Executive summary

Pharmacy Benefit Managers (PBM) are the middle men of the flow of money in pharmaceutical drugs. With millions of drugs processed everyday, PBMs were established to help negotiate pricing between the key players in the industry: Health Group Plans, Medicare, private insurers, pharmacies, and drug manufacturers. Although built to help lower costs for consumers, PBMs have been facing recent Congressional pressure and litigation challenges that are targeting their corrupt rebate and price gouging methods. Additionally, the three largest PBMs, owned by CVS, Cigna, and UnitedHealthcare, account for nearly 80% of the entire market share, with companies like CVS Health owning nearly every chain of the flow of money for consumer drugs coming to their pharmacies through constant endeavors achieving vertical integration–like the purchasing of the health insurance giant Aetna. 

With national concerns over rising drug prices, recent legislation is looking to increase price transparency and even reform rebate structures in PBMs. Although seeing bipartisan support, legislation is yet to come to the floor in the Senate, even with recent FTC lawsuits against the largest PBMs. Opposition arises against regulating private businesses, like PBMs, that have the right in a free market to structure their own pricings. Legislators should continue to advocate for PBM reform, while considering additional options to better regulate excessive price manipulation; however, it will be imperative to consider free market guidelines, while keeping in mind bipartisan rhetoric to ensure effective policy making practices. 

Overview

Key players in the pharmaceutical industry, both public within Medicare groups and private within giants like Abbive, have PBMs constantly on their radars, as they negotiate contracts and formulary lists that turn into significant profits for all groups in the pharmaceutical flow of money. With profits as their main motive, PBMs have stepped beyond their boundaries as mediators to lower drug prices for consumers, and instead are facing incredible pressure by numerous stakeholders for their corrupt practices. 

In a long list of grievances, lack of transparency remains at the top for legislators, followed by poorly administrative rebates, anti-competitive bidding, and “performance fees” that are crushing smaller pharmacies. Transparency initiatives have seen the most Congressional action, as Senator Cantwell and Senator Sanders both have their own PBM reform championed legislations in the Senate, with the latter being more heavy on regulatory pressures. Senator Cantwell’s policy aims for increased transparency, but is that all that should be addressed nationwide? Many state legislatures across the country have championed PBM Transparency bills, most recently signed in Pennsylvania by Governor Josh Shapiro, aiming to prohibit certain “steering” practices, such as requiring a policyholder to purchase drugs exclusively through a mail order pharmacy or at a pharmacy owned or controlled by the PBM. That bill also prohibits pharmacies from charging a price that is more than the consumer would pay if they walked in off the street and paid in cash or that is more than the pharmacy would receive from the insurer or PBM. 

In regards to the monopoly-like setting of the PBM market, with roughly 80% of all PBMs being owned by just three companies–CVS, Cigna, and UnitedHealthcare–there is not much Congress can do to break up these free market entities. After all, PBMs are privately owned and generally do not step over federal guidelines; however, until recently with vertically integrated giants like CVS’s Caremark in 2019 with the purchase of health insurer Aetna, PBMs have increased their tendencies to take advantage of the lack of transparency with their clawbacks and shady rebates. Unfortunately, this remains a serious question in Congress regarding the extent to which PBMs can be regulated in the free market, but increasing transparency is a potentially effective step towards a fairer pharmaceutical financial system for all players, especially the consumers and smaller pharmacies. 

Pointed Summary

• PBMs have a critical role in the pharmaceutical industry, as the negotiators for drug pricing and the formulary lists that influence the majority of pharmacies, medicare options, and health plans across the U.S. 
• Although built to lower drug costs for consumers, PBMs have face scrutiny for corrupt pricing practices, such as price sweeping, high DIR fees, anticompetitive rebates, and aggressive clawbacks on struggling pharmacies–-which all heavily affect the price for consumers
• Lack of transparency is another key issue within consumer frustration with PBMs, which Senator Cantwell (D-WA) has highlighted after championing federal legislation that is aiming to increase their price transparency 
• States like Pennsylvania have passed legislation that enacts transparency laws on the state level, with additional sections to mitigate other corrupt price strategies to both smaller pharmacies and consumers
• CVS, Cigna, and UnitedHealthcare make up roughly 80% of the PBM market share, causing growing concerns of “too-much” vertical integration and monopolistic competition for the already giant pharmaceutical leaders, yet there is little Congress can do to set regulations or breakup these free-market entities 

