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The Quiet Middlemen: What Pharmacy Benefit Managers Actually Do With Your Money

armantabesh
12 minutes ago
11 min read

Picture a vial of insulin with a list price of $300. Behind the pharmacy counter, the manufacturer has agreed to hand $200 of that back as a rebate to the company that runs your drug benefit. The vial’s real price, what the industry calls the net price, is $100.


Now walk up to the counter. If you have not met your deductible, you pay $300. If your plan charges 30 percent coinsurance, you pay $90, because the percentage is applied to the list price, not to the $100 the drug actually costs. The $200 rebate does not vanish. It flows to the middleman, which keeps a share and passes the rest to your employer or insurer, where it can help hold down premiums for everyone. The patient who needs the drug pays the inflated price so that the healthy members of the plan can pay a little less.


The numbers are illustrative. The mechanism is not. It is the business model of the pharmacy benefit manager, or PBM, the most powerful company in American health care that most Americans could not name.


My verdict, up front: PBMs do useful work, and the country would pay more for drugs without someone bargaining on its behalf. But the system they run is rigged in a specific, fixable way. They are paid more when list prices are higher. Fix that incentive, and much of the rest follows.


Diagram of how money flows among drugmakers, pharmacy benefit managers, health plans, pharmacies and patients
How the money moves: rebates and fees flow from drugmakers to PBMs, and patients’ cost-sharing is often pegged to the list price. Simplified. Graphic: Pulse of Public Health, based on FTC and KFF descriptions of PBM business practices.

What does a PBM actually do?

Employers, insurers, and government programs hire PBMs to run their prescription drug benefits. The job has four parts. PBMs process claims at the pharmacy in real time. They build the formulary, the list of covered drugs and the tier each one sits on. They negotiate rebates from drugmakers in exchange for favorable spots on that list. And they assemble pharmacy networks, deciding which pharmacies are in and how much each is paid.


Three companies dominate the business: CVS Caremark, Cigna’s Express Scripts, and UnitedHealth Group’s Optum Rx. Together they processed nearly 80 percent of the roughly 6.6 billion prescriptions dispensed in the United States in 2023; the top six processed more than 90 percent.[1] Each sits inside a conglomerate that also owns a major health insurer and its own mail-order and specialty pharmacies.[2]


Bar showing the three largest PBMs processed nearly 80 percent of U.S. prescriptions in 2023
Three companies processed nearly 80 percent of U.S. prescriptions in 2023. Graphic: Pulse of Public Health. Data: Federal Trade Commission interim staff report, July 2024.

How did a claims processor become a gatekeeper?

PBMs began in the 1960s as back-office administrators that helped insurers process drug claims. Over time they took on benefit design, formularies, and rebate negotiation.[3] In the early 1990s, drugmakers noticed the power of whoever controls the formulary and started buying in. Merck acquired Medco, then the largest PBM, and SmithKline Beecham and Eli Lilly followed with purchases of their own. The Federal Trade Commission investigated the conflict of interest, Merck had to adopt an open formulary, and by the end of the decade most drugmakers had exited the business.[3]


Then the consolidation ran in a different direction. CVS announced its purchase of Caremark in 2006. Express Scripts bought Medco in 2012. In 2018, CVS acquired Aetna and Cigna acquired Express Scripts.[3] The question regulators asked in the 1990s, whether a referee should own one of the teams, never went away. Today the teams are insurers and pharmacies instead of drugmakers.


Follow one vial: where does the money go?

Insulin is the cleanest case study: it was discovered more than a century ago, and it is cheap to make. According to the FTC, the list price of Eli Lilly’s Humalog rose from about $21 in 1999 to more than $274 by 2017, an increase of over 1,200 percent.[4] A 2018 study in BMJ Global Health estimated that insulin lispro, the molecule in Humalog, could be supplied at a cost-based price of roughly $6.50 to $9 per vial.[5]


Bar chart comparing Humalog list prices in 1999 and 2017 with an estimated cost-based price
Humalog’s list price rose more than 1,200 percent between 1999 and 2017, while researchers estimate a cost-based price under $9 a vial. Graphic: Pulse of Public Health. Data: FTC (2024); Gotham, Barber and Hill, BMJ Global Health (2018).

In September 2024, the FTC sued all three major PBMs over insulin. It alleged that they built a rebate system in which manufacturers competed on the size of the rebate rather than the net price, that they left lower-list-price versions of identical insulins off their formularies, and that patients with deductibles and coinsurance paid based on the unrebated list price.[4] Those were allegations, not findings, and the cases have been resolved through settlements rather than verdicts. But the incentive they describe is plain arithmetic.


