If a single legislative paragraph could expose the rebate that flows from a manufacturer to a plan sponsor through a pharmacy benefit manager, it would have been written and passed by now. Six congressional sessions have tried. Twenty-seven state legislatures have built their own versions. The rebate remains opaque, the spread remains profitable, and the three companies that control roughly 80 percent of the prescription claims processed in the United States—CVS Caremark, Express Scripts, and OptumRx—remain the most consequential intermediaries in American healthcare that almost no patient could name.
The reform conversation around pharmacy benefit managers has settled into a stable, somewhat exhausted vocabulary. Spread pricing must be eliminated. Rebates must be passed through to patients. Formularies must be rationalized so that clinical evidence outweighs rebate yield in placement decisions. The Federal Trade Commission’s interim report from July 2024 characterized the largest PBMs as exerting market power over independent pharmacies, steering patients toward affiliated entities, and inflating the cost of specialty drugs through vertically integrated specialty pharmacies. The findings drew bipartisan applause, the kind that signals genuine agreement on the problem and continued disagreement on what to do about it.
What the reform debate has not adequately reckoned with is why PBMs accumulated their leverage in the first place. The standard account, which treats PBMs as parasites grafted onto a market that would function better without them, is satisfying and incomplete. PBMs exist because plan sponsors—employers, unions, Medicare Part D plans—lack both the negotiating scale and the formulary expertise to extract concessions from manufacturers on their own. Even a Fortune 100 employer with 200,000 covered lives is, by pharmacy spend, a rounding error in the negotiating universe of a top-three PBM with 100 million covered lives. The aggregation creates value. The question is who captures it.
Spread pricing—the practice of charging plan sponsors more for a drug than the PBM pays the dispensing pharmacy and pocketing the difference—has become the focal point of state-level reform. Ohio’s Medicaid agency famously audited its PBM contracts in 2018 and discovered that the spread amounted to roughly $224 million in a single year. The state moved to a transparent pass-through model and recovered most of that margin. The PBMs, of course, were not destroyed. They redirected their margin to alternative levers: rebate retention, manufacturer-paid formulary fees rebranded as data services, ownership of mail-order and specialty pharmacies that capture margin one layer down. Reform shifted the rent. It did not eliminate it.
The vertical integration that defines all three of the largest PBMs—each now sitting inside a parent company that also owns insurers, providers, specialty pharmacies, and in some cases primary care clinics—has changed the geometry of the market in ways that simple spread-pricing reforms cannot reach. When a PBM owned by a health insurer steers a patient to a specialty pharmacy owned by the same insurer, where the medication is dispensed by clinicians employed by yet another subsidiary, the question of whether the rebate was passed through becomes almost beside the point. The margin has been redistributed across so many corporate entities that no single legislative reform addressing any one of them changes the aggregate outcome.
Manufacturers, who one might expect to welcome PBM reform that erodes the rebate-driven formulary architecture, have proved ambivalent. The rebate structure is also a list-price preservation tool. A drug priced at $1,000 list with a 60 percent rebate is, to the manufacturer’s quarterly earnings, broadly equivalent to a drug priced at $400 with no rebate, but only the first version produces a public price that anchors international reference comparisons, supports physician perception of innovation value, and preserves negotiating room for future price increases. Research published in Health Affairs has documented how the gap between list and net price for branded drugs widened steadily from the mid-2010s onward, even as the underlying drugs delivered no additional clinical value. The gap is the rebate. The rebate is what the PBMs have been monetizing. And the manufacturers, who could in principle have refused to play, found the architecture mutually convenient.
The federal reform proposals that have moved closest to passage—provisions in various Medicare and Medicaid bills that would impose minimum pass-through requirements, ban spread pricing in Medicaid managed care, and tighten reporting requirements—are not negligible. They will recover some money for some plan sponsors. They will reduce the most egregious of the documented practices. What they will not do, and what no one in the legislative process appears prepared to attempt, is dismantle the vertical integration that allows the three dominant PBMs to extract margin at every point in the prescription lifecycle. To do so would require an antitrust posture that the federal government has not seriously held in healthcare since the consent decrees of the Clinton era.
The Federal Trade Commission’s lawsuit filed in September 2024 against the three largest PBMs over insulin pricing is the closest the government has come to direct action. The case alleges that the PBMs created a rebate-driven system that systematically excluded lower-priced insulins in favor of higher-priced versions whose larger rebates flowed back to the PBMs themselves. The complaint is structurally important because it is one of the first to argue that the rebate architecture is itself anticompetitive, not merely opaque. Whether the litigation produces a remedy that meaningfully changes market structure is uncertain. The defendants have responded with their own counter-suits arguing that the FTC’s commissioners are biased. The litigation will outlast the current administration.
There is a quieter reform vector, less politically photogenic, that has begun to matter more than the headline legislation. Several large self-insured employers, including some of the largest in the country, have moved to transparent or pass-through PBM contracts, often through smaller entrants like Capital Rx, Navitus, or RightwayRx. These contracts charge the employer a flat administrative fee and pass through the manufacturer rebates entirely. The employers report meaningful savings. The PBMs they left report no measurable revenue impact. This last fact, in a sense, says everything one needs to know. The reform that worked, in this small slice of the market, was procurement, not legislation. It worked because a sophisticated buyer with enough scale to walk away from the dominant vendors actually walked away. Most plan sponsors cannot, or will not.
What the PBM reform debate has revealed, over a decade of frustrated effort, is that the structural problem is not the rebate. It is the absence of a buyer with both the information and the incentive to negotiate against the PBM’s interests. Patients lack the information. Plan sponsors lack the incentive when the costs are passed through to employees. The federal government, in its capacity as Part D plan sponsor, has the incentive but has historically lacked the information; the IRA’s negotiation provisions begin to change this only at the very top of the spend distribution. Until the buyer side is reorganized, the PBMs will adapt to whatever rules are imposed on them, redistribute their margin to whichever activities the new rules leave untouched, and continue to occupy the position they have held since the 1990s: the indispensable middleman in a transaction whose terms no one else can read.