Relevance

The effects of PBM pricing is incredibly relevant to all Americans who receive prescriptions through pharmacies, regardless of your insurance plan. The effects of opaque pricing and excessive fees on pharmacies by PBMs is leaving significant consumer cost burdens, and even causing thousands of pharmacy closures across the country. CVS, for example, has closed 851 stores nationwide, due to economic tailwinds like low reimbursement rates from PBMs. Rising drug prices being artificially bolstered by anticompetitive formulary list bidding by PBMs, with endeavors to scrape more profit from the higher rebates, is also causing economic burden on the government’s Medicare and Medicaid programs due to the higher premiums and out-of-pocket payments from patients and taxpayers. The effects of PBM pricing affects not just the entire healthcare system but truly every taxpaying American, as Medicare costs continue to rise for the government, 

Health inequality is another important issue that is fully relevant to today’s society, with higher prescription costs affecting lower-income families and communities. These issues combined that affect the federal budget and millions of Americans have spurred bipartisan support for PBM reform, starting at the first level: to increase transparency within pricing to crack down on PBM manipulation in the flow of pharmaceutical money.

Current Stances

Congressional action to reform PBMs, starting with transparency regulations, has gained significant momentum as legislative efforts are underway. These increased transparency requirements will add additional measures of accountability and federal oversight into the spread pricing and hidden rebate tactics of PBMs, with endeavours to mitigate the inflated drug prices that cause burden to the consumers and pharmacies. With the 2020 SCOTUS ruling of Rutledge v. Pharmaceutical Care Management Association states have been given constitutional confirmation to bring reform through state-level legislation. Many states, such as Pennsylvania, have taken recent action in increasing transparency and accountability, with some states like Arkansas prohibiting clawbacks and DIR fees altogether (Arkansas Act 900: The PBM Law) 

The Federal Trade Commission (FTC) in Fall 2024 has initiated investigations and lawsuits over the three largest PBMs, previously mentioned that take up roughly 80% of PBM market share, who have been accused of anti-competitive practices—-which relates back to the formulary list and decisions to add drugs to the list that are higher in price simply to receive a rebate that the PBM likely will pocket for profit, raising drug prices for the consumer. To mitigate this, Senator Cantwell has utilized this FTC investigation to support her federal legislation that needs a boost in the Senate to pass, although a similar bill is through the house that will require, under federal law, PBM transparency compliance. 

Health insurers and independent pharmacies are also seeing the effects of PBM price strategy, as fees squeeze these organizations' bottom lines, resulting in higher premium costs for consumers and the closure of  thousands of pharmacies nationwide. Some of these PBM fees inflicted are the performance fees, DIR fees, and clawbacks, which can come months after a given drug is processed with a consumer—which is also sparking interest in federal reform to stop these late fees.  

PBM trade organizations and interest groups are pushing back against recent legislation, with claims that free-market PBMs are negotiating lower drug prices and giving nearly all rebate funds back to the consumers. The FTC recent lawsuit is also seeing serious backlash from stakeholders with its potential misjudgement and intent related to the recent political environment of the 2024 election. Additionally, the PBM Express Scripts argues against the recent lawsuit, highlighting that the former Trump administration didn’t restrict Medicare rebates due to its implications that would continue to raise drug prices for consumers. Ironically, FTC Chair Khan wants to limit rebates on Medicare and privatized healthcare, spurring concerns for causing the opposite: even more expensive drugs for consumers. Nonetheless, the FTC is right in holding concern over recent consumer drug prices, but one of the main issues PBMs are inflicting on the healthcare industry is the heavy economic pressure on smaller pharmacies from the performance fees and new contract plans, which could be better addressed in these recent legislation and litigation actions. The free-market principles are another clear opposition, as these groups claim that federal regulation and transparency reform is stepping too close into the private sector boundaries of healthcare. 

