United, Cigna stocks unfazed after FTC lawsuit targets PBM subsidiaries

Shares in UnitedHealth Group Inc. and The Cigna Group were largely unfazed following a lawsuit filed by the US Federal Trade Commission against the managed care giants and their subsidiaries alleging their pharmacy benefits managers engaged in unfair pricing.

The lawsuit, filed on Sept. 20, targets the "Big Three" pharmacy benefits managers (PBMs) — United Health Group's Optum Inc., Cigna's Express Scripts Inc. and CVS Health Corp.'s Caremark LLC — for allegedly abusing "their economic power by rigging pharmaceutical supply chain competition in their favor, forcing patients to pay more for life-saving medication."

UnitedHealth and Cigna saw minimal drops in their stock over the weekend following the lawsuit, each declining by 0.6% from Sept. 19, the day prior to the lawsuit's announcement, to the end of trading on Sept. 23.

The S&P 500 and S&P Insurance index fared somewhat better during the same time, rising by 0.09%.

Stocks of managed care insurers have generally performed poorly in September. Since the beginning of trading this month through Sept. 25, UnitedHealth and Cigna's stock have declined 3.7% and 4.5%, respectively. Meanwhile, more embattled managed care insurers such as Humana Inc. and Centene Corp. fell 14.2% and 7.6%, respectively.

The lawsuit

According to the US Federal Trade Commission complaint, the three PBMs in question together administer about 80% of all prescriptions in the United States and are partly the cause of a drug affordability crisis via the manipulation of price competition for their own benefit.

"Normally, companies compete by lowering prices. And normally, insurance systems function by the healthy subsidizing the sick," the complaint said. "Respondents' conduct has turned these basic principles on their head."

The FTC goes on to allege that the respondents played roles in "designing, directing, and overseeing a drug reimbursement system" that generates billions of dollars in rebates and fees for them while "incentivizing drug manufacturers to raise (not lower) the sticker price (i.e., list price)" of their drugs.

In the complaint, the FTC argues that in the race for higher rebates and to preserve the manufacturers own profits-manufacturers, PBMs have steadily increased the list price of their drugs, leading to artificially inflated list prices that are disconnected from the actual cost of the drugs to insurers.

"As a result, many diabetics and other sick patients are stuck paying significantly more for life-saving medications like insulin," the complaint reads.

Cigna's chief legal officer, Andrea Nelson, pushed back against the lawsuit in a statement issued soon after, describing the legal action as part of a "troubling pattern from the FTC of unsubstantiated and ideologically-driven attacks on pharmacy benefit managers."
"This will hurt consumers and those who provide their prescription drug benefits — including employers, labor unions, and the federal government itself," Nelson said.

UnitedHealth Group did not respond to a request for comment regarding the FTC lawsuit.

More legal action

The lawsuit comes on the heels of a separate legal action filed earlier the same week in Missouri federal court by Cigna's Express Scripts against the FTC, arguing that the agency should retract a July 2024 report "filled with false and misleading claims about the pharmacy benefit management industry and fails to serve the interests of American consumers."

"The commission's Report followed prejudice and politics, not evidence or sound economics, and wrongly concluded that PBMs inflate drug costs and harm independent pharmacies," Express Scripts' complaint reads. "Express Scripts' business and reputation have been harmed by the commission's unlawful, unconstitutional, and arbitrary and capricious conduct and defamatory statements."

In the lawsuit, the company claims defamation under Missouri common law and violation of the Fifth Amendment of the US Constitution, among other violations.

PBM profit streams

Following news of the FTC's lawsuit, J.P. Morgan analyst Lisa Gill wrote in a research note that PBMs do not rely on a single profit stream and that there is a misconception that significant profitability comes from rebates.

"At times, we believe that both investors and politicians have assumed that PBMs are hoarding away rebates negotiated on behalf of plan sponsors (health plans and employers)," Gill wrote. "That does not line up with prior disclosures."

Although rebating differs from drug to drug, Gill wrote that rebating is understood to have declined from approximately 54% in early 2003 to less than 5% on average as disclosed in 2018 during the Cigna-Express Scripts merger.

Additionally, Gill wrote that OptumRx has noted that they have 100% pass through of rebates for all UnitedHealth members.

As PBMs have become part of larger managed care organizations, the benefit to retaining rebates has fallen, Gill wrote.

"Much of the PBM economics are predicated on volume, and as the industry increasingly focuses on value-added services and complex conditions served by specialty pharmacy, we believe the PBM business model will continue to evolve," she wrote.