PHARMACY BENEFIT MANAGERS AND GENERIC PHARMACEUTICALS PRICING CONSPIRACY:UNVEILING LOCK-IN MECHANISMS, STRUCTURAL SHORTCOMINGS AND ANTITRUST EVIDENCE.

• Author: Yoo, Kwanghyuk

1. INTRODUCTION: ANOTHER CONCERN EMERGING, BUT OVERLOOKED? 45 II. THE NATURE OF ANTITRUST CONCERNS OVER THE LIKELY GENERIC-PBM CONSPIRACY IN A NUTSHELL 49 A. ANTITRUST IMPLICATIONS BASED ON THE TOTALITY OF THE EVIDENCE 49 B. ANTITRUST CONCERNS ARISING FROM THE GENERIC-PBM CONSPIRACY 52 III. THE FAR REACHING ROLES OF THE PBM IN THE CROSSHAIRS OF THE OVERARCHING INTER-GENERIC PRICING CONSPIRACY 55 A. THE PIVOTAL ROLE OF THE PBM IN THE PHARMACEUTICAL SUPPLY CHAIN 55 B. THE ANTICOMPETITIVE POTENTIAL OF THE PBM'S ROLE AS COOPERATIVELY APPROPRIATED IN FURTHERANCE OF GENERIC PRICING CONSPIRACIES 58 IV. THE COMPLEX PRICING SYSTEM AND COST-SAVING SCHEMES IN THE PHARMACEUTICAL INDUSTRY 60 A. THE DYNAMICS OF THE INTERCHANGEABILITY BETWEEN AWP AND WAC AS PRIMARY BENCHMARK PRICE 60 B. THE GENERAL USE OF MAC AS A SURROGATE BENCHMARK PRICE FOR GENERIC DRUGS 62 1. The History of MAC: Conversion from State-Level MAC Programs to Federal-Level FUL Program 62 2. The PBMs' Incentive to Employ Self-Devised MA C Prices 65 3. The Procompetitive Role of MAC Prices 65 C. THE PBMS' MANIPULATION OF THE PRICING SYSTEM IN VIOLATION OF ANTITRUST LAW 66 V. THE PBM'S MANIPULATION OF THE MANUFACTURER REBATE SCHEME IN FURTHERANCE OF THE HORIZONTAL INTER- GENERIC CONSPIRACY 71 A. Two TYPES OF MANUFACTURER REBATES: FORMULARY PAYMENTS AND MARKET-SHARE PAYMENTS 71 B. THE REBATE MANIPULATION MISALIGNING DISPARATE INTEREST OF MARKET PARTICIPANTS 75 1. The Joint Incentive for Generic Manufacturers and PBMs to Maneuver for the Benchmark Price Inflation for Larger Rebates 75 2. The interest Misalignment of the Benchmark Price Inflation 78 VI. THE PBM'S MANIPULATION OF THE PHARMACY REIMBURSEMENT SCHEME IN FURTHERANCE OF THE HORIZONTAL INTER-GENERIC CONSPIRACY 81 A. ENCAPSULATING THE PHARMACY REIMBURSEMENT SCHEME 81 1. Discount Transfer from PBMs to Third Party Payers 81 2. The Manipulation of the Discount Scheme Through Manufacturer-PBM Collusion 83 3. Proof of the Likelihood of Tacit Generic Rebates in Practice 83 B. VERTICAL INTEGRATION BETWEEN A PBM AND A MAIL-ORDER PHARMACY 86 1. Unlawful Margin Squeeze in the Form of Predatory Pricing 89 2. Unlawful Margin squeeze in the Form of Price Discrimination 90 C. FACTORS DRIVING THE GENERIC-PBM CONSPIRACY 91 VII. CONCLUSION: PINPOINTING KEY TAKEAWAYS FOR BEST DIRECTED INVESTIGATORY FOCUS IN VIEW OF THE LIKELY GENERIC-PBM CONSPIRACY 92 I. INTRODUCTION: ANOTHER CONCERN EMERGING, BUT

   OVERLOOKED?

