some of its members are friends of independent pharmacy”). See generally HHS Dental
Hygienists Report at 73,165 (HHS noted that “[t]he dental hygiene profession has progressed less quickly
than most other health professions. This is largely due to the regulation of the profession of dentistry, a
condition that is unusual in health regulation since most other professions are provided with autonomy in
governing their constituents.” HHS further noted “There is a demonstrated, adversarial relationship in
organized professional circles between dental professionals and hygiene professionals.”).
22 See Patrick v. Burget, 486 U.S. 94, 100 (1988); Opinion of the Commission, North Carolina State Board
of Dental Examiners at 9 (Feb. 8, 2011), available at:
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this concern.
(b) 	Information Disclosures to the Pharmacy Board and Others
SB-2445 gives the Pharmacy Board complete discretion over what information
PBMs must provide and allows the board to share that information with pharmacies and
health plans. Moreover, there are no confidentiality provisions for sensitive financial or
business information.23 The bill requires each PBM to file an annual statement with the
Pharmacy Board. This statement “shall be on forms prescribed by the board and shall
include: (a) A financial statement of the organization, including its balance sheet and
income statement for the preceding year; and (b) Any other information relating to the
operations of the pharmacy benefit manager required by the board under this section.”24
Moreover, the bill authorizes the Board to “provide a copy of the financial examination to
the person or entity who provides or operates the health insurance plan or to a pharmacist
or pharmacy.”25
These provisions could result in sharing competitively sensitive cost information
among competing pharmacies and pharmaceutical manufacturers. In particular, such
information sharing could undermine competition between pharmacies to be included in
PBM networks and between pharmaceutical manufacturers to offer discounts to PBMs.
Both outcomes could raise prescription drug prices for consumers. We note, however,
that if there are appropriate confidentiality safeguards in place, health plan sponsors (and
their consultants) may find specific cost information helpful as they seek to select among
PBMs, understand their enrollees' prescription drug use, and ensure that they are
receiving appropriate rebates from PBMs.
In some circumstances, sharing information among competitors may increase the
likelihood of collusion or coordination on matters such as price or output.26 The antitrust
agencies have explained how coordinated interaction harms consumers: coordinated
http://www ftc.gov/os/adjpro/d9343/110208commopinion.pdf.
23 But see SB-2445 at § 73-21-107 (4) (unlike the provisions related to PBMs, this Section prevents the
pharmacy board, without written consent, from inspecting drug wholesalers’ “(a) Financial data; (b) Sales
data other than shipment data; or (c) Pricing data”).
24 SB-2445 at § 73-21-157.
25 SB-2445 at § 73-21-159 (3).
26 FTC/DOJ G UIDELINES FOR C OLLABORATIONS AMONG COMPETITORS §3.31(b) (discussing potential
harms to competition when competitors exchange or disclose sensitive business information). See also
D EPARTMENT OF J USTICE AND F EDERAL TRADE COMMISSION , S TATEMENTS OF A NTITRUST ENFORCEMENT
P OLICY IN H EALTH CARE, Statement 6 (Aug. 1996) (same); available at http://www.ftc.
gov/bc/healthcare/industryguide/policy/hlth3s.pdf; Letter from FTC Staff to Sen. James L. Seward, New
York Senate (Mar. 31, 2009) (disclosure of sensitive business data in one market segment may chill
competition in multiple market segments); available at
http://www ftc.gov/os/2009/04/V090006newyorkpbm.pdf; U.S. D EPARTMENT OF J USTICE AND F EDERAL
TRADE C OMMISSION , H ORIZONTAL MERGER G UIDELINES §7 (2010) (describing anticompetitive effects of
coordination among rivals), available at http://ftc.gov/os/2010/08/100819hmg.pdf [hereinafter FTC/DOJ
H ORIZONTAL MERGER G UIDELINES ].
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interaction “can blunt a firm’s incentive to offer customers better deals by undercutting
the extent to which such a move would win business away from rivals” and “also can
enhance a firm’s incentive to raise prices by assuaging the fear that such a move would
lose customers to rivals.”27
For example, pharmacies may compete with one another by offering deeper
discounts or lower dispensing fees in order to be included in a PBM’s limited network or
to become a preferred provider. Knowing that rivals will see, and can respond to, one’s
prices can dilute incentives to bid aggressively. Thus, depending on the information the
Board requires, the disclosure provisions may undercut the most efficient pharmacy
network contracts, leading to higher prescription drug prices.