Tried Policy

Numerous bills have been introduced across the United States Congress and state legislatures that aim to bring increased transparency requirements to PBM practices, with many getting passed in the states. National bills are slow to make progress, and questions over oversight and regulation remain; however, legislation in the 118th Congress has recently passed in the House of Representatives titled H.R. 5378: Lower Costs, More Transparency Act that aims to bring that accountability to PBMs. Although the bill passed quite outstandingly, with a vote of 320-71, a bill is still slow to move to the Senate floor. S.127: Pharmacy Benefit Manager Transparency Act of 2023 is a similar legislation initiative to the passed house bill, yet it will likely become dead before the next Congress begins, as a vote date seems unlikely. This senate bill prohibits PBMs from charging health plans a higher amount than what they reimburse pharmacies, while also cracking down on clawbacks and reimbursement payments that see increased fees on pharmacies. PBMs are exempted from the previous restrictions, stated in the last sentence, if and only if they pass 100% of their rebates, discounts, or other concessions, from manufacturers to rise on their formulary list, back to the consumers. Additionally, PBMs are to disclose detailed information about their fees, costs, and pricing models, and should report these payments and pricing information to the FTC, who has the right to enforce the bill’s provisions. 

On the state-level, Pennsylvania legislation approved by Governor Shapiro titled H.B. 1993: Pharmacy Audit Integrity and Transparency Act, grants the state authority to prohibit PBM price “steering” practices in pushing patients for mail-order pharmacies and requiring PBMs to disclose manufacturer rebates and other pricing models, a common theme between numerous other state legislations. The law additionally requires PBMs to not charge consumers more than what they would pay if they bought medication out-of-pocket at different pharmacies, and also requires annual reports sent to the state, in order to disclose prices, fees, and rebates. Other states have similar legislation either in the works or passed, but not all 50 have transparency and oversight into PBMs enacted that can bring better awareness to drug prices for consumers and pharmacies. 

Policy Problem

A. Stakeholders

Variety of concerns have grown from pharmacies for the economic struggles both their consumers and their budgets face, as PBMs stretch many pharmacies thin with clawbacks and DIR fees. Presidential administrations have also been involved, as Medicare plays an essential role in price negotiation with PBMs; however, recent Biden administration efforts to require these clawbacks and fees upfront, rather than weeks later, has backfired as new 2024 PBM contracts have made a drastic cut to their reimbursement plans. The majority of pharmacies across the country will be forced to accept these contracts, since they need to keep Medicare customers and these contracts will be accepted by giant pharmacies like CVS--who are already vertically integrated into a PBM (CVS Caremark). 

Groups of pharmacists, such as the National Community of Pharmacists Association, have built large platforms advocating for PBM reform. There is a large push for state legislators to take control and implement change, especially since PBM reform in the states has been upheld over federal laws, like ERISA, with the SCOTUS 2020 ruling Rutledge v. Pharmaceutical Care Management Association–favoring state reform. 

B. Risks of Indifference

As demonstrated by recent FTC legal action, the largest PBMs in the United States are utilizing their anti competitive tactics and  monopoly-like size to squeeze drug manufacturers for higher drug prices and higher rebates on their formularies–the select list of drugs on a PBMs health plan. These excessive profit seeking methods are causing severe economic struggles to not just consumers but also the pharmacies that are not vertically integrated within the PBMs parent company; however, even still, the PBM Caremark, subsidiary of CVS Health, has seen thousands of CVS pharmacies close due to financial struggles that are a part of the larger pharmaceutical drug flow of money crisis. 

The FTC investigated the specific PBM manipulation on insulin pricing, and found that they continue to avoid lower cost manufacturing alternatives to add to their formularies. Instead of caring about lower consumer prices, PBMs are prioritizing profits from rebates that these anticompetitive big pharma giants are utilizing to rinse out as much profit as possible in these under-the-table interactions. Transparency is another big concern, as many consumers at pharmacies don’t know the true meaning behind their prescription prices. Additionally, pharmacies are getting hit with late performance fees from PBMs that come weeks to months after any given drug was processed. Without federal action via Congressional legislation, aiming to increase transparency and accountability within these corrupt PBM pricing and fee practices, consumers will continue to face rising drug prices and see more smaller, brick-and-mortar pharmacies shut down across the country. 

C. Nonpartisan Reasoning

Prescription drug prices across the United States are on the rise, and many look to the PBMs, a key middleman and player in the pharmaceutical flow of money, to question the rising drug costs. Afterall, PBMs are the negotiators of drug prices between manufacturers like Pfizers, insurance groups like UnitedHealthcare, and pharmacies like CVS, but to what extent are their privatized practices actually influencing rising drug costs in the free-market. Bipartisan support has arised to answer these questions by increasing transparency and accountability in the pharmaceutical flow of money, aiming to reduce overall healthcare costs by limiting any corrupt pricing strategies that PBMs are being accused of. Increasing transparency doesn’t necessarily mean complete oversight in the private sector by the federal government, but rather it hopes to provide a clearer picture of how the money flows and where the price volatility comes from, which has been genuinely blind for consumers. 

