Urban hospital building exterior at dusk with ambulances outside
Blog
BlogbyQualify Health

TL;DR

  • Three PBM giants control 80% of prescription processing: CVS Caremark, Express Scripts, and OptumRx dominate through vertical integration with major insurers, creating concerning market concentration.
  • Complex revenue mechanisms obscure true drug costs significantly: PBMs profit through rebate retention, spread pricing, and proprietary pricing systems while maintaining information asymmetry against clients.
  • Patient costs rise despite negotiated manufacturer discounts: Cost-sharing calculations use pre-rebate list prices, while copay accumulator programs and specialty markups increase out-of-pocket expenses substantially.
  • Independent pharmacies face existential threats from PBM practices: Rural pharmacy closures reached 10% since 2013 due to below-cost reimbursement, steering, and unpredictable fees.
Table of Contents
Pharmacy reimbursement companies wield a lot of influence over the cost, access, and distribution channels of pharmacy drugs. Most of these companies are . structured as primarily Pharmacy Benefit Managers (PBMs) that end up operating as critical intermediaries in America’s healthcare system.

Three Companies Control 80% of the Market

The PBM market is highly concentrated around a few players which affects healthcare costs:

  • three major companies: CVS Caremark, Express Scripts (Cigna), and OptumRx (UnitedHealth); control approximately 80% of the market
  • this “Big Three” oligopoly processes over 4 billion prescriptions annually
  • major health insurance companies have vertically integrated that has fueled market consolidation
  • independent PBMs represent a shrinking minority of market participants
  • local levels often exceed thresholds for anti-competitive concern because of the high concentration

This works out to be a large amount of power concentrated within a few companies . These companies can then exert tremendous leverage over both pharmaceutical manufacturers and retail pharmacies; it’s no surprise there is evidence of price discrimination against competing pharmacies and preferential treatment for affiliated entities. And it’s even triggered Federal Trade Commission investigations which highlight concerns about anti-competitive practices resulting from this market dominance.

Core Revenue Streams: How PBMs Generate Profits

PBMs use many mechanisms to charge for fees, the six main ones are:
  1. Rebate retention
    • negotiate substantial discounts from pharmaceutical companies but pass only a portion to plan sponsors
  2. Spread pricing
    • charge health plans more for medications than they reimburse to pharmacies, and pocket the difference
  3. Administrative fees
    • charge for claims processing and administration of benefits
  4. Pharmacy steering
    • direct patients to PBM-owned specialty and mail-order pharmacies
  5. Formulary management fees
    • collect payments from drug manufacturers for preferred placement
  6. Differential reimbursement
    • create payment structures that disadvantage non-affiliated pharmacies
It’s difficult for employers, health plans, and patients to understand the economics of their pharmacy benefits. It’s not just the number of charges but also how fees are calculated coupled with a lack of transparency. This opacity results in information asymmetry between PBMs and the clients they serve. PBMs have much more knowledge about the actual drug costs and fees charged.
Hospital staff meeting with pharmacy reimbursement companies representative

The Pricing Mechanisms That Drive Drug Costs

PBMs have created five, proprietary, complex pricing systems that greatly affect what patients and plans pay for medications.
  1. Average Wholesale Price (AWP)
    • benchmark that serves as the starting point for many pricing calculations but bears little relationship to actual costs
  2. Maximum Allowable Cost (MAC)
    • proprietary lists that set reimbursement ceilings for generic drugs
  3. Wholesale Acquisition Cost (WAC)
    • the manufacturer’s list price before discounts
  4. National Average Drug Acquisition Cost (NADAC)
    • a more transparent benchmark based on pharmacy surveys
  5. Direct and Indirect Remuneration (DIR) fees
    • retrospective charges applied after prescription dispensing
Let’s see how these pricing systems might be applied.

Example
A PBM might reimburse a retail pharmacy $30 for dispensing a medication while charging the health plan $45. This produces a $15 “spread” that becomes pure profit for the PBM.

The example illustrates a common practice with generic medications. The acquisition costs are typically low but markup opportunities are substantial. And in all cases, there is a lack of transparency in favour of the PBM.

