In the first issue, I introduced the concept of pharmacy benefit managers (PBMs) as one of the central reasons Americans pay far more for prescription drugs than patients in any other nation. PBMs are large intermediaries that negotiate rebates from drug makers on behalf of insurers and employers. The three largest PBMs control roughly 80 percent of the U.S. market. Today I will go deeper into PBMs: how they actually work, where they came from, what laws enabled them to grow largely unchecked, how much money they make, what accountability they face, and what the evidence shows about their impact on what Americans pay at the pharmacy counter.
The picture that emerges is of an industry that started as a modest administrative service and grew through consolidation, vertical integration, and regulatory ambiguity, into one of the most powerful forces in American healthcare.
Part I — What a PBM Actually Does
The official description sounds benign enough: pharmacy benefit managers are companies that administer prescription drug benefits on behalf of health insurers, employers, and government programs. They process claims, maintain pharmacy networks, and use their purchasing scale to negotiate lower prices from drug manufacturers.
In practice, their role is far more expansive, and far more consequential.
The Five Core Functions
Formulary Management. A formulary is the list of drugs a health plan will cover, organized into tiers that determine how much patients pay out of pocket. PBMs build and control these formularies. A drug placed on a preferred tier gets far more prescriptions filled; a drug excluded entirely is, for practical purposes, inaccessible to most patients. This power over formulary placement is the lever that gives PBMs their negotiating influence over drug manufacturers; manufacturers pay rebates to secure favorable placement, and PBMs decide who pays enough.
Rebate Negotiation. PBMs negotiate confidential rebates from drug manufacturers — discounts paid in exchange for formulary placement. These rebates are calculated as a percentage of a drug’s list price. The higher the list price, the larger the potential rebate. Critics argue this structure creates a direct financial incentive for PBMs to favor high-list-price drugs, because larger rebates flow from more expensive medications — regardless of whether cheaper, equally effective alternatives exist.
Pharmacy Network Administration. PBMs establish and manage the networks of pharmacies where patients can fill covered prescriptions. They negotiate reimbursement rates with pharmacies — the amount a pharmacy receives for dispensing a drug. These rates are often opaque and can be set well below what independent pharmacies need to remain financially viable.
Claims Processing. Every time a patient fills a prescription, a real-time transaction flows through the PBM’s system: verifying eligibility, adjudicating the claim, applying cost-sharing rules, and authorizing payment. The three largest PBMs collectively process nearly 80 percent of all prescription drug claims filed in the United States each year.
Utilization Management. PBMs administer tools like prior authorization, step therapy, and quantity limits. Prior authorization requires a doctor to obtain approval before a patient can access certain drugs. Step therapy requires patients to fail on a cheaper drug before a more expensive (or brand-name) drug is approved. These tools can lower costs — but they can also delay care, and critics argue they are sometimes applied in ways that serve PBM financial interests rather than patient outcomes.
Part II — The Legal Framework That Made This Possible
Pharmacy benefit managers originated in the 1960s, established to handle the administrative burden of the newly introduced prescription drug benefits offered by insurance companies. For most of their early history, they were modest back-office operations — processing paper claims, maintaining eligibility databases. No single law created them. No single law governs them today.
What enabled their transformation from administrative vendors into dominant market players was a combination of regulatory gaps, one landmark federal statute, and decades of largely unchecked consolidation.
ERISA: The Law That Shielded Them From State Oversight
The Employee Retirement Income Security Act of 1974 — ERISA — is a federal law that established a regulatory framework for employer-sponsored health and retirement benefit plans. It was designed to ensure that employees’ benefits were protected and that large employers operating across multiple states didn’t have to navigate a patchwork of conflicting state rules.
ERISA contains an expansive preemption clause — it overrides any state law that ‘relates to’ an employee benefit plan. For PBMs, this became a formidable shield. Because the vast majority of working-age Americans receive their health coverage through employer-sponsored plans governed by ERISA, states that tried to regulate PBM practices — requiring rebate transparency, banning spread pricing, mandating fair pharmacy reimbursement — frequently found their laws preempted by federal statute.
The PBM industry, through its trade association, litigated aggressively to expand ERISA’s preemptive reach. The result was that for decades, PBMs operating on behalf of self-insured employer plans faced virtually no meaningful state oversight, and Congress created no federal alternative.
