WASHINGTON, July 9 (Reuters) - The consolidation of

pharmacies and health insurance companies through years of deal

making has led to a handful of pharmacy benefit managers

exercising outsized influence over prescription drug prices, the

U.S. Federal Trade Commission said on Tuesday.

Pharmacy benefit managers, or PBMs, act as middlemen between

drug companies and consumers. They negotiate volume discounts

and fees with drug manufacturers, create lists of medications

that are covered by insurance, and reimburse pharmacies for

prescriptions.

The FTC argues the three biggest PBMs - managing 79% of U.S.

prescription drug claims - have greatly enriched themselves at

the expense of smaller pharmacies and consumers, according to an

interim staff report calling for possible greater regulation.

"These powerful middlemen may be profiting by inflating drug

costs and squeezing Main Street pharmacies," the FTC said in its

findings, two years into an investigation of top PBMs and their

impact on prescription drug prices in the United States.

The consumer protection agency "will continue to use all our

tools and authorities to scrutinize dominant players across

healthcare markets," said FTC Chair Lina Khan.

The three biggest PBMs are UnitedHealth Group Inc's ( UNH )

Optum unit, CVS Health Corp's ( CVS ) CVS Caremark and Cigna

Corp's Express Scripts.

The report included some closely guarded information about

how companies, such as CVS Caremark, contract for formulary

placement for drugs.

Formulary drugs is the term used for the list of

medications covered by various insurance plans.

The report also detailed how the three largest PBMs recently

established separate affiliated entities called group purchasing

organizations, or PBM GPOs, that negotiate contracts and rebates

with drug makers, traditionally something the PBMs engaged in

directly. The term GPO usually refers to companies that purchase

drugs and medical supplies on behalf of healthcare providers.

The report comes amid a renewed effort by President Joe

Biden to combat soaring healthcare costs and drug prices after

the passage of his landmark Inflation Reduction Act.

The PBM market has become highly concentrated with the

largest companies being vertically integrated with the largest

insurance companies and pharmacy chains. This has given PBMs

significant power over prescription drug prices and the ability

of Americans to access them, the FTC said.

PBMs set which drugs are covered by insurance and at what

price, as well as which pharmacies patients can use to fill

their prescriptions. They do this without transparency or public

accountability, the report said.

Of the three biggest PBMs, CVS owns the nation's largest

retail pharmacy chain as well as insurance company Aetna.

UnitedHealth ( UNH ) and Cigna ( CI ) also have insurance units and own

specialty pharmacies.

The FTC also investigated Humana Pharmacy Solutions, Prime

Therapeutics and MedImpact Healthcare Systems. These six

companies together control over 90% of the market.

UnitedHealth Group Inc ( UNH ), CVS Health Corp ( CVS ), Cigna Group ( CI ), and

Humana Inc ( HUM ) and their subsidiaries -- which include the biggest

PBMs -- took part in more than 190 transactions over the 2016 to

2023, the report said, citing data from PitchBook.

The market consolidation has led to PBMs favoring their own

affiliated businesses, which creates conflicts of interest that

prevent smaller independent pharmacies from staying competitive

by steering patients away from them.

PBMs are also able to lock independent pharmacies into

unfair contracts that do not accurately reflect the final

payment amounts these pharmacies will get, the FTC said.

The FTC said it found evidence that PBMs and the makers of

brand drugs negotiate rebates conditioned on limiting access to

cheaper generic competitors.

Rebates, the term for volume-based discounts, are

negotiated on the behalf of health insurance companies, large

employers, and Medicare prescription drug plans with drugmakers

and pharmacies.

The FTC began investigating the top PBMs and their impact on

pricing and access to prescription drugs in 2022. It initially

went after the three biggest PBMs, but later expanded its probe

to include the top six.