In settlements with the Federal Trade Commission (FTC) in the agency’s lawsuit against the nation’s three largest pharmacy benefit managers (PBMs) for allegedly inflating the cost of insulin, the PBMs denied the allegations but agreed to orders regarding nondiscrimination of low-WAC versions of drugs. This blog (Part 1) explains key drug-pricing terms and the order provisions on nondiscrimination of low-WAC versions of drugs.

Insulin Affordability Investigation

As background, on September 20, 2024, the FTC brought an action against the three largest PBMs—Caremark Rx, Express Scripts, and OptumRx—for allegedly engaging in anticompetitive and unfair rebating practices that artificially inflated the list price of insulin drugs, impaired patients’ access to lower-list-price products, and shifted the cost of high insulin list prices to patients, according to a news release. The FTC’s administrative action seeks “a fix that could ripple beyond the insulin market and restore healthy competition to drive down drug prices for consumers,” Rahul Rao, Deputy Director of the FTC’s Bureau of Competition, said in the release.

Investigation status: Two of the three PBMs have settlement orders with the FTC: Express Scripts and Caremark Rx. The third PBM, OptumRx, has reached a tentative settlement.

Why it matters: The orders may affect how PBMs structure formularies, rebates and plan sponsor offerings, and they signal continued scrutiny of PBM practices beyond insulin.

What did the FTC allege?

Initially, the FTC was concerned that insulin out-of-pocket costs were too high for members, particularly those in high-deductible health plans (HDHPs), and that members were not receiving the benefit of insulin drug rebates. The FTC alleged that PBMs artificially drove up drug list prices by creating a system that favored rebates. The complaint alleges that this system pushed insulin manufacturers to compete for preferred formulary coverage based on the size of rebates off the list price rather than the net price. Allegedly, this ultimately benefitted the PBMs because they were allowed to keep some or all of the inflated rebates, as well as fees paid by drug manufacturers that were based on the list price. According to the FTC’s complaint, the inflated list prices hurt patients whose out-of-pocket payments, such as copays and coinsurance, are tied to the drug’s list price.

Key Definitions in the Orders

The following definitions are based on the FTC orders and simplified with context from Susan Hayes, chief executive officer of Pharmacy Investigators and Consultant, who presented an International Foundation webcast titled, “Rx Changes: New Laws and Future Impacts to Prescription Drugs.”

• Plan sponsors: Employers, insurers, or unions purchasing PBM services.
• Members: Individuals (participants and their dependents) enrolled in pharmacy benefit plans.
• Drug manufacturers: Companies that produce or market prescription drugs approved for sale by the Food and Drug Administration.
• Drug product: A pharmaceutical product approved by the Food and Drug Administration to be prescribed and offered for sale in the United States with a specific combination of active ingredient(s) or biological product(s), dosage form, route of administration, and strength.
• Pharmacy benefit plans: Plans that provide insurance coverage for prescription drugs and pharmacy services.
• Standard formulary: A PBM’s current or future drug formulary offered to commercial plan sponsors, adopted without any plan sponsor-requested customization.
• Standard offering to plan sponsors: A PBM’s package of products, services, features, or terms offered to all plan sponsors under the FTC order.
• Out-of-pocket costs: Payments made by members for prescription drugs such as co-pays, coinsurance, and deductibles.
• Rebates: Manufacturer discounts paid to a PBM by a drug manufacturer related to drug utilization by a member (excluding any fees).

Drug Pricing Terms

Drug pricing often relies on benchmarks. In many PBM contracts, plan sponsors pay drug claims based on a discount off average wholesale price (AWP). Wholesale acquisition cost (WAC), often called the drug’s list price, is another key benchmark.

• Average wholesale price (AWP): A pricing benchmark commonly used in PBM contracts. Plan sponsor discounts may be shown as a percentage off AWP, even though pharmacies typically do not buy drugs at AWP.
• Wholesale acquisition cost (WAC): The manufacturer’s list price to wholesalers or direct purchasers in the United States. Pharmacies generally purchase drugs based on WAC.

According to Hayes, AWP is typically about 20% to 25% higher than WAC. For example, if a plan sponsor pays 18% off AWP and the pharmacy buys at WAC, the pharmacy may retain a 2% to 5% margin between the two pricing points.

What is a low-WAC drug?

Some drug manufacturers offer two versions of the same drug: a high-WAC version with a higher list price and a low-WAC version with a lower list price.

• Low-WAC version: The lower-list-price version of a drug with the same active ingredient or biological product, dosage form, route of administration and strength, made or marketed by the same manufacturer.
• High-WAC version: The higher-list-price version of that same drug.

Nondiscrimination of low-WAC drugs

The FTC orders generally prevent PBMs from favoring a high-WAC version of a drug over a low-WAC version on standard formularies. The requirement is intended to help keep members from paying higher out-of-pocket costs when a comparable lower-list-price option is available.

Standard formulary must have low-WAC option

When a drug manufacturer markets both a high-WAC version and a low-WAC version of a drug product, PBMs shall not offer or administer any standard formulary on which the high-WAC version is covered and the low-WAC version is omitted, placed on a less favorable tier (i.e., a tier with greater member out-of-pocket costs) than the high-WAC version, or subject to additional restrictions (e.g., prior authorization or step therapy) relative to the high-WAC version.

The FTC orders are aimed at parity between low-WAC and high-WAC drugs. PBMs cannot make the lower-list-price version less favorable while giving preferred status to the brand or other higher-list-price version, assuming the supply and net unit cost conditions are met.

Hayes emphasized that PBMs can still offer a nontransparent high-WAC option, as long as they also offer the plan sponsor the low-WAC option.

To Be Continued

Part 2 will cover additional PBM obligations in the orders, including out-of-pocket cost protections, compensation and rebates, increased transparency for plan sponsors, standard offerings, implementation dates, and potential effects on the broader PBM industry.

Developed by International Foundation Information Center staff. This does not constitute legal advice. Please consult your plan professionals for legal advice.