Why would anyone want a higher list price?

Rebates, and many of the fees PBMs collect from manufacturers, are calculated as a share of list price. A higher sticker means a bigger rebate, a bigger cut for the PBM, and a more impressive “savings” figure to show the employer who hired it. Researchers at the USC Schaeffer Center found that from 2015 to 2018, each $1 increase in rebates was associated with a $1.17 increase in list price.[6] That is a correlation, not proof of causation, but it points the way the incentives predict.


The scale is enormous. The gap between what brand-name drugs list for and what manufacturers actually collect, which Drug Channels Institute calls the gross-to-net bubble, reached an estimated $356 billion in 2024, most of it rebates paid to insurers and PBMs.[7]


Drugmakers are not innocent bystanders in this story. They set list prices, and no PBM forced them to buy formulary access with rebates instead of lower prices. When a Novo Nordisk executive described PBMs as “addicted to rebates,” he was describing a habit his own industry fed.[4] The proof that list prices could fall came in March 2023, when Lilly announced a 70 percent cut to the list price of Humalog and a $35 monthly cap on what most commercially insured patients pay.[8] That came two months after Medicare’s $35 monthly cap on insulin cost-sharing took effect for roughly 1.5 million beneficiaries who use it.[9] The rebate game takes two players. Both profit, and the patient at the counter pays.


Bar chart showing a patient paying $300 versus $100 in the deductible and $90 versus $30 with coinsurance
Illustrative example: when cost-sharing is pegged to a $300 list price instead of a $100 net price, the patient pays three times as much. Graphic: Pulse of Public Health.

Is the rebate the only problem?

No. Two other practices deserve mention. The first is spread pricing, in which a PBM bills the health plan more than it pays the pharmacy and keeps the difference. In 2018, Ohio’s auditor found that PBMs in the state’s Medicaid managed care program kept $224.8 million in spread over one year, 8.9 percent of drug spending, and 31.4 percent on generic drugs.[10]


The second is self-preferencing. In January 2025, the FTC reported that pharmacies affiliated with the Big Three earned more than $7.3 billion above estimated acquisition cost on specialty generic drugs between 2017 and 2022, with some drugs marked up by hundreds or thousands of percent.[11] When the company that sets pharmacy pay also owns pharmacies, independents compete on a field their rival drew.


The strongest case for the defense: won’t reform just raise premiums?

The PBM industry’s best argument deserves a serious hearing. PBMs do bargain hard. Their trade association, citing estimates it commissioned from the consulting firm Visante, says PBMs save employers and patients an average of $1,040 per person per year.[12] In Medicare Part D, the Government Accountability Office found that PBMs passed more than 99 percent of negotiated rebates on to plan sponsors in 2016, and sponsors can use that money to hold down premiums.[13]


The industry also has a history lesson on its side. In 2019, the Trump administration proposed moving Medicare rebates to the pharmacy counter. The Congressional Budget Office projected the rule would raise federal spending by $177 billion over a decade, in large part because Part D premiums would rise.[14] A Milliman analysis projected premium increases of 12 to 22 percent.[15] No free lunch, the industry concludes; reform only moves the bill from the counter to the premium.


That argument is partly right, and it still fails, for three reasons.


First, moving some cost from the counter to premiums is the point. Insurance exists to spread the cost of illness across the healthy and the sick. A system in which the sickest patients pay inflated prices so that healthy members can pay slightly lower premiums is insurance running backward. Restoring the normal direction is a feature, not a cost overrun.


Second, in the commercial market the premium effect appears small. A Milliman analysis of the commercial market estimated that applying all manufacturer rebates at the point of sale would raise plan costs by 0.6 percent or less, with the largest out-of-pocket savings going to patients in coinsurance plans.[16] That study was commissioned by PhRMA, the drug industry’s trade group, which has its own interest in the outcome. Even so, a fraction of a percent is a modest price for ending a system that charges diabetics list price for insulin.


Third, the savings claims beg the question. A discount measured against a list price that the rebate system itself helped inflate is like a store that doubles its prices and then advertises half off. The premium argument also treats today’s list prices as fixed. They are not. Remove the reward for a high sticker, and the sticker can come down, as Humalog showed.


Who wins and who loses?

The winners are easy to name. The conglomerates come first: by the FTC’s count, the specialty generics it studied accounted for 12 percent of the parent companies’ combined segment operating income in 2021.[11] Drugmakers that buy formulary position with rebates instead of price cuts win too. So do healthy plan members, who get slightly lower premiums.


