The price a patient pays for a prescription drug is not set by a single decision. It is the output of a chain of negotiations, contracts, and financial arrangements involving multiple parties — most of whom are invisible to the patient standing at the pharmacy counter. At the center of that chain is an intermediary that most Americans have never heard of: the Pharmacy Benefit Manager, or PBM.
PBMs are the entities that manage prescription drug benefits on behalf of insurance companies, employers, and government programs. They negotiate with drug manufacturers, contract with pharmacies, process claims, and design the formularies — the lists of covered drugs and their cost-sharing tiers — that determine what a patient pays for a given medication. They sit between manufacturers and patients in the drug supply chain, and the financial arrangements they operate under have a direct and well-documented relationship to why drug prices in the United States are as high as they are.
What PBMs Do
When an employer or insurance company wants to offer prescription drug coverage, it typically contracts with a PBM to manage that benefit. The PBM negotiates with drug manufacturers for discounts and rebates in exchange for favorable formulary placement — putting a manufacturer’s drug on a lower cost-sharing tier, where patients pay less out of pocket and are therefore more likely to fill the prescription. The PBM contracts with a network of retail and mail-order pharmacies, setting the reimbursement rates those pharmacies receive for dispensing drugs. It processes the claims that flow through the system and provides the administrative infrastructure that makes drug coverage function.
For this work, PBMs receive compensation through several channels: administrative fees from plan sponsors, a share of the rebates they negotiate from manufacturers, and in some cases the spread between what they reimburse pharmacies and what they charge plan sponsors for the same drug — a practice called spread pricing. The opacity of these compensation arrangements is one of the central issues in PBM regulation debates.
The Rebate System and Its Perverse Incentives
The rebate system is the mechanism most directly implicated in high drug list prices, and its logic is worth understanding carefully because it is counterintuitive.
A drug manufacturer sets a list price — the wholesale acquisition cost — for its product. It then negotiates with PBMs, offering rebates in exchange for favorable formulary placement. A manufacturer that offers a larger rebate is more likely to get its drug placed on a lower tier, which means more patients fill the prescription, which means higher sales volume. The manufacturer is effectively buying market access through the rebate.
The perverse incentive this creates is well-documented: manufacturers have an incentive to set high list prices in order to have room to offer large rebates. A drug priced at $300 per month with a 40 percent rebate nets the manufacturer $180 and offers the PBM a $120 rebate. The same manufacturer could price the drug at $180 with no rebate and net the same amount — but it would have nothing to offer PBMs in exchange for favorable placement. The rebate architecture makes high list prices strategically rational for manufacturers competing for formulary position.
The consequences fall on patients whose cost-sharing is based on list price. A patient who is uninsured pays based on list price. A patient in the deductible phase of a high-deductible health plan pays based on list price or a negotiated cash price, not the post-rebate net price. A patient whose coinsurance is calculated as a percentage of the drug’s cost pays more when list prices are higher, regardless of what rebates are flowing elsewhere in the system.
A 2019 Senate Finance Committee investigation into insulin pricing documented this dynamic in detail. It found that the list price of Lantus insulin increased 159 percent between 2012 and 2019, while Sanofi’s net price — what it actually received after rebates — increased only 8 percent over the same period. The list price increases were not primarily about what the manufacturer received. They were about maintaining competitive rebate offers to PBMs.
PBM Consolidation
Three PBMs now dominate the US market. CVS Caremark, Express Scripts (owned by Cigna), and OptumRx (owned by UnitedHealth Group) together manage approximately 80 percent of all prescription drug claims in the United States. Each of the three is owned by or affiliated with a major health insurer or pharmacy chain — a vertical integration that raises distinct questions about conflicts of interest.
CVS Caremark is owned by CVS Health, which also owns CVS pharmacies and Aetna insurance. Express Scripts is owned by Cigna, a major health insurer. OptumRx is owned by UnitedHealth Group, the largest health insurer in the country. This means the same corporate family can simultaneously be the insurer collecting premiums, the PBM negotiating drug rebates, and the pharmacy dispensing the drug — with financial interests at each stage of the transaction.
The consolidation has reduced competition in PBM services. Employers and insurers that want to offer drug coverage have few alternatives to the three major PBMs, which limits their negotiating leverage. Independent pharmacies — particularly rural pharmacies serving communities that major chains do not reach — report that PBM reimbursement rates are set below their cost of dispensing in some cases, a practice they attribute to PBMs preferring their affiliated pharmacy networks.
The Federal Trade Commission launched an investigation into PBM practices in 2022. An interim report released in 2024 found that the largest PBMs used their market position to steer patients toward affiliated pharmacies, that spread pricing practices were widespread, and that the rebate system created incentives that contributed to high list prices. The full investigation was ongoing as of 2026.
Why Transparency Is Limited
One of the most consistent features of the PBM system is its opacity. The contracts between PBMs and manufacturers are confidential. The contracts between PBMs and plan sponsors are confidential. The rebates PBMs negotiate — and how much of those rebates they pass through to plan sponsors versus retain — are not publicly disclosed. The spread pricing margins PBMs earn on individual drug transactions are not disclosed to plan sponsors in most cases.
This opacity is not incidental. It is structurally maintained because transparency would expose the financial arrangements that benefit PBMs and manufacturers at the expense of patients and plan sponsors. Several states have passed PBM transparency legislation requiring disclosure of spread pricing and rebate pass-through rates. The results of those disclosures, where they have occurred, have consistently shown significant retention of rebates by PBMs — money that plan sponsors and patients believed was flowing through to reduce drug costs.
The lack of federal transparency requirements means that the full financial picture of how drug pricing works in the United States — who receives what at each step of the chain — remains partially invisible even to regulators. The FTC investigation is the most significant federal effort to document what the system actually looks like, and its findings are still emerging.
What This Sets Up
The rebate system, PBM market concentration, and the opacity of PBM financial arrangements are the subject of a substantial and bipartisan policy debate. Reform proposals range from rebate reform — requiring that rebates be passed directly to patients at the point of sale rather than retained by PBMs — to PBM transparency requirements, to antitrust action against vertical integration, to more fundamental restructuring of how drug benefits are managed.
Each of these proposals has a rationale, proponents across the political spectrum, and serious criticisms. The following articles examine what other countries do differently and what the full range of reform proposals looks like. If you have direct experience with PBM practices — as a patient, pharmacist, employer, or benefits administrator — the forum is where that experience belongs.
- Getting Started
- What Americans Pay and Why: The Basics of Drug Pricing
- The Insulin Crisis: A Case Study in Pricing Failure
- The Issue Pipeline
This article was researched and drafted with AI assistance under human review. See our full AI and editorial practices.