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

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

Corp's Express Scripts.

CVS and Express Scripts denounced the findings. Express

Cripts said the report contained "blatant" inaccuracies and its

conclusions were biased. Increased regulation of PBMs would

reward drugmakers and hurt consumers, CVS said.

PBM shares slipped upon the report's release, with CVS down

1%, Humana falling 1.2%, and UnitedHealth ( UNH ) down marginally.

The report included some closely guarded information about

how companies 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 drugmakers, traditionally something the PBMs engaged in

directly. A CVS spokesperson said the company uses its GPO,

Zinc, to lower prices for Caremark clients. Cigna ( CI ) did not

address the issue in its response to Reuters questions.

The report comes amid a renewed effort by U.S. 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 2016 to

2023, the report said, citing data from PitchBook. Humana

declined to comment.

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, the FTC said.

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.

CVS said independent pharmacies account for 30% of

Caremark's pharmacy network spend and that they are on average

reimbursed at a higher rate than CVS pharmacies.

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

brand drugs negotiate rebates - volume-based discounts for plans

and pharmacies - conditioned on limiting access to cheaper

generic competitors.

Several PBMs were issued orders to hand over data but were

not forthcoming and timely in their responses, the report said,

which has hindered the investigation. CVS said it complied with

all data requests. Cigna ( CI ) said it provided the agency with

millions of lines of data and documents.