The 2020 Rutledge Decision: States Get Some Leverage Back
In 2020, the Supreme Court issued a significant ruling in Rutledge v. Pharmaceutical Care Management Association. The case involved an Arkansas law requiring PBMs to reimburse pharmacies at a price at least equal to what the pharmacy paid to acquire the drug. The Court held that the Arkansas law was not preempted by ERISA because it regulated PBM conduct without forcing employers to adopt any specific benefit design.
The Rutledge ruling gave states meaningful, if limited, new authority to regulate PBM pricing practices. Since the decision, all 50 states have enacted at least one PBM regulation, and 24 states passed 33 separate PBM-related bills in 2024 alone. However, the legal boundaries remain unsettled as some state laws have been struck down as ERISA violations, while others have survived, and the circuit courts have reached conflicting conclusions.
No Federal Fiduciary Duty — By Default
Under current law, PBMs are not considered ERISA fiduciaries. This is a crucial gap. As fiduciaries, they would be legally required to act in the best interests of the plan and its members, to prioritize patient welfare and plan value over their own financial gain. Without fiduciary status, PBMs face no such obligation. They can retain rebates, favor expensive drugs, steer patients to their own affiliated pharmacies, and structure contracts to maximize their own revenue and face no legal duty to act otherwise.
In December 2025, bipartisan legislation, “the PBM Fiduciary Accountability, Integrity, and Reform (FAIR) Act,” was introduced in both the House and Senate. If enacted, it would amend ERISA to designate PBMs as fiduciaries when providing services to employer health plans, requiring them to act prudently, loyally, and in the interests of participants rather than their own bottom lines. As of this writing, the bill has not been enacted.
The MMA and Medicare Part D: A Structural Opportunity
The Medicare Modernization Act of 2003 created Medicare Part D (the prescription drug benefit for Medicare enrollees) and embedded PBMs at the center of it. Private insurers offering Part D plans were required to contract with PBMs to administer the benefit. This gave PBMs access to a massive new market of tens of millions of patients, with federal dollars flowing through a system that had no requirement for PBM transparency and no prohibition on spread pricing.
The Medicare Part D structure also introduced Direct and Indirect Remuneration fees (DIR fees) a mechanism by which PBMs could retroactively reduce the reimbursements they paid to pharmacies, sometimes months after a prescription was filled. Pharmacies often had no way to predict what they would ultimately be paid. The 2022 Inflation Reduction Act required CMS to move most DIR fees to the point of sale beginning in 2024, providing patients with lower up-front costs, but the retroactive pressure on pharmacies has not been fully resolved.
Part III — How Much Money PBMs Make
The PBM industry generates revenue through multiple simultaneous streams, most of which are invisible to patients, employers, and even the insurers that hire them. Understanding where the money comes from is essential to understanding why reform has proven so difficult.
Revenue Stream 1: Administrative Fees
The simplest revenue source. Health plans and employers pay PBMs a per-claim fee to process prescriptions, maintain pharmacy networks, and administer benefits. This is the original business model and, by itself, it would be largely uncontroversial.
Revenue Stream 2: Manufacturer Rebates
Drug manufacturers pay PBMs rebates calculated as a percentage of a drug’s list price, in exchange for favorable formulary placement. These rebates can be substantial: the total value of gross-to-net reductions across all brand-name drugs in the United States reached an estimated $334 billion in 2023, according to the Drug Channels Institute.
PBMs are supposed to pass the majority of these rebates to their insurer clients, who can then use them to lower premiums. In practice, the share that actually flows to patients — particularly those with high-deductible plans who pay cost-sharing based on list price — is minimal. Research from USC Schaeffer Center found that while manufacturers take home a smaller share of net drug expenditures than they once did, the share going to PBMs has more than doubled.
Revenue Stream 3: Spread Pricing
Spread pricing is the practice of billing a health plan more for a drug than the PBM reimburses the pharmacy that actually dispensed it — and keeping the difference. If a PBM reimburses a pharmacy $50 for a medication but charges the health plan $70, the $20 spread is pure PBM revenue, invisible to both the pharmacy and the patient.
