Published on Apr 10, 2024
This article has been updated for clarity.
HHS Secretary Xavier Becerra may run for governor of California in 2026. HHS Secretary Becerra is thinking about leaving the White House after the presidential election this November with the goal of running for governor of California in 2026, Politico reported. Becerra formerly spent 12 terms in the U.S. House of Representatives and served as California attorney general.
Critics allege that while Becerra has vocally been on board the Biden administration’s efforts to lower drug costs, the results in terms of changing market realities (high costs, poor outcomes, conflicts of interest, concentrated power, high levels of fraud, etc.) in the health care sector have been modest. Overall, Becerra has been a relatively industry-friendly health care regulator and law enforcer, and, should Biden win reelection, whom he selects to be the next HHS Secretary is perhaps the single biggest uncertainty—and potential risk—for the health care industry.
HHS cites middleman concentration in white paper on shortages but doesn’t mention AKS safe harbor; Comments pour in on cross-agency probe into GPOs, wholesalers. Amid increased antitrust scrutiny of group purchasing organizations (GPOs) and wholesalers, drug supply-chain middlemen that critics accuse of creating a “pay-to-play” marketplace that favors brand-name drug manufacturers and exacerbates supply issues, the Department of Health and Human Services (HHS) has issued a white paper with policy proposals for combatting record-high shortages of essential drugs.
Echoing some of the concerns of competition advocates, HHS cited concentration among supply-chain middlemen as one factor driving drug shortages. The agency acknowledged that critics say GPOs, wholesalers and pharmacy benefit managers (PBMs), all highly consolidated industries, undermine price competition and may contribute to supply-chain fragility through opaque contracting practices.
“This concentration gives most, if not all, the negotiating power to intermediaries (e.g., Group Purchasing Organizations (GPOs), Pharmacy Benefit Managers (PBMs), wholesalers), which some argue have applied strong downward price pressures to generic drugs through harmful contracting practices, including low-price clauses that allow middlemen to unilaterally walk away from a contract if they find a lower price from another manufacturer,” HHS wrote.
Also in the white paper, HHS cited its efforts to promote domestic drug manufacturing and said it’s considering ways to tweak Medicare payments to reward hospitals that stock enough essential medicines. The agency also proposed a resiliency program for manufacturers, where drugmakers would receive ratings based on metrics tied to supply-chain resiliency. HHS floated a similar program for hospitals, where Medicare payments would reflect hospitals’ commitment to practices that promote supply-chain resiliency, including sustainable contracting with middlemen.
Notably, the white paper failed to mention a safe harbor that Congress carved out for GPOs in 1987 under the Anti-Kickback Statue (AKS) for Medicare. GPOs represent groups of hospitals and providers, and purport to negotiate lower prices from drugmakers and medical suppliers for their members. The law exempts “administrative fees” paid by manufacturers to GPOs from AKS enforcement as long as the GPO discloses fees above three percent of the purchase price in its contracts.
Critics say the AKS safe harbor is what creates a fragile, pay-to-play drug purchasing environment—and some even describe GPOs’ conduct as “legalized bribery,” as The Capitol Forum reported.
HHS didn’t respond to a request for comment on whether it’s been considering any policies or recommendations related to the AKS safe harbor. Competition advocates have criticized other policy briefs that similarly refrain from mentioning how the AKS treats GPO fees, as The Capitol Forum reported.
Meanwhile, a cross-agency request for information on how consolidation among drug supply-chain middlemen and their contracting practices may impact drug supply has racked up over five thousand comments from the public. The agencies that issued it, the FTC and HHS, have extended the deadline for comment to late May.
Several commenters cited the AKS safe harbor and GPO payment structure as driving forces behind drug shortages: “The existing protections for GPOs under the Federal Anti-Kickback Statute have created a problematic environment of market concentration and dubious contracting practices, leading directly to drug shortages,” one person wrote. “This alarming situation cannot be overlooked.”
Other commenters discussed consolidation among wholesalers and how that might destabilize the drug ecosystem. Luke Slindee, senior pharmacy consultant and Myers Stauffer LC, drew attention to the effects of middleman consolidation on independent pharmacies.
Slindee’s comment accused the largest wholesalers of subjecting pharmacies to “product tying schemes” where they must buy a certain amount of generic products from wholesalers in order to score brand-name discounts: “Once this incentive structure is in place, it gives wholesalers extraordinary power to raise prices on Generic products, as pharmacies are essentially trapped into buying Generic products at high prices in order to meet the volume requirements needed to retain the lower Brand purchase prices the pharmacies desire / are financially dependent upon,” Slindee wrote.
Meanwhile, some health systems published comments in support of the GPO and wholesaler industries.