Similarly, if the Pharmacy Board requires PBMs to provide detailed information
about their rebate arrangements with pharmaceutical manufacturers, then tacit collusion
among the manufacturers may be more feasible.28 Absent such knowledge,
manufacturers have powerful incentives to bid aggressively for formulary position,
because preferential formulary treatment offers the prospect of substantially increased
sales. Disclosure of such confidential financial and business information thus may raise
the price that Mississippi consumers pay for pharmaceutical coverage by harming
competition among pharmaceutical companies for preferred formulary treatment.
In sum, allowing the Pharmacy Board to demand confidential business
information from PBMs and to disclose it presents a significant threat to competition that
could lead to higher prescription drug prices for Mississippi consumers.
(c) 	Requirement that Nonresident Pharmacies have a Mississippi-licensed
Pharmacist-in-Charge
Section 73-21-106 of the Mississippi Code currently requires a nonresident
pharmacy to register with the board. In addition, the nonresident pharmacy, among other
things, must “[c]omply with all lawful directions and requests for information from the
regulatory or licensing agency of the state in which it is licensed . . . [and] maintain at all
times a valid unexpired license, permit or registration to conduct the pharmacy in
compliance with the laws of the state in which it is a resident.” SB-2445 would amend
this section to add the requirement that the pharmacist-in-charge of a nonresident
pharmacy “hold a Mississippi pharmacist license, be licensed to practice pharmacy in the
state of residence of the nonresident pharmacy, and be current and in good standing with
the licensing boards of both states.”29
27 FTC/DOJ H ORIZONTAL MERGER G UIDELINES §7.
28 See, e.g., Svend Albaek et al., Government Assisted Oligopoly Coordination? A Concrete Case, 45 J.
I NDUS . ECON. 429 (1997).
29 A nonresident pharmacy is “Any pharmacy located outside this state that ships, mails or delivers, in any
manner, controlled substances or prescription or legend drugs or devices into this state.” SB-2445, Section
73-21-106.
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8
This additional requirement could increase the costs of mail-order pharmacies that
provide pharmacy services to Mississippi consumers and potentially reduce the incentives
or increase the costs for health plans and PBMs to offer mail order options to
beneficiaries. As noted above, in its 2005 PBM Study, the FTC found that the prices for
a common basket of prescription drugs dispensed by PBM-owned mail order pharmacies
were typically lower than the prices charged by retail pharmacies.30 Similarly, a
Maryland study found that statutory impediments to the use of mail-order pharmacies for
maintenance drugs can be costly for a State and its citizens.31 In the absence of
countervailing health and safety rationales for the new licensure requirement, FTC staff
urges the Mississippi legislature to consider carefully whether requiring a nonresident
pharmacy to employ a Mississippi-licensed pharmacist could unnecessarily hamper
affordable access to pharmaceutical goods and services.
Conclusion
Our analysis of SB-2445 suggests that its passage may increase pharmaceutical
prices for Mississippi consumers. FTC staff recommends that the Mississippi legislature
seriously consider whether there are benefits to consumers from the additional, more
restrictive regulations in SB-2445 that would outweigh the competitive harm and
consumer costs identified herein. Finally, FTC staff recommends that if the Mississippi
legislature concludes PBMs should be subject to additional oversight, that the legislature
consider giving additional authority to the Mississippi Commissioner of Insurance rather
than to the Board of Pharmacy.
We appreciate your consideration of these issues.
Respectfully submitted,
Susan S. DeSanti, Director
Office of Policy Planning
Joseph Farrell, Director
Bureau of Economics
Richard A. Feinstein, Director
Bureau of Competition
30 See PBM S TUDY, supra note 10 at 23.
31 See Md. Health Care Comm. and Md. Ins. Admin., Mail-Order Purchase of Maintenance Drugs: Impact
on Consumers, Payers, and Retail Pharmacies, 2-3 (Dec. 23, 2005), available at
http://mhcc maryland.gov/legislative/mailorderrpt.pdf (noting greater use of mail-order maintenance drugs,
as would be enabled by liberalizing Maryland insurance law, would save Maryland consumers 2-6% on
retail drug purchases overall, and third-party carriers 5-10%).