How Pharmacy Benefit Managers Work—and Why Drug Prices Rise

The Invisible Middlemen of U.S. Drug Pricing

When Americans fill a prescription, most never think about the company standing between their insurer and the pharmacy counter. Yet pharmacy benefit managers (PBMs) touch nearly every prescription dispensed in the United States, managing drug benefits for roughly 275 million people. Originally created to handle paperwork, PBMs have grown into powerful intermediaries whose business practices now sit at the center of a fierce national debate over why medications cost so much.

What PBMs Actually Do

PBMs emerged in the 1960s when U.S. insurers began covering prescription drugs and needed help processing claims. Their core functions have since expanded to include three main roles:

• Formulary management — PBMs decide which drugs a health plan covers, how they are ranked by tier, and what patients pay out of pocket.
• Rebate negotiation — Using the purchasing power of millions of enrollees, PBMs negotiate discounts from drug manufacturers in exchange for favorable formulary placement.
• Pharmacy network contracting — PBMs set the terms under which pharmacies participate in insurance networks, including how much each pharmacy is reimbursed per prescription.

In theory, this consolidation of bargaining power should lower costs for everyone. In practice, the system has attracted intense scrutiny from lawmakers, physicians, and consumer advocates.

The Big Three Dominate

The PBM market is strikingly concentrated. Three companies — CVS Caremark (owned by CVS Health), Express Scripts (owned by Cigna), and Optum Rx (owned by UnitedHealth Group) — process roughly 80 percent of all prescription claims in the country. Each parent company also owns a health insurer and, in some cases, pharmacies and clinics, creating vertically integrated empires that profit at multiple points in the drug supply chain.

This consolidation gives the Big Three enormous leverage. Manufacturers must negotiate with them to reach most insured patients, and independent pharmacies must accept their reimbursement terms or risk being shut out of networks entirely.

How Rebates Can Backfire

The rebate system is where critics say the model breaks down. PBMs negotiate rebates — essentially kickbacks — from manufacturers, and may prefer a higher-priced drug that offers a larger rebate over a cheaper alternative. Research cited by the Commonwealth Fund found that from 2015 to 2018, every additional dollar in rebates was associated with a $1.17 increase in a drug's list price.

The consequences fall on patients. Those with high-deductible plans or coinsurance tied to list price pay more out of pocket, even though the PBM and insurer may be collecting large rebates behind the scenes. A 2024 U.S. House Oversight Committee report concluded that PBM pricing tactics contribute meaningfully to rising healthcare costs.

Spread Pricing: The Hidden Markup

Another controversial practice is spread pricing. A PBM charges an insurer one price for a drug, reimburses the pharmacy a lower amount, and pockets the difference. According to congressional investigators, the three largest PBMs generated an estimated $1.4 billion from spread pricing on just 51 generic specialty drugs over roughly five years. Patients absorb the cost indirectly through higher premiums and reduced pharmacy access, particularly in rural areas where independent pharmacies have closed under financial pressure.

Reform Is Finally Arriving

After years of stalled efforts, significant federal reform reached PBMs in early 2026. The Consolidated Appropriations Act of 2026 introduced mandatory transparency reporting, requires PBM compensation in Medicare Part D to shift to flat-fee service payments by 2028, and mandates any-willing-pharmacy network participation starting in 2029. Separately, the Federal Trade Commission secured a settlement with Express Scripts over alleged inflation of insulin costs.

Whether these reforms will meaningfully lower drug prices remains to be seen. PBMs argue they save the healthcare system billions annually through negotiation. But as long as the rebate-driven model rewards higher list prices and opaque business practices, the tension between cost containment and profit extraction will persist at America's pharmacy counters.