Though the request for information focuses specifically on GPOs and wholesalers, some commenters said the rebates paid by brand-name drugmakers to PBMs hurt pharmacies and patients and exacerbate shortages. “They pick and choose what drugs to cover based on kickbacks (rebates) that they keep,” one independent pharmacist commented. “Their choices in what to cover and not to cover increase the issues on drug shortages as well.”
HHS touted its joint request for information with FTC in the recent white paper. Whether policy or litigation will emerge from the comments received by the agencies remains to be seen.
When asked about the concerns that have emerged from agencies’ request, a spokesperson for the Healthcare Distribution Alliance, which represents drug distributors, told The Capitol Forum, “Distributors play a unique and critical role in efforts to prevent drug shortages, and when they do occur, to limit their impact on healthcare providers and their patients. Our strong partnerships across the pharmaceutical supply chain allow us to support providers as they navigate these challenges. The comments that we will be submitting, timed with the May 30 deadline, will provide additional perspective.”
The Healthcare Supply Chain Association, which represents hospital GPOs, did not respond to a request for comment.
Antitrust Agency Health Care Agenda
Food and Drug Administration 2025 budget request includes legislative proposals for “facilitating competition.” Under that banner, the FDA’s request includes amendments to the Hatch-Waxman and Food, Drug, and Cosmetic Acts for generics, as well as eliminating statutory distinctions between the approval standard for biosimilars and interchangeable biosimilars. The request also includes updating the Food, Drug, and Cosmetic Act to account for generic drug-device combination products.
Breaking down the FDA’s request for amendments to the FDCA, FDA LawBlog says, “this proposal is clearly intended to address difficulties in formulating generic drugs with the same quantity and quality of inactive ingredients as required by regulation for certain dosage forms.” Similarly, this observation extends to biosimilars.
Amendments to Hatch-Waxman include limiting the Act’s three-year exclusivity period for certain new drug applicants in cases where data can back the drug’s hypothesized effect. The agency is also seeking out “a safe harbor for “skinny labeling.”” However, FDA LawBlog notes that “the proposed “safe harbor” isn’t exactly a “safe harbor” that would alleviate concerns of allegations of induced infringement arising from skinny labels; instead, it would only limit the use of certain claims from evidence of induced infringement and thus may not have the intended effect.”
An FDA spokesperson told The Capitol Forum that the agency was looking forward “to working with Congress to further our efforts on making safe and effective generic drugs available to patients quickly and ensuring there’s adequate competition so patients have affordable access to the treatments they need.”
Revisiting research on UnitedHealth-Catamaran merger in light of DOJ investigation. A working paper published in 2023 by the National Bureau of Economic Research found that the 2015 merger between UnitedHealth, the largest U.S. insurer and owner of one of the “Big Three” pharmacy benefit managers (PBMs), and Catamaran, a PBM that wasn’t integrated with an insurer, increased market consolidation and led to health plan premium increases.
According to the paper, which we first covered last fall, the share of Medicare Part D beneficiaries enrolled in a health plan vertically integrated with a PBM almost tripled between 2010 and 2018. The authors focused specifically on the effects of the UnitedHealth-Catamaran merger, finding that it eliminated the “last significant standalone PBM” in the Part D market and led to premium increases of 36% for non-vertically-integrated insurers—both those who had to switch from Catamaran to a rival vertically-integrated PBM and those who had already been using a rival vertically-integrated PBM.
The authors attributed this to “input foreclosure,” an effect of market consolidation where a vertically integrated PBM can raise costs for the non-vertically-integrated insurers it contracts with because those insurers no longer have the option to switch to a standalone PBM like Catamaran.
The findings of the working paper may take on new meaning given the Department of Justice’s ongoing monopolization probe into the managed-care industry, which includes an investigation into UnitedHealth Group. While that probe focuses specifically on value-based or capitated-payment insurance models like Medicare Advantage, not Medicare Part D, DOJ appears to be taking a broad look at the potential competitive harm caused by UnitedHealth’s vertical acquisitions. The paper highlights one way vertical integration may disadvantage competing insurers.
Alternatively, the findings could attract attention from the FTC, which is set to make policy in the PBM area this year with the publications of a 6(b) report on PBMs, enforcement against insulin manufacturers, and potentially a settlement or law enforcement action related to the drug Remicade.
A spokesperson for UnitedHealth Group didn’t respond to a request for comment.
Medical Care Market Developments
In CA provider steering lawsuit, Optum and Emanate spar over allegedly anticompetitive contracts. A California health system called Emanate Health sued UnitedHealth Group (UHG), the nation’s largest insurer and employer of physicians, in Dec. 2023, alleging that its subsidiary Optum stifled competition among primary care physicians. The complaint alleged that Optum tried to force Emanate into unfairly amended contracts that would block Emanate’s physicians from competing with Optum. When Emanate didn’t agree to the contracts, Optum allegedly steered patients away from Emanate’s facilities.
