Pharmacy Benefit Managers, From Rebates to Spread Pricing

In July 2024 the Federal Trade Commission released a document with a plain title and an unusual tone: an interim staff report on pharmacy benefit managers, the companies most Americans have never heard of that decide which drugs their insurance covers, how much their pharmacy gets paid and, often, what they pay at the counter. Government reports usually hedge. This one said that the three largest PBMs, CVS Caremark, Express Scripts and OptumRx, administered nearly 80 percent of the prescriptions filled in the United States, that each was part of a larger health conglomerate that also owned an insurer and pharmacies, and that the agency's staff had found evidence these firms could profit at the expense of patients and independent pharmacies. The FTC had opened the inquiry two years earlier and had to issue orders to get the companies to hand over documents. Within months, it took one step further and filed an administrative complaint against all three over how they handled insulin rebates. If you have ever wondered why the price of the same pill seems to depend on who is asking, the companies in that report are a good place to start looking.

In short: Pharmacy benefit managers negotiate rebates with drugmakers, build lists of covered drugs, and set what pharmacies are paid. Over time a few of them merged with insurers and pharmacy chains, gaining power at every link. Rebates tied to list prices and a practice called spread pricing can raise what patients pay, and states and federal regulators have begun to push back.

A middleman invented to save money

PBMs began in the late 1960s and 1970s with a modest job: processing prescription claims for insurers so a pharmacist could check coverage quickly. As drug spending grew, their role expanded. They built pharmacy networks and paid pharmacies on the plan's behalf. They wrote formularies, the lists of covered drugs, and used them as leverage: a drugmaker that wanted its product on the preferred tier would pay a rebate. They ran mail-order pharmacies.

For a long time, this was seen as cost control, and in part it was. When several drugs compete in the same class, a PBM that can steer a large number of patients toward one of them can extract a real discount. That is the strongest version of the industry's case: PBMs say they save employers and insurers money that would otherwise be spent, and they argue that the problem is high list prices set by drugmakers, not the companies that bargain those prices down.

The trouble is what happened to the structure around that job.

How three firms came to sit at every link

Starting in the 2000s and accelerating in the 2010s, PBMs and insurers combined. CVS, the pharmacy chain, merged with Caremark in 2007 and later bought the insurer Aetna. Cigna acquired Express Scripts in 2018. OptumRx is part of UnitedHealth Group, which also owns the country's largest health insurer. Each of the three now sits inside a company that can own the insurance plan, the PBM, the specialty pharmacy, the mail-order pharmacy and, in some cases, retail stores and doctors' practices.

That vertical integration changes incentives. A PBM that owns a pharmacy can set reimbursement rates that favor its own stores over independent competitors. It can steer patients with expensive specialty prescriptions to its own specialty pharmacy. It can design a formulary that benefits the parent company's bottom line in ways that are hard to see from the outside. The FTC's interim report focused on exactly these possibilities, and on the fact that independent pharmacies, especially in rural areas, have been closing in large numbers.

The rebate puzzle

Rebates are the part of the system that confuses almost everyone, so take it slowly.

A drug has a list price, called the wholesale acquisition cost. That is the starting number. A PBM negotiates a rebate from the drug's maker, a payment returned after the drug is dispensed in exchange for favorable placement on the formulary. The rebate is often expressed as a percentage of the list price. The PBM keeps some of the rebate and passes some to the insurer or employer, depending on the contract.

Now follow the incentives. If a rebate is a percentage of list price, then a higher list price can mean a bigger rebate in dollars, even if the net price stays the same. A PBM whose income depends partly on rebates may prefer a drug with a high list price and a big rebate over a competing drug with a low list price and a small one, even when the net cost is similar. Drugmakers, knowing this, have reasons to raise list prices and offer bigger rebates to keep their spot.

Who loses? The patient whose costs are tied to list price. Many people pay coinsurance, a percentage of the drug's price, or pay the full price while meeting a deductible. Those amounts are generally based on a price close to list, not on the net price after rebates. So a patient with a high-deductible plan can pay hundreds of dollars for a drug whose real net cost to the insurer was far less, while the rebate flows elsewhere and, in theory, lowers premiums for everyone.

Insulin is the textbook case. The FTC's complaint against the three big PBMs, filed in September 2024, alleged that they built rebate systems that favored insulins with high list prices and steered patients away from lower-priced versions, raising costs for patients whose out-of-pocket amounts were tied to the higher prices. The companies disputed the charges, and the case has been contested since; for its current status, see our court tracker and the FTC's own case page.

Spread pricing, explained with one prescription

The second mechanism is simpler, and it shows up most in generic drugs.

When you fill a prescription, two payments happen behind the scenes. Your plan pays the PBM. The PBM pays the pharmacy. In a spread-pricing arrangement, those two numbers are different, and the PBM keeps the difference. If the plan pays the PBM $40 for a generic and the PBM reimburses the pharmacy $10, the spread is $30.

Spread pricing is not hidden in every contract; some employers knowingly accept it in exchange for other terms. But it becomes a problem when the payer cannot see how big the spread is, and when the pharmacy is paid less than the drug cost it to stock. Ohio's state auditor examined the PBMs serving the state's Medicaid managed-care plans and reported in 2018 that they had kept more than $200 million in spread over a single year. That finding helped push Ohio, and then other states, to change how their Medicaid programs paid PBMs.