Impact on Patients: Rising Out-of-Pocket Expenses

PBM practices directly affect patient affordability and care in multiple ways:
  • cost sharing calculations are typically based on pre-rebate list prices rather than the lower net prices PBMs negotiate
  • patients pay higher out-of-pocket costs while plans benefit from rebates (and research shows that high out-of-pocket costs lead to medication non-adherence and worse health outcomes)
  • PBMs implement “copay accumulator” programs that prevent patient assistance programs from counting toward deductibles
  • policies can create “financial cliffs”: sudden, dramatic increases in a patient’s out-of-pocket drug costs that occur when manufacturer assistance funds are depleted (a patient pays nothing for their medication for several months while using manufacturer assistance, then suddenly faces thousands in costs when that assistance is exhausted)
  • exclusions may force patients to switch medications or pay full price

A particularly concerning PBM practice involves specialty medications. PBM-owned pharmacies have been documented applying markups of hundreds or even thousands of percent on critical medications for conditions like cancer and HIV. This practice not only increases costs throughout the system but can directly impact patient access to life-saving therapies. A related discussion explores how reimbursement pressures contribute to broader system-wide challenges and sustainability concerns for pharmacies.

Vertical Integration: Consolidating Control Across Healthcare

Approximately 72% of commercially insured Americans receive coverage through vertically integrated entities. This integration creates powerful incentives for self-preferencing and patient steering. The FTC has documented how this integration enables problematic practices.

  • major PBMs now operate within conglomerates that own insurers, specialty pharmacies, and sometimes even provider networks
  • these structures allow profits to shift between business units, making regulatory oversight challenging
  • integration enables complex financial arrangements that can mask the true economics of drug pricing
Example
The affiliated pharmacies of the three largest PBMs retained nearly $1.6 billion in excess revenue on just two cancer drugs over less than three years. This finding suggests that vertical integration may serve to increase overall healthcare costs rather than reduce them through efficiency gains.

The Crisis Facing Independent Pharmacies

Between 2013 and 2022, approximately 10% of independent rural pharmacies closed permanently. In many communities, these pharmacies represent the only accessible healthcare provider. Their viability is a public health concern.

Community retail pharmacies, particularly those in rural and underserved areas, face five challenges that threaten their business sustainability due to five PBM practices:

  1. Reimbursement rates set through proprietary MAC lists
  2. Post-adjudication fees that reduce already slim margins
  3. Restrictive network contracts that limit service offerings
  4. Steering of patients to PBM-owned mail-order facilities
  5. Unpredictable payment adjustments that complicate financial planning
When local pharmacies close, patients often face increased travel distances to obtain medications. This negatively impacts adherence and health outcomes, particularly for elderly and disabled populations.

Drug Access & Usage Restrictions

Utilization management are the techniques that PBMs use to control prescription drug usage and costs. These techniques can promote appropriate medication use but they also create administrative burdens for healthcare providers and potential barriers for patients.

Ultimately these techniques impact patient care.

  1. Prior authorization requirements that delay access to prescribed medications
  2. Step therapy protocols that force patients to try preferred drugs before accessing alternatives
  3. Quantity limits that restrict medication supply
  4. Exclusions that eliminate coverage for certain medications entirely
Research indicates that utilization management practices can delay necessary treatment. This could then lead to adverse health outcomes and increased healthcare use in other areas.

Emerging Alternatives and Reform Efforts

The problematic aspects of traditional PBM models have sparked both market and regulatory responses such as:
  • transparent “pass-through” PBMs that eliminate spread pricing and pass 100% of rebates to plan sponsors
  • cost-plus models using public benchmarks like NADAC for more predictable pricing
  • federal legislation targeting spread pricing, gag clauses, and self-preferencing
  • state regulations mandating PBM licensure and transparency
  • employer-led initiatives demanding greater accountability and value
The “Big Three” maintain dominant market positions but there is growing awareness of their practices. This awareness has created opportunities for alternative models that better align incentives with patient and plan sponsor interests. Some employers have begun moving to transparent PBM arrangements or even developing their own in-house pharmacy benefit solutions.

What’s Next

Pharmacy reimbursement companies will remain essential components of the U.S. healthcare system, but their practices require significant reform to better serve patients and reduce overall costs. The key priorities for reform should include:
  • mandate point-of-sale rebates to ensure patients benefit from negotiated discounts
  • require transparent, acquisition-based cost models for reimbursement
  • address conflicts of interest inherent in vertical integration
  • protect community pharmacy access, particularly in underserved areas
  • implement meaningful fiduciary standards for PBM operations

Policymakers can address these structural issues and help create a pharmaceutical supply chain that delivers on the promise of affordable medications while maintaining appropriate access to necessary therapies.

The future of pharmacy benefit management must prioritize true value creation rather than profit extraction through complex financial engineering.

Related Posts

Qualify Health software automates the matching of financial aid funds to patient treatment plans and health needs, ensuring access to necessary healthcare services even retroactively.

Request a Meeting