The losers are the patients whose costs are pegged to list price. A third of covered workers are now in high-deductible plans, and among workers with a deductible, the average for single coverage is $1,886.[17] The losers also include independent pharmacies, employers who cannot see inside their own contracts, and cheaper competitors, such as low-list-price insulins and biosimilars, that a rebate-driven formulary can lock out.


Hasn’t Washington already fixed this?

Partly. The Consolidated Appropriations Act of 2026, signed on February 3, 2026, will pay PBMs in Medicare Part D flat service fees instead of a cut of list prices beginning January 1, 2028. It also requires PBMs to pass 100 percent of rebates through to employer plans regulated under ERISA and adds new reporting requirements.[2,18] Congress dropped a ban on spread pricing in Medicaid, reportedly over cost concerns.[2]


The FTC’s insulin cases have moved to settlements. Express Scripts settled in February 2026, agreeing to base patients’ out-of-pocket costs on net rather than list prices and to delink its fees from list prices.[19] Caremark settled in July on similar terms.[20] Optum Rx reached a proposed settlement in June.[21] In the states, Arkansas tried to bar PBMs from owning pharmacies outright; a federal court blocked the law, and the appeal is pending.[22]


This is real progress, but it is incomplete. Most of the federal changes do not start until 2028. Passing rebates through to an employer is not the same as passing them through to a patient. And delinking in Medicare does nothing, by itself, for the millions of Americans with employer coverage.


What should change?

  1. Delink everywhere. Extend Medicare’s flat-fee model to the commercial market so that PBM pay is a fixed charge for services, not a percentage of list prices or rebates. This is a market fix, not a price control: it changes what the middleman is rewarded for and keeps the bargaining.

  2. Price the counter honestly. Require that deductibles and coinsurance be calculated on the net price, after rebates, in every plan. Patients should never pay a percentage of a price no one actually pays.

  3. Finish the Medicaid job. Congress should pass the ban on spread pricing it dropped in 2026 and move to a transparent model in which pharmacies are paid the drug’s acquisition cost plus a professional dispensing fee.

  4. Give employers real visibility. Enforce drug-level reporting quickly and back it with fiduciary accountability, so the businesses paying the bill can see where the money goes.

  5. Police self-dealing before breaking up. The FTC should aggressively scrutinize steering toward affiliated pharmacies. Structural separation, Arkansas-style, should stay available as a backstop if fixing the incentives fails.


None of this requires abolishing PBMs. It requires paying middlemen for the work they do, not the prices they inflate.


A market works when the price tells the truth. For two decades, the price of insulin has told a convenient fiction, and charged the sick for the difference.




References


  1. Federal Trade Commission. FTC releases interim staff report on prescription drug middlemen. Published July 9, 2024. Accessed October 28, 2026. https://www.ftc.gov/news-events/news/press-releases/2024/07/ftc-releases-interim-staff-report-prescription-drug-middlemen

  2. KFF. What to know about pharmacy benefit managers (PBMs) and federal efforts at regulation. KFF. Accessed October 28, 2026. https://www.kff.org/other-health/what-to-know-about-pharmacy-benefit-managers-pbms-and-federal-efforts-at-regulation/

  3. Myshko D. Beyond the Big Three, and how we got here. Managed Healthcare Executive. 2022;32(12). Published December 14, 2022. Accessed October 28, 2026. https://www.managedhealthcareexecutive.com/view/beyond-the-big-three-and-how-we-got-here

  4. Federal Trade Commission. FTC sues prescription drug middlemen for artificially inflating insulin drug prices. Published September 20, 2024. Accessed October 28, 2026. https://www.ftc.gov/news-events/news/press-releases/2024/09/ftc-sues-prescription-drug-middlemen-artificially-inflating-insulin-drug-prices

  5. Gotham D, Barber MJ, Hill A. Production costs and potential prices for biosimilars of human insulin and insulin analogues. BMJ Glob Health. 2018;3(5):e000850. doi:10.1136/bmjgh-2018-000850

  6. Sood N, Ribero R, Ryan M, Van Nuys K. The association between drug rebates and list prices. USC Schaeffer Center for Health Policy & Economics. Published February 11, 2020. Accessed October 28, 2026. https://schaeffer.usc.edu/research/the-association-between-drug-rebates-and-list-prices/

  7. Drug Channels Institute. The gross-to-net bubble hits $356 billion in 2024. Drug Channels. Published July 15, 2025. Accessed October 28, 2026. https://www.drugchannels.net/2025/07/gross-to-net-bubble-hits-356b-in.html

