Pharmacy Benefit Managers
Three companies process roughly 80% of every prescription filled in the United States. They are called pharmacy benefit managers. They sit between drug manufacturers, health insurers, pharmacies, and patients. Their stated purpose is to negotiate lower drug prices on behalf of employers and insurance plans. For two decades, they did the opposite.
What Pharmacy Benefit Managers Do
A pharmacy benefit manager (PBM) manages the prescription drug benefit for health insurers, employers, and government programs. When a patient fills a prescription, the PBM decides which drugs are covered, what the patient pays, how much the pharmacy is reimbursed, and which manufacturer rebates flow back to the plan sponsor.
Three PBMs dominate the market:
| PBM | Parent Company | Market Share |
|---|---|---|
| Express Scripts | Cigna | ~25% |
| CVS Caremark | CVS Health | ~25% |
| OptumRx | UnitedHealth Group | ~25% |
Combined, the Big 3 control 75-80% of the prescription drug market. That concentration alone would raise antitrust concerns. But the real problem is what each of these companies has become.
Vertical Integration: Four Businesses in One
Each of the Big 3 now operates simultaneously as an insurer, a PBM, a pharmacy owner, and a group purchasing organisation (GPO). CVS Health owns Aetna (insurance), CVS Caremark (PBM), CVS Pharmacy (retail), and CVS Specialty (mail-order). UnitedHealth Group owns UnitedHealthcare (insurance), OptumRx (PBM), and a growing network of pharmacies and clinics. Cigna owns Express Scripts and the Ascent GPO.
The same company that decides which drugs your plan covers also profits from rebates on those drugs, steers you toward its own pharmacy, and sets reimbursement rates for independent pharmacies that compete with it. Every transaction creates a conflict of interest.
How PBMs Make Money
Rebates
Drug manufacturers pay PBMs rebates in exchange for preferred placement on the formulary. For high-volume drugs like insulin, rebates typically run 25-60% of gross sales. A 40% rebate on a $300 drug is $120. On a $100 drug, it is $40. The PBM's financial incentive is clear: prefer the expensive drug.
PBMs negotiate these rebates on behalf of health plans but retain a portion as compensation. The exact amount retained has historically been hidden behind confidentiality clauses. Plan sponsors often do not know how much their PBM keeps.
Spread Pricing
When a patient fills a prescription, the PBM charges the health plan one price and reimburses the dispensing pharmacy a lower price. The PBM keeps the difference. On generic drugs, spreads may be a few dollars. On specialty drugs, they can reach hundreds of dollars per prescription. The plan sponsor typically has no visibility into what the pharmacy was actually paid.
Offshore Operations
Express Scripts operated its group purchasing organisation, Ascent, from Switzerland. Ascent handled approximately $750 billion in purchasing activity. Operating offshore placed its rebate structures and compensation arrangements beyond easy US regulatory scrutiny. Under the 2026 FTC settlement, Express Scripts must move Ascent back to the United States.
Formulary Manipulation
PBMs control which drugs patients can access through administrative tools designed to steer utilisation toward high-rebate products:
- Prior authorisation: Requires a physician to submit paperwork justifying why the patient needs a non-preferred drug. Delays treatment by days or weeks.
- Step therapy ("fail first"): Forces patients to try the PBM's preferred drug and document clinical failure before the prescribed drug is covered.
- Non-medical switching: Moves stable patients to different medications mid-treatment for formulary reasons unrelated to clinical outcomes.
Why PBMs Prefer Expensive Drugs
The rebate system creates a structural incentive to favour high-priced drugs. This is not a side effect. It is how the business model works.
Consider two competing drugs for the same condition. Drug A has a list price of $300 and offers a 40% rebate ($120). Drug B has a list price of $150 and offers a 40% rebate ($60). Both drugs are clinically equivalent. The PBM earns twice as much from Drug A. Drug B loses its formulary spot.
This is the "chase the rebate" dynamic. Manufacturers compete not on price but on rebate size. A company that tries to lower its list price may actually lose formulary placement because the rebate dollars shrink. The system punishes lower prices.
Patients Pay Based on the List Price
Patient copays and coinsurance are calculated on the list price, not the net price after rebates. A patient with 20% coinsurance on a $300 insulin pays $60 out of pocket. The PBM collected a $120 rebate on that same prescription, bringing the effective cost to $180. The patient's cost-sharing subsidises the rebate the PBM keeps.
This is the mechanism behind the insulin prices crisis. Insulin list prices rose more than 300% over two decades. Most of that increase reflected rebate growth, not changes in manufacturing costs. From 2015 to 2019, Humalog's list price rose 27% while its net price fell 14%. The entire increase went to intermediaries. Patients on high-deductible plans paid based on the inflated list price while PBMs collected ever-larger rebates.
Reports of insulin rationing followed. One in four insulin-dependent patients reported skipping doses or using expired insulin because copays tied to list prices were unaffordable.
