Middlemen Are Profiting off the Broken US Pharma System
Pharmacy benefit managers push expensive medications and slash drug reimbursement rates, pocketing the profits for themselves. Congress looked set to regulate these shadowy middlemen — but $50 million in industry lobbying later, the effort has stalled.
Small, independent pharmacies say that pharmacy benefit managers are putting them out of business. (SteFou! / Flickr)
Lawmakers from both parties and thirty-nine state attorneys general joined forces to stop the shadowy corporate middlemen behind rising drug prices and the death of independent pharmacies. Now these reform efforts are in peril, following nearly $50 million in industry lobbying — including tens of thousands to congressmembers who sponsored reform legislation.
These largely unregulated middlemen, called pharmacy benefit managers, serve as intermediaries between insurers and pharmaceutical manufacturers, determining which drugs insurers will cover and how much they cost. But they are incentivized to opt for the most expensive medicines and slash drug reimbursement rates to maximize profit, hurting both patients and small pharmacies.
As Federal Trade Commission chair Lina Khan just declared at a White House roundtable on the matter, these “dominant gatekeepers” have “outsized power to decide how people do or don’t receive the lifesaving prescription drugs they depend on.”
Concerns about pharmacy benefit managers, or PBMs, have reached such a level that lawmakers from both parties have introduced more than twenty federal bills to curb these companies’ power, and late last month, more than three quarters of the nation’s state attorneys general sent a letter to Congress urging action on them.
But days after the letter, it was revealed that Congress may not include any of the reforms in the next federal funding package, which allocates money to health programs and services including Medicare and Medicaid. This comes after PBMs spent a combined $47 million on lobbying in 2023.
Meanwhile, these companies are actively stonewalling state and federal investigations into their practices.
“It is disheartening that Congress is as dysfunctional as they are and the stakes [of PBM reform] rests on what gets put into federal spending bills,” said Colorado attorney general Phil Weiser, one of the attorneys general who signed the letter to Congress. “There is strong bipartisan support for this reform, and if this can’t get into a bipartisan spending package, I don’t know what can.”
While big pharmacies, insurers, and PBMs often like to blame one another for high drug prices, in reality they’re all part of the same corporate scheme. The three major PBMs are owned by health care behemoths — CVS Health, Cigna, and UnitedHealth — that together have considerable control over both the pharmacy and insurance markets. This means these conglomerates run nearly every stage of the pricing process with hardly any checks on prescription drug costs.
The proposed laws would combat high drug prices by requiring PBMs to charge flat service fees under Medicare plans; increase transparency around pharmaceutical payments to PBMs; and ban PBMs from charging Medicaid and other providers more than they pay pharmacies for drugs and pocketing the difference, a practice known as spread pricing.
Lobbying on the bills came primarily from the three major pharmacy and insurance companies that dominate the PBM industry. The Pharmaceutical Care Management Association, a lobbying group that represents PBMs, also spent $15.4 million lobbying on PBM legislation and other matters last year, according to lobbying records.
“It was a gut punch, I was sick, I was speechless,” said Brandi Chane, who owns a local pharmacy outside of Fort Worth, Texas, of Congress’s potential inaction on PBM reform efforts. “You’ve got to be kidding me. We’ve shown [Congress] over and over and over about the danger of PBMs and we’re not going to do anything now?”
In response to a request for comment, Greg Lopes, vice president of public affairs and communications at the Pharmaceutical Care Management Association, wrote in an email, “This year, Congress has held an unprecedented number of hearings focused on PBMs as Big Pharma continues its extraordinarily high advertising spending to blame-game others for high drug costs. It is imperative to educate lawmakers on the value PBMs provide to the health care system by lowering prescription drug costs and helping improve health outcomes.”
CVS Health, Cigna, and UnitedHealth did not respond to requests for comment.
Profits for the Middleman
PBMs were created in the 1960s to negotiate drug prices and coverage with pharmaceutical manufacturers and insurers. In theory, these negotiations should help individuals enrolled in health insurance plans save money by finding the best prices for consumers. In reality, these middlemen often do the opposite.
That’s because PBMs are incentivized to deter insurers from covering generic and cheaper medicines, as they are paid based on the discount they arrange with pharmaceutical manufacturers, otherwise called a rebate, which critics say is effectively a legalized kickback. Consequently, the more expensive the drug, the larger the rebate, and the more money that ends up in PBMs’ pockets.
“PBMs have an incentive to pick a drug that comes with a larger rebate, so that they get a larger cut, even if the drug is more expensive overall,” Zach Freed, advocacy and outreach manager at the nonprofit advocacy group American Economic Liberties Project wrote in a 2022 analysis.
Freed cited a 2021 Senate investigation that discovered PBMs use their aggressive negotiating tactics to “extract more generous rebates, discounts, and fees from insulin manufacturers,” which, Freed noted, contributed to “skyrocketing insulin prices and discouraged price decreases for the drug.”
The problem with PBMs goes all the way to the top.
The three largest PBMs, which control 80 percent of the prescription drug market, are owned by the country’s biggest health care companies. CVS Caremark is owned by pharmacy colossus CVS Health, which also owns the insurer Aetna. Express Scripts, meanwhile, is owned by the massive insurer Cigna; while OptumRx is owned by insurance giant UnitedHealthcare.
With so much power, PBMs have evolved from “cost savers” to companies that profit at nearly every stage of the drug supply chain.