   The ongoing titanic-scale court battle between the coalition of nearly every state of the United States and a myriad of generic drug manufacturers has drawn public attention as an unprecedented landmark case since December 2016 when it was initially filed in the United States District Court for the District of Connecticut. (1) In July 2014, the State of Connecticut initiated a non-public investigation into generic drugs' price increase, which, over time, expanded by leading more additional states to join forces with Connecticut. (2) In December 2016, a wide range of investigation across the United States, spearheaded by Connecticut, culminated in an antitrust lawsuit filed by twenty states, accusing six generic manufacturers of conspiring to raise their two generic drugs' prices. (3) In March 2017, the initial Complaint was amended to add additional states and state law claims. (4) In the meantime, the Judicial Panel on Multidistrict Litigation ordered that several private antitrust actions brought against some of those defendants in several other states were transferred to the Eastern District of Pennsylvania and consolidated under multidistrict litigation (MDL) for centralized pretrial proceedings. (5) Plaintiff states sought to have their Connecticut lawsuit stand unconsolidated and moved to vacate the transfer order of April 2017 potentially expanding the scope of MDL to encompass the state action. (6) However, in August 2017, the Judicial Panel rejected the Plaintiff states' motion and ordered transfer of the Connecticut lawsuit to the Eastern District of Pennsylvania and consolidation with other private class actions in the MDL. (7) In October 2017, the Plaintiff states filed a proposed Consolidated Amended Complaint alleging an overarching conspiracy involving the increased number of defendants and generic drugs. (8) The Proposed Complaint shows that the MDL case at bar now involves forty-six Plaintiff states, including the District of Columbia and the Commonwealth of Puerto Rico, and twenty defendants, including eighteen generic manufacturers and two individuals and fifteen generic drugs. (9) In an overarching conspiracy, defendants allegedly participated in a series of horizontal conspiracies to engage in illegal conduct to fix prices and allocate markets for fifteen generic drugs. (10) The overarching conspiracy was systemically schemed to lessen or thwart robust competition in the generic pharmaceutical industry. (11) Defendants effectuated this pervasive and industry-wide conspiracy by entering into a number of specific anticompetitive agreements to raise prices, maintain artificially inflated prices, and allocate markets in accordance with an established, agreed-upon standard of market share. (12) A series of conspiracies eliminated competition from markets for fifteen generic drugs and thereby caused the significant price hike to the detriment of consumer welfare. (13)

   By all accounts, the Plaintiffs' approach appears to focus on proving that defendants could effectively earn and share supra-competitive ill-gotten gains through an overarching conspiracy. Indeed, the proposed Amended Complaint reveals that the purview of the investigation is limited to several inter-generic conspiracies, but does not extend to any convoluted interplay between generic manufacturers and other market entities in the pharmaceutical supply chain under the even broader overarching conspiracy. (14) However, this view may not be correct. The complex structure of pharmaceutical supply chain and the interaction between participants may create strong suspicions on the generic pricing overarching conspiracy, closely intertwining generic manufacturers with pharmacy benefit managers (PBMs) acting as important intermediaries in the tangled pharmaceutical supply web. (15) PBMs do not directly participate in pharmaceutical distribution, but have enormous effects on the supply chain. (16) The prominent feature of PBMs is that they play an exclusive, pivotal role in nearly every process of the transactions between market entities, even at the point of filling and dispensing prescriptions at retail pharmacies in the end. (17) Problematically, this structural and functional trait allows PBMs to have full access to all the price information that is not available for other entities. (18) Accordingly, in their role, PBMs have market power to manipulate a variety of contractual schemes underlying deep-rooted practices in the generic industry, particularly manufacturer rebates and pharmacy reimbursement schemes. This fact may create grave antitrust concerns that defendants are incentivized to illegally pay PBMs to abuse their dominant market positions to facilitate the generic pricing conspiracy. (20) Generic-PBM collusion aligns their interests at the cost of other market entities, especially third-party payers, i.e., health insurers, and consumers. Such being the case, even if it is true that defendants' conduct is not peripheral, but is indeed the direct target of the ongoing antitrust probe throughout the states, limiting the investigatory scope of PBMs may not be the best approach for the Plaintiff states to describe the whole shape of the large generic anticompetitive scheme. The fact that circumstantial and economic evidence demonstrating the PBM's participation in the broader overarching generic pricing conspiracy serves to vindicate the argument that the prospective multistate investigation should neither overstate nor understate such available evidence one way or another to warrant the legitimacy of the investigative approach and resulting consequences.

   With the wisdom of foresight, this article aims to provide the in-depth and panoramic analysis of pivotal roles of PBMs as an integral actor in the alleged overarching generic conspiracy. It provides pragmatic guidance by which the Plaintiff states can direct their prospective investigation, particularly by determining whether the purview of the Plaintiffs' proposed Complaint should extend to include plausible allegations of various forms of specific conspiracies between generic manufacturers and PBMs. (21) The spectrum of analysis ranges from examining the dynamic functioning of PBMs in the pharmaceutical supply chain to identifying circumstantial and economic evidence that prove PBMs' participation in an overarching conspiracy by the extensive, vigorous manipulation of manufacturer rebate and pharmacy reimbursement schemes in furtherance of a number of specific horizontal generic conspiracies. (22) The analysis is predicated upon a thorough review of primary sources such as relevant case law and litigation documents, and also secondary sources including, but not limited to: a variety of pharmaceutical industry reports and surveys, scholarly articles, and wide-ranging studies issued by government agencies, e.g., the United States Department of Justice (DOJ), Federal Trade Commission (FTC), Congressional Budget Office (CBO), General Accounting Office (GAO), and Office of Inspector General of Department of Health and Human Services (HHS OIG).

   The article discusses all the issues in the following order. First, Section II provides a concise, holistic overview of the vital nature of emerging antitrust concerns over the likely generic-PBM conspiracy. (23) Section III articulates the contours of the problematic, extensive roles PBMs play in overarching generic pricing conspiracy. (24) In turn, Section IV examines the complex pricing system and cost-saving schemes in the...