In the United States, health insurance providers often hire an
outside company to handle price negotiations, insurance claims, and distribution of
prescription drugs. Providers that use such pharmacy benefit managers include commercial
health plans, self-insured employer plans,
Medicare Part D plans, the
Federal Employees Health Benefits Program, and state government employee plans. Pharmacy benefit management companies can make revenue in several ways. First, they collect administrative and service fees from the original insurance plan. They can also collect rebates from the manufacturer. Traditional PBMs do not disclose the negotiated net price of the prescription drugs, allowing them to resell drugs at a public list price (also known as a sticker price), which is often higher than the net price they negotiate with the manufacturer. This practice is known as "spread pricing". The industry argues that savings are
trade secrets. Pharmacies and insurance companies are often prohibited by PBMs from discussing costs and reimbursements. This practice has raised concerns about a lack of transparency. Therefore, states are often unaware of how much money they lose due to spread pricing, and the extent to which drug rebates are passed on to enrollees of Medicare plans. In response, states like Ohio, West Virginia, and Louisiana have taken action to regulate PBMs within their Medicaid programs. For instance, they have created new contracts that require all discounts and rebates to be reported to the states. In return, Medicaid pays PBMs a flat administrative fee.
Formulary PBMs advise their clients on ways to "structure drug benefits" and offer complex selections at a variety of price rates from which clients can choose. This happens by constructing a "formulary" or list of specific drugs that will be covered by the healthcare plan. The formulary is usually divided into several "tiers" of preference, with low tiers being assigned a higher copay to incentivize consumers to buy drugs on a preferred tier. Drugs that do not appear on the formulary at all mean consumers must pay the full list price. To get drugs listed on the formulary, manufacturers are usually required to pay the PBM a manufacturer's rebate, which lowers the net price of the drug, while keeping the list price the same. The complex pricing structure of the formulary can have unexpected consequences. When filing an insurance claim, patients usually are charged an
insurance copayment, which is based on the public list price, and not the confidential net price. Around a quarter of the time, the cost of the insurance copayment on the list price is more than the entire price of the drug bought directly in cash. The PBM can then pocket the difference, in a practice known as a "clawback". Consumers can choose to buy the drug in cash, but in their contracts with pharmacies, PBMs often forbid pharmacists from telling consumers about the possibility of buying their medication for a cheaper price without an insurance claim, unless consumers directly ask about it. Since 2017, six states have passed legislation making such "gag clauses" illegal. This has recently been followed by a federal bans on gag orders for private insurance effective Oct 2018, and for Medicare effective Jan 2020.
PBM-affiliated Group Purchasing Organizations (GPOs) Healthcare
group purchasing organizations, or GPOs, are entities meant to negotiate contracts and rebates with drugmakers. Theoretically, these GPOs can leverage an aggregate of rebates for greater bargaining power in negotiations. Starting in 2019, each of the three major PBMs established affiliated GPOs, with Express Scripts creating Ascent Health Services in 2019, CVS Health creating Zinc Health Services in 2020, and OptumRx creating Emisar Pharma Services in 2021. Both Emisar Pharma and Ascent are headquartered in Ireland and Switzerland, respectively. Critics argue that these PBM-affiliated GPOs allow PBMs to avoid regulations and audits, an additional outlet for fee capture, and a safe harbor form antikickback statutes. The
U.S. Federal Trade Commission noted these GPOs in their 2022 PBM investigation, leading to the House Oversight Committee to file a probe into their business practices. A 2026 investigation by
Hunterbrook Media found that these business entities operate as "ghost headquarters" with little day-to-day activities and minimal employees. Following sweeping PBM reform in the 2026 Consolidated Appropriations Act, legislators have expressed interest in exploring GPOs as a next step of PBM regulation.
Net effect on consumers The New York Times,
Effect on independent pharmacies PBMs regulate how much community pharmacies are reimbursed by drug companies and health insurance plans for the drugs they sell. PBMs are not required to share how these rebate rates are calculated, and this can result in local pharmacies being paid back less or the same as the sticker prices of the drugs themselves.
Vertical integration of PBMs can lead to a preference for PBM-affiliated pharmacies compared to unaffiliated pharmacies. Some PBMs may increase the reimbursement rates for affiliated pharmacies compared to unaffiliated pharmacies. Because of this, unaffiliated pharmacies compete with affiliated pharmacies in the dispensing of drugs. For example, the vertical integration of the three largest PBMs, CVS Caremark, Cigna Express Scripts, and UnitedHealth Group’s Optum Rx, in which each owns its own insurance companies and pharmacies, allows PBMs to divert patients away from unaffiliated independent pharmacies and toward their affiliated pharmacies. == History ==