  8. Associated Press. Eli Lilly cuts the price of insulin, capping drug at $35 per month out of pocket. GBH News. Published March 1, 2023. Accessed October 28, 2026. https://www.wgbh.org/news/2023-03-01/eli-lilly-cuts-the-price-of-insulin-capping-drug-at-35-per-month-out-of-pocket

  9. Sayed BA, Finegold K, Olsen TA, et al. Insulin affordability and the Inflation Reduction Act: Medicare beneficiary savings by state and demographics. Office of the Assistant Secretary for Planning and Evaluation, US Dept of Health and Human Services. Published January 24, 2023. Accessed October 28, 2026. https://aspe.hhs.gov/reports/insulin-affordability-ira-data-point

  10. Ohio Auditor of State. Auditor’s report: pharmacy benefit managers take fees of 31% on generic drugs worth $208M in one-year period. Published August 16, 2018. Accessed October 28, 2026. https://ohioauditor.gov/news/pressreleases/details/5042

  11. Federal Trade Commission. FTC releases second interim staff report on prescription drug middlemen. Published January 14, 2025. Accessed October 28, 2026. https://www.ftc.gov/news-events/news/press-releases/2025/01/ftc-releases-second-interim-staff-report-prescription-drug-middlemen

  12. Pharmaceutical Care Management Association. PBMs 101 [presentation to the Montana Legislature Economic Affairs Interim Committee]. Published October 2, 2025. Accessed October 28, 2026. https://archive.legmt.gov/content/Committees/Interim/2025-2026/EAIC/October_02_2025/PCMA_101_Presentation-Montana_10.2.25_final.pdf

  13. US Government Accountability Office. Medicare Part D: Use of Pharmacy Benefit Managers and Efforts to Manage Drug Expenditures and Utilization. GAO-19-498. Published July 15, 2019. Accessed October 28, 2026. https://www.gao.gov/products/gao-19-498

  14. Center on Budget and Policy Priorities. CBO: proposed rule on Medicare, Medicaid drug rebates would raise drug spending. Off the Charts. Accessed October 28, 2026. https://www.cbpp.org/blog/cbo-proposed-rule-on-medicare-medicaid-drug-rebates-would-raise-drug-spending

  15. HHS’s proposed drug rebates rule would raise premiums; benefits unclear. Psychiatric News. Published 2019. Accessed October 28, 2026. doi:10.1176/appi.pn.2019.3b11

  16. Jonaitis E, Robb M, Petroske J. Measuring the impact of point of sale rebates on the commercial health insurance market. Milliman. Published July 6, 2021. Accessed October 28, 2026. https://www.milliman.com/en/insight/measuring-the-impact-of-point-of-sale-rebates-on-the-commercial-health-insurance-market

  17. KFF. 2025 Employer Health Benefits Survey. Published October 22, 2025. Accessed October 28, 2026. https://www.kff.org/health-costs/2025-employer-health-benefits-survey/

  18. Bonavitacola J. New legislation aims to address transparency in PBMs as first major step in reform. AJMC. Published February 10, 2026. Accessed October 28, 2026. https://www.ajmc.com/view/new-legislation-aims-to-address-transparency-in-pbms-as-first-major-step-in-reform

  19. Federal Trade Commission. FTC secures landmark settlement with Express Scripts to lower drug costs for American patients. Published February 4, 2026. Accessed October 28, 2026. https://www.ftc.gov/news-events/news/press-releases/2026/02/ftc-secures-landmark-settlement-express-scripts-lower-drug-costs-american-patients

  20. Federal Trade Commission. FTC secures major settlement with Caremark, resolving antitrust case against second drug middleman. Published July 14, 2026. Accessed October 28, 2026. https://www.ftc.gov/news-events/news/press-releases/2026/07/ftc-secures-major-settlement-caremark-resolving-antitrust-case-against-second-drug-middleman

  21. Olsen E. UnitedHealth, FTC reach proposed settlement in insulin case. Healthcare Dive. Published June 12, 2026. Accessed October 28, 2026. https://www.healthcaredive.com/news/unitedhealth-optum-rx-ftc-proposed-settlement-insulin-case/822857/

  22. Alexander RA, Carnegie TC, Hupart JH, Musgrave EK, Hill ME. State regulation of PBMs subject to robust legal challenges. Mintz. Published July 8, 2026. Accessed October 28, 2026. https://www.mintz.com/insights-center/viewpoints/2146/2026-07-07-state-regulation-pbms-subject-robust-legal-challenges


Featured image: “Follow the money” diagram by Pulse of Public Health, based on FTC and KFF descriptions of PBM business practices. All charts in this post were built by Pulse of Public Health from the cited data.

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