The scale of spread pricing abuse can be substantial. A state audit in Ohio found that PBMs overcharged the state’s Medicaid program by $224.8 million in a single year. Ohio has since transitioned to a pass-through model requiring full pricing transparency. FTC data found that the Big 3 PBMs generated an estimated $1.4 billion in spread pricing income on just the narrow set of specialty drugs analyzed in the agency’s 2025 report.
Revenue Stream 4: Affiliated Pharmacy Markups
This is where the vertical integration problem becomes most acute. Each of the three largest PBMs is owned by a corporation that also owns a major pharmacy chain or specialty pharmacy. CVS Health owns both CVS Caremark (PBM) and CVS Pharmacy. Cigna owns both Express Scripts (PBM) and specialty pharmacy operations. UnitedHealth owns both OptumRx (PBM) and OptumRx mail-order and specialty pharmacies.
The FTC’s 2025 report found that between 2020 and 2023, 63 percent of specialty generic drugs dispensed through PBM-affiliated pharmacies were marked up more than 100 percent above acquisition cost — and 22 percent were marked up more than 1,000 percent. One cancer drug, Capecitabine, was marked up 3,289 percent. From 2017 to 2022, affiliated pharmacies generated more than $7.3 billion in revenue above acquisition costs on specialty generics alone.
The Gross-to-Net Bubble
All of these dynamics combine to produce what analysts call the ‘gross-to-net bubble’: the ever-widening gap between a drug’s published list price and the net revenue manufacturers actually receive after rebates and fees. The bubble exists because manufacturers raise list prices to fund the growing rebates PBMs demand, while PBMs retain a larger share of those rebates rather than passing them to patients.
For patients with high-deductible plans or who are in their deductible period, cost-sharing is calculated based on the inflated list price not the net price after rebates. A patient may pay $200 out of pocket for a drug whose net cost to the plan is $60. The difference is not coincidental. It is structural.
Part IV — Legal Liability and Accountability
For most of their history, PBMs operated with minimal legal exposure. No fiduciary duty. Contracts structured to obscure pricing. ERISA preemption blocking state lawsuits. The FTC focused elsewhere. That picture has changed substantially in recent years, though meaningful accountability remains elusive.
The FTC Lawsuit
In September 2024, the Federal Trade Commission filed an administrative lawsuit against the Big 3 PBMs — CVS Caremark, Express Scripts, and OptumRx — and their affiliated group purchasing organizations, alleging that the companies created a ‘perverse drug rebate system’ that artificially inflated the cost of insulin and other medications. The complaint alleged anticompetitive conduct: specifically, that PBMs steered patients toward high-list-price insulins that generated larger rebates, suppressing competition from lower-cost alternatives and biosimilars.
The PBMs sought to have the case dismissed. In February 2025, a federal judge declined to block the FTC’s action, allowing the case to proceed. The outcome remains pending and will likely shape the future of PBM regulation regardless of which direction it resolves.
In February 2026, the FTC announced a consent agreement with Express Scripts that required certain changes to formulary practices. The full implications of the settlement are still being assessed.
State Attorney General Actions
Ohio’s Attorney General has filed multiple lawsuits against PBMs — including suits against Express Scripts for allegedly overcharging the state’s Highway Patrol Retirement System, and against OptumRx for drug overcharges. Other state attorneys general have filed or threatened similar actions. These cases have varied in outcome, but collectively they have produced evidence that state and federal investigators are now citing in support of broader reform.
Fiduciary Litigation Against Employers
A newer and potentially sweeping source of liability does not target PBMs directly — it targets the employers who hired them. Class action lawsuits have been filed against large employers alleging that plan fiduciaries breached their ERISA obligations by failing to adequately monitor their PBM contracts, verify pricing accuracy, and ensure rebate pass-through. As courts develop this theory, employers may face direct financial exposure for having contracted with PBMs under terms that harmed plan participants — creating new pressure on employers to demand greater PBM transparency.
The Industry’s Defense
PBMs vigorously dispute the characterization of their practices as harmful. The Pharmaceutical Care Management Association — the industry’s trade group — argues that PBMs deliver substantial savings to employers, unions, and government programs, and that the FTC’s reports rely on cherry-picked data. CVS Health’s CEO publicly argued in February 2025 that PBMs create roughly $100 billion in net annual value for the healthcare system, and that branded pharmaceutical manufacturers — not PBMs — are the primary driver of rising drug costs.