Optum previously filed a motion to compel arbitration—or, if a judge finds the case non-arbitrable, Optum asked the court to dismiss the case. Emanate defended its antitrust claims in a response to that motion, as previously reported.
Now, Optum has fired back in a court filing that again entreats the judge to either compel arbitration or dismiss the case. The parties are sparring over the importance of the previous contracts between Optum and Emanate—and whether it matters that the antitrust claims pertain to contract terms that Emanate turned down.
Optum said the contracts that formerly existed between itself and Optum still apply, and therefore the arbitration clauses hold, contrary to Emanate’s claims that Optum’s alleged behavior “is exogenous to the contracts and thus does not relate to their performance breach or interpretation.” According to Optum, because the antitrust claims at issue are rooted in a former agreement between the parties, the contracts and their arbitration clauses are still applicable.
Optum said to the extent that the court finds the case non-arbitrable, Emanate’s antitrust claims still don’t hold up, in part because the complaint references contracts that Emanate didn’t enter. “Trying to have it both ways, Plaintiffs now argue that the absence of those contracts is supposedly anticompetitive because it resulted in fewer patients visiting Emanate Health-affiliated hospitals,” Optum said. “In doing so, Plaintiffs effectively recast their antitrust allegations as a “refusal to deal” claim. But, under any guise, Plaintiffs’ antitrust claims are flawed and should be dismissed.”
For its part, Emanate previously said they’d plausibly alleged the anticompetitive effects of the terminated contracts and the “dangerous probability” of Optum boosting its market power. According to Emanate, the procedures it provided to patients in Optum’s physician network declined by 70-80 percent as a result of Emanate not accepting the allegedly anticompetitive terms.
The New York Times’ Sunday paper cites previous Capitol Forum investigations into the legally challenged medical pricing data company MultiPlan. The Times’ article recounts how MultiPlan (MPLN) arose from the expiration of settlement terms against a similar company in the 2000s, UnitedHealth subsidiary Ingenix, now known as Optum.
In response to the Times’ reporting, a MultiPlan spokesperson provided The Capitol Forum with the following comment: “We are aware of the articles recently published by the New York Times. We fundamentally disagree with the depiction of our position in the industry and the services that we provide… MultiPlan is and always has been focused on bending the cost curve in healthcare with fairness, efficiency, and affordability for consumers.”
As we have previously reported, claims repricers have occupied a unique position in the health care ecosystem. In theory, an independent pricing service would be in the public interest, as it could help mitigate aggressive billing practices by medical providers, specifically those owned by private equity; however, MultiPlan’s close ties to insurers, UnitedHealth in particular, mean that MultiPlan’s prices are not independent. As a result, MultiPlan is vulnerable to antitrust allegations of collusion and fraud allegations of misrepresenting their independence.
To revisit The Capitol Forum’s extensive reporting on MultiPlan and UnitedHealth’s Naviguard, a MultiPlan competitor, click here.
Pharma Supply Chain Developments
Ohio to implement new pharmacy regulations following CVS settlement. On May 1, the Ohio Board of Pharmacy will implement rules aimed at improving pharmacy staffing in the state and preventing prescription delays. This comes after the board settled with CVS for over $1.25 million last month, resolving cases against 22 CVS locations in Ohio for severe understaffing, safety issues and service delays, as The Capitol Forum reported. CVS has also drawn scrutiny for allegedly creating “pharmacy deserts” in Ohio by buying up and then closing independent pharmacies across the state.
The Ohio Board of Pharmacy will soon require pharmacies to ensure sufficient staffing such that pharmacists can “practice with reasonable competence and safety.” Pharmacies will also be required to establish processes through which employees can request more staff, give pharmacists sufficient break time and fill prescriptions within three to five days.
A CVS spokesperson pointed The Capitol Forum to the company’s previous comment on the settlement.
M&A and Partnerships
Boston Scientific, Axonics receive FTC second requests for $3.7 billion deal. Last week, the FTC sent second requests to Boston Scientific and Axonics regarding their transaction, which would make Boston Scientific more of a power in devices and treatments that handle incontinence. Boston Scientific is a leading producer of vaginal slings, devices that prevent incontinence in women. Axonics is the market leader in bulking agents, which are injected into the bladder to help prevent overactivity.
The companies had previously pulled and refiled the notification of their deal to give the FTC more time to examine it, but the maneuver didn’t prevent a more in-depth investigation triggered by the second requests.
In a statement, Boston Scientific said that it’s “working cooperatively with the FTC.” Out of respect for the regulatory process, the company is “not disclosing the details of the [second] request or the information we’ve provided.”
Axonics didn’t respond to a request for comment. The FTC declined to comment.