FTC Enforcement
In September 2024, the Federal Trade Commission brought enforcement action against the Big 3 PBMs for anticompetitive rebating practices in the insulin market. The agency alleged that PBMs' rebate-chasing behaviour artificially inflated insulin list prices and directly harmed patients.
Express Scripts Settlement (February 4, 2026)
The FTC's consent order requires Express Scripts to:
- Eliminate spread pricing across all plan contracts
- Delink compensation from list prices. No more percentage-of-WAC rebate retention
- Implement cost-plus reimbursement for independent pharmacies
- Reshore the Ascent GPO from Switzerland to the United States
The order takes effect January 2027.
CVS Caremark Settlement (March 23, 2026)
Seven weeks later, the FTC reached a settlement with CVS Caremark on substantially similar terms. The settlement covers formulary practices, spread pricing, and pharmacy reimbursement.
OptumRx, the third of the Big 3, has not reached a settlement. The FTC's case against UnitedHealth Group's PBM remains ongoing.
The FTC projects the two completed settlements alone will save patients up to $7 billion over 10 years.
Federal Legislative Reform
Consolidated Appropriations Act 2026
The most comprehensive federal PBM reform legislation to date, the CAA 2026 restructures how PBMs are compensated and how rebates flow through the system:
| Provision | Effective Date |
|---|---|
| PBM compensation limited to flat-dollar service fees at fair market value | January 2028 |
| 100% manufacturer rebate pass-through to ERISA plans (quarterly, within 90 days) | January 2029 |
| Spread pricing banned for ERISA plans | January 2029 |
| "Any willing pharmacy" requirement for Medicare Part D | January 2029 |
| Semiannual reporting and audit rights for plan fiduciaries | January 2029 |
The shift from percentage-of-WAC compensation to flat-dollar service fees is the structural change that matters most. It eliminates the financial incentive to prefer high-list-price drugs. If a PBM earns a flat fee regardless of drug price, the chase-the-rebate dynamic breaks.
DOL Transparency Rule
On January 30, 2026, the Department of Labor proposed a rule requiring PBMs to disclose compensation details to ERISA plan fiduciaries. Employers and unions would gain visibility into exactly how their PBM is paid. This information has been obscured by confidentiality clauses for decades. Understanding how drug prices are set starts with knowing where the money goes.
Independent Pharmacies Under Pressure
Rural pharmacies declined 5.9% between 2018 and 2023. The cause is straightforward: PBMs reimburse independent pharmacies at rates that sometimes fall below the cost of the drug itself. Pharmacy owners report filling prescriptions for as little as $0.88 in total profit before labour costs.
PBMs compound the problem by steering patients away from independents. Differential cost-sharing means patients pay lower copays at PBM-owned pharmacies and higher copays at competing independents. The combination of below-cost reimbursement and patient steering creates an economic squeeze that disproportionately hits rural and underserved communities where an independent pharmacy may be the only option within miles.
State-Level Reform
States have moved faster than Congress on PBM regulation, and some results are already measurable.
Washington: Proof That Rebate Pass-Through Works
Washington's HB 2263 requires PBMs to pass 100% of manufacturer rebates through to health plans. The result: the 2025 small-group insurance rate increase was slashed by 52%. That is not a projection. It is a measured outcome reported by the state insurance commissioner.
Florida: Comprehensive PBM Regulation
Florida's Prescription Drug Reform Act introduced PBM licensing requirements, a spread pricing ban, and a 100% rebate pass-through mandate.
Alabama: Protecting Independent Pharmacies
Alabama's Community Pharmacy Relief Act established a minimum dispensing fee for pharmacies and banned patient steering to PBM-owned pharmacies.
Arkansas: Breaking Vertical Integration
In January 2026, Arkansas became the first state to ban PBM pharmacy ownership outright. The law addresses the vertical integration conflict directly by preventing a single company from acting as both the entity that sets reimbursement rates and the pharmacy that benefits from underpaying competitors.
What Changes and When
The combination of FTC enforcement, federal legislation, and state laws represents the most significant structural reform the PBM industry has faced. The timeline matters:
- January 2027: FTC Express Scripts consent order takes effect. Spread pricing eliminated, compensation delinked from list prices.
- January 2028: CAA 2026 flat-dollar fee requirement begins. PBMs can no longer earn more by favouring expensive drugs.
- January 2029: Full rebate pass-through, spread pricing ban, and "any willing pharmacy" requirement for Part D take effect.
These reforms do not cover everything. Medicare drug price negotiation addresses what manufacturers charge. PBM reform addresses what happens to the money after the price is set. Both are necessary. Neither is sufficient alone.
For patients and employers, the immediate step is transparency. Employees covered by employer-sponsored plans can ask their benefits department which PBM manages the drug benefit and whether the plan receives 100% of manufacturer rebates. Residents of states with rebate pass-through laws already have stronger protections. The DOL transparency rule, if finalised, will give plan fiduciaries the data they need to hold PBMs accountable.
The question is whether the PBM industry restructures in good faith or finds new ways to extract value from the prescription drug supply chain. Two decades of opaque pricing suggest caution is warranted.