Some independent economists have found that PBM operating margins are less than 5 percent, and that the industry does generate real savings through negotiation, generic substitution, and administrative efficiencies. The honest accounting is that PBMs are not a pure negative — the problem is structural: a system that simultaneously produces some savings while generating powerful incentives to inflate list prices, steer toward high-cost drugs, and extract value from both pharmacies and patients.
Part V — What the Evidence Shows About Their Impact on Drug Costs
The question of whether PBMs raise or lower drug costs is complicated by the fact that both statements are partially true — depending on which costs you measure, for whom, and over what time horizon.
PBMs have demonstrably increased the use of generic drugs, which are substantially cheaper than branded alternatives. They have driven down the net prices manufacturers receive — by 2023, net brand-name drug prices had fallen for an unprecedented sixth consecutive year, even as list prices continued to rise. For health plans and employers that receive full rebate pass-through, PBMs may deliver real savings on aggregate drug spend.
But for patients — particularly those with chronic conditions, high-deductible plans, or who need expensive specialty medications — the picture is starkly different.
List Prices Rise as a Consequence of the Rebate System
Research from USC Schaeffer Center and others has documented a clear positive correlation between rebates and list prices: as PBMs demand larger rebates, manufacturers respond by raising list prices to maintain their net revenue. The result is a self-reinforcing cycle. Higher list prices generate larger rebate dollars; PBMs demand more rebates; manufacturers raise prices further. The gross-to-net bubble grows. List prices bear less and less relationship to what anyone actually pays — except patients in their deductible period, who pay based on list.
Independent Pharmacies Are Closing
PBM reimbursement rates to independent pharmacies have fallen to levels that, in many cases, do not cover the pharmacies’ own acquisition costs. PBMs reimburse their affiliated pharmacies at higher rates than independent competitors — a practice the FTC has called out explicitly. Studies published in 2025 confirmed that the share of prescriptions filled at PBM-owned pharmacies was substantially higher among patients enrolled in PBM-affiliated health plans. The result has been a wave of independent pharmacy closures, creating pharmacy deserts in rural and underserved communities.
Patients Pay List Price, Not Net Price
A 2023 Government Accountability Office report on Medicare Part D found that drug rebates were used primarily to lower plan premiums — benefiting all enrollees — while patients who actually took the highly rebated (and highly expensive) drugs paid more at the pharmacy counter. This is, as USC Schaeffer researchers noted, ‘the antithesis of how health insurance is supposed to work’: the sickest patients, who need expensive medications, subsidize the premiums of the healthiest patients, who need few or none.
The FTC’s Conclusion
The Federal Trade Commission’s July 2024 interim staff report did not equivocate. Its subtitle read: ‘The Powerful Middlemen Inflating Drug Costs and Squeezing Main Street Pharmacies.’ The report found that PBMs had overcharged health plans, steered patients to affiliated pharmacies, used formulary design to favor high-cost drugs for rebate maximization, and excluded lower-cost generics and biosimilars from preferred formulary positions. The report concluded that the present structure of the PBM market is failing patients and requires legislative remedy.
Part VI — Current Reform Efforts
As of early 2026, PBM reform is one of the most active areas of health policy at both the federal and state levels. Below is a summary of the major pieces of legislation currently in play.
What these bills share is a focus on transparency, delinking, and fiduciary accountability. What they face is the same headwind that has blocked PBM reform for years: the pharmaceutical industry — including PBMs — spent over $370 million on federal lobbying in 2023 alone, more than any other sector. Until that equation shifts, the most reliable counterweight remains public pressure.
FROM THE EDITOR
The PBM story is often told as a question of whether these companies help or hurt the healthcare system — as if the answer has to be one or the other. The reality is messier. PBMs do produce some real efficiencies. Generic substitution is real. Some administrative savings are real. The $100 billion figure the industry cites is not purely invented.
But a system that produces some savings while also structurally inflating list prices, concentrating market power in three vertically integrated corporations, driving independent pharmacies out of business, and ensuring that the sickest patients pay the most — is not a system that is working. It is a system that has been optimized for PBM revenue, not patient welfare. And the legal framework that enabled it was not designed with patients in mind.
The next issue will examine the patent strategies pharmaceutical manufacturers use to extend drug monopolies — the practice known as ‘evergreening’ — and why it may be even harder to unwind than the PBM system.