Such integration also hurts smaller independent pharmacies by jacking up fees and cutting back on drug reimbursements that PBMs pay out for prescriptions, which these stores depend on to stay afloat. For Chane, the local pharmacy owner in Texas, the reimbursements she receives often don’t even cover the cost of purchasing and dispensing medications.
Thanks to these companies’ power, pharmacies are unable to negotiate better reimbursement rates. When a pharmacist in rural Minnesota, who requested to remain anonymous, asked for higher reimbursement rates from Aetna Medicare, the company responded in an email that they had to sign the contract as is in order to stay in-network.
“Unfortunately, the terms of this agreement are non-negotiable,” noted an Aetna representative in an email we reviewed. “Please note refusal to sign the amendment will result in termination from the P3 network.”
Overall, the drug pricing system is “perversely incentivized to pay off the middlemen while squeezing profits out of every single other part of the supply chain,” said Monique Whitney, executive director of the advocacy group Pharmacists United for Truth & Transparency.
Although most states have passed legislation to regulate PBMs, these companies often argue that a lack of federal regulation “limit[s] states’ authority to regulate PBMs,” the attorneys general wrote in their recent letter to Congress. In some cases, these companies have purposefully obstructed state laws by withholding information from state regulators.
Last May, the Federal Trade Commission expanded an investigation into how PBMs are jacking up prescription drug prices and hurting local pharmacies by steering patients away from independent pharmacies, charging arbitrary fees, and decreasing reimbursements. This comes after years of agency support for PBMs.
Despite federal orders to cooperate, the agency now says that the PBMs have refused to turn over key documents and data.
“Reaching a Breaking Point”
Alongside the federal government’s investigation, a total of twenty bills related to PBMs have been introduced in the House and the Senate during the 2023–2024 congressional session.
Four of them passed Senate committees last year, including the Pharmacy Benefit Manager Transparency Act of 2023 that would require PBMs to pass all of their rebates to the insurance plan or payer and provide full disclosure of drug costs and pharmacy and health plan reimbursements. The Pharmacy Benefit Manager Reform Act, which passed the Senate Committee on Health, Education, Labor, and Pensions, would prohibit PBMs from charging insurance plans more than they reimburse pharmacies.
Seven bills passed House committees, including the Lower Costs, More Transparency Act, which would require PBMs to disclose their spending, drug rebates, and pharmacy fees associated with covered drugs.
But at the same time, CVS Health, Cigna, UnitedHealth, and the lobbying group Pharmaceutical Care Management Association were lobbying on PBM-reform efforts, including “issues related to drug pricing transparency” and “drug pricing reforms.” They also sent money directly to lawmakers.
Rep. Cathy McMorris Rodgers (R-WA), who led the Lower Costs, More Transparency Act, received a total of $13,500 in lobbying contributions from the political action committees of CVS Health, Cigna, UnitedHealth, and the Pharmaceutical Care Management Association, according to data from OpenSecrets. She received the most contributions of any House member from the health service industry during the 2023–2024 session.
Reps. Frank Pallone (D-NJ) and Jason Smith (R-MO), two of the bill’s cosponsors, received $15,000 and $25,000, respectively. Rep. Gus Bilirakis (R-FL), who wrote two measures that were included in the legislation, received $10,000. All three legislators were among the top twenty representatives who received contributions from the health services industry.
Sen. Bob Casey (D-PA) introduced the Protecting Seniors from High Drug Costs last year, which sought to prohibit health plans and PBMs from overcharging Medicare beneficiaries for prescription drugs. He received $15,000 from CVS Health, Cigna, and UnitedHealth via their political action committees.
Rep. Ann Kuster (D-NH), who led the Pharmacy Benefits Manager Accountability Act that would increase oversight and regulation of PBMs, received $11,000 last year from the same companies’ political action committees and the Pharmaceutical Care Management Association. She was also among the top twenty recipients of health service industry contributions.
Other legislators who have spoken out against targeting PBMs to reduce drug costs, including Sens. Rand Paul (R-KY.) and Kyrsten Sinema (I-AZ), along with Reps. Kevin Hern (R-OK) and Eric Burlison (R-MO) received a combined $56,500 from these political action committees during the 2023–2024 session.
Reps. Pallone, Smith, Bilirakis, Kuster, and Sen. Casey did not respond to a request for comment. Rep. Rodgers’s legislative aide responded but did not provide a comment.
Following this lobbying blitz, and disagreements about PBM reforms that sources say have arisen between the House and the Senate, news outlets reported that Congress may abandon efforts to include any of these reforms in the upcoming federal funding package, which now must be passed by March 22 to avert a federal shutdown.
“We cannot understate the urgency or the need to enact immediate PBM reforms,” Pharmacists United for Truth and Transparency wrote in a letter to Congress a day after lawmakers showed signs of punting PBM reform. “We speak plainly and without hyperbole when we say community pharmacies are collectively reaching a breaking point. Numerous small business pharmacies are running out of time and will be forced to permanently close their doors if relief is not forthcoming soon.”
The number of independent pharmacies dropped by nearly 50 percent from 1980 to 2022 — and industry experts predict that if nothing is done to address the problem, even more local pharmacies will close by the end of 2024.
Chane, for one, doesn’t know how much longer she can keep her pharmacy’s doors open.
“How do I pay my staff?” said Chane. “How do I keep the lights on? How do I continue to service these people in my community that have depended on us for generations? If I close my doors, where are they going to go?”