It’s no secret that smaller, independent pharmacies that aren’t vertically integrated into PBMs today are utilizing their voice to speak out against PBMs reimbursement and performance fees. The biggest issue is the ambiguity that arises when PBM fees settle weeks after any given drug is processed by a consumer, rather than coming up right after the transaction. Bipartisan support is growing to pressure PBMs to create fairer reimbursement fees and structures that don’t take weeks to process. Smaller pharmacies are facing economic burdens that have been brewed from the PBM price strategies, with thousands of locations across the country shutting their brick and mortar locations. 

Policy Options

Nationwide federal legislation is needed to ensure that all states are protected from PBM pricing and fee tactics that are increasing the costs of Medicare, drug costs, and putting significant pressure on pharmacies. Congressional policy should mandate transparency of PBMs by requiring disclosed information on rebates, pricing structures, and fees to the general public. All consumers should be aware of their prescription’s price volatility, and PBMs additionally should report such information annually to the FTC to hold accountability. 

Federal policy would also benefit from sections that prohibit specific PBM fees, including but not limited to DIR fees and performance fees that squeeze pharmacies weeks after a transaction. If given prohibitions are too extreme, then policies should at least create a cap or requirement that PBMs initiate such fees directly following any given prescription transaction. Policies could also enforce PBMs to not solely prioritize higher-priced drugs on their formulary list, with the endeavors to scrape out higher rebates from manufacturers. This can be difficult to track by federal agencies, however, federal law should call PBMs to not push for higher rebates if it means higher drug prices for the consumers. 

Insurance companies that have vertically integrated subsidies or affiliations with PBMs could also see federal policy that targets their monopolistic behaviors, with the goal to protect independent pharmacies. This is especially targeting the three largest PBMs in terms of market share that have direct connections to vertically integrated insurance entities. Pricing strategy and performance fees are both common monopolistic practices that are all too common, and a given federal policy can help mitigate the weakening industry of smaller pharmacies. PBMs could also be required under federal legislation to send a minimum percentage, preferably as close to 100% to ensure consumers are of top priority, of their rebates back to consumers’ pockets directly. These are the rebates processed and given by drug manufacturers, with the goal to be selected on the PBMs formularies list. 

It’s critical to keep in mind that the given policy options, beyond federal legislation that aims to require price and fee disclosures from PBMs, are potentially leaning towards excessive federal oversight into private, free-market entities like PBMs. With that being said, starting with increased transparency, federal lawmakers are increasingly clearing pharmaceutical consumer ambiguity. With crackdowns on performance fees, clawbacks, and DIR fees, federal legislation could take an additional step to providing more stability to smaller pharmacies that could be dealing with significant financial burden from the rising costs across the industry. 

Conclusions and Recommendations

The United States is in a fight to keep drug prices from skyrocketing by capping prices and altering Medicare, yet PBMs could have some influence in recent price shifts for certain consumer prescription drugs. With large market share domination and completely vertically integrated sectors, the largest PBMs and their parent organizations have significant control of price determinations within the complex flow of money in the pharmaceutical industry. As consumers face rising drug prices, there has also been a rise in concerns over what influence PBMs have in these economic struggles, as they are the negotiator of prices in the industry. 

Today, the federal government looks to investigate and potentially prepare federal oversight into PBMs, even as private market entities, to ensure that all prices and fees across the board are disclosed fully to both the federal agencies and the consumers. Congress can get this done with policy that requires these transparency and disclosing endeavors, but it’s important to consider the implications and whether this will push for a better overall price strategy for both the consumer and pharmacy. The FTC and other federal agencies should be prepared to track the effectiveness of these recommendations and policy initiatives to ensure that they are contributing to overall improved financial wellbeing of the consumer. If anything is done, a federal transparency bill at a bipartisan level can provide consumers with their desired right to understand the pricing behind their prescription drugs, while also providing important information to federal agencies regarding PBMs practices—ensuring they are aligning with antitrust and other regulatory guidelines.

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Acknowledgment

The Institute for Youth in Policy wishes to acknowledge Paul Kramer, Carlos Bindert, Gwen Singer, and other contributors for developing and maintaining the Programming Department within the Institute.

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