The FTC's later work turned to specialty generics, older drugs for conditions such as cancer and HIV. In a second interim report in January 2025, agency staff said the three largest PBMs had marked up many specialty generic drugs dispensed through their affiliated pharmacies by large amounts above what they paid for them, generating billions of dollars in revenue in excess of acquisition costs over several years. The companies criticized the report's methods.

The view from behind the pharmacy counter

Patients see one side of these arrangements. Pharmacists see another, and their side explains why so many small-town drugstores have closed.

An independent pharmacy has little bargaining power. To fill prescriptions for most insured customers, it must join the networks run by the big PBMs, on terms the PBMs largely set. Those terms include the reimbursement rate for each drug, often based on a PBM's own maximum allowable cost list for generics, which the pharmacy cannot see in advance and which can change without warning. A pharmacist can fill a prescription and learn only afterward that the payment was below what the drug cost to buy.

For years, Medicare Part D added another twist. Plans and PBMs collected fees from pharmacies, known as direct and indirect remuneration, or DIR fees, often months after a prescription was filled, based on performance measures that pharmacists said were opaque. A pharmacy might think it had made a small profit on a prescription in January and discover in the fall that a clawback had turned it into a loss. Because those concessions were collected after the fact, they did not lower the price at the counter, so patients paying coinsurance did not benefit either. A Medicare rule that took effect at the start of 2024 required those price concessions to be reflected at the point of sale. Pharmacists welcomed the change, though many said it squeezed their cash flow during the transition.

Steering is the other complaint. When a PBM owns a mail-order or specialty pharmacy, it can design benefits that push patients toward it: higher copays at outside pharmacies, or rules that require certain drugs to be filled only through the affiliated pharmacy. Patients who have had a long relationship with a local pharmacist sometimes find that relationship ended by a letter in the mail.

The result shows up in the map. Pharmacy closures have left some rural communities and urban neighborhoods with no drugstore within easy reach, a pattern researchers have documented as pharmacy deserts. When a pharmacy closes in a small town, the nearest replacement can be a long drive away, and for an older patient without a car, that distance becomes a health problem.

The other side, heard out

The PBM industry's defense deserves a fair hearing. Its trade group argues that PBMs reduce drug spending substantially for the employers and unions that hire them, that most rebate dollars are passed through to clients, that clients can and do choose transparent contracts without spread pricing, and that high list prices are set by drugmakers, who are trying to shift blame. Some of this is accurate. Many large employers do negotiate pass-through contracts. Drugmakers do set list prices, and they have every reason to point at the middlemen.

But the defense has a hole. If the market were working, the patient at the counter, the independent pharmacy and the small employer would all be able to see what is going on and switch to a better deal. Instead, contracts are confidential, the biggest firms control the networks pharmacies need to survive, and a single corporate family can sit on both sides of a transaction. Competition cannot discipline what nobody can see.

What states and Washington have tried

States moved first. Many have banned or restricted spread pricing in their Medicaid programs, required PBMs to be licensed, set rules for how pharmacies are reimbursed, or required rebates to be passed through. In April 2025 Arkansas went further than any state, passing a law that would bar PBM owners from operating pharmacies in the state; a federal judge blocked it from taking effect while legal challenges proceed. Its fate is one of the cases worth watching.

In Washington, PBM reform has drawn rare support from both parties. Bills to delink PBM compensation from list prices in Medicare, ban spread pricing in Medicaid and require more transparency for employers have advanced in committees with bipartisan votes in recent Congresses. A package of PBM reforms was attached to a year-end spending deal in December 2024 and then dropped when that deal collapsed. Whether a version becomes law is a question to check against the current record; our list of bills both parties passed together is the place to see what has cleared both chambers.

The federal question that matters most is structural. Transparency rules and spread-pricing bans treat symptoms. The FTC's study, and the separate push by some lawmakers to break up the ownership of PBMs and pharmacies, aim at the cause: a few firms sitting at every link in the chain.

Why this is a working families issue

It is tempting to treat PBMs as a technical subject for health-policy specialists. It is not. The pharmacist in a small town whose store closed because reimbursements fell below cost was running a small business that employed her neighbors. The diabetic paying list price during his deductible was subsidizing someone else's premium without knowing it. The union health fund that discovered, years later, how much spread it had been paying was spending workers' deferred wages. These are pocketbook stories that cross party lines, which is why PBM reform is one of the few health topics on which rural Republicans and urban Democrats often vote together.

What you can do

Ask your plan a direct question. If you get insurance through work, your human resources office or union benefits fund can ask its PBM whether the contract uses spread pricing and how rebates are passed through. This is general information; your plan documents and benefits administrator are the authority on your coverage.

Support your local pharmacy and its fight. Independent pharmacists have been among the most effective advocates for reform; many state pharmacy associations testify for PBM bills.

Track the votes. Our Congress tracker follows health bills and roll calls, and you can find your own representative and senators, their contact information and recent votes with the representatives lookup.

Read more on the pattern behind the problem. Our topic page on corporate power follows consolidation in health care and beyond.

The FTC report's plain title hid a simple finding: the companies in the middle had become the companies at the center. Moving them back to the middle is a fight that patients, pharmacists and employers can wage together.