The PBM squeeze: how middlemen quietly control drug pricing in the US

Following the insulin pen's $150

Here's a simplified, illustrative walk-through (figures are rounded estimates for teaching purposes, not exact market data):

1. List price: manufacturer sets a public price of $150 (this is the WAC, wholesale acquisition costacquisition costCustomer Acquisition Cost (CAC) is the total sales and marketing spend divided by the number of new customers gained in a period. It measures how efficiently you grow.View full definition →).

2. Rebate negotiation: the PBM tells the manufacturer, "cover our members at preferred formulary tier, or lose access to millions of lives." The manufacturer agrees to rebate roughly $60 to $90 back to the PBM.

3. Rebate distribution: the PBM keeps a slice (disclosure varies, this is a major point of controversy) and passes most of the rest to the insurer/employer plan sponsor, who may use it to lower premiums.

4. Pharmacy reimbursement: the PBM tells the pharmacy it will pay, say, $100 for the vial, and separately charges the health plan $130, keeping the $30 spread. This practice is called spread pricing.

5. Patient cost: the patient's copay or coinsurance is often calculated off the list price ($150), not the net price after rebates, so patients frequently pay more than the "true" cost to the system.

The net effect: the manufacturer nets less than list price, the pharmacy gets squeezed on reimbursement, the PBM captures margin at two or three points in the chain, and the patient's out-of-pocket cost is disconnected from what anyone actually paid.

Why manufacturers don't just cut list prices

A common question: if rebates are so large, why not just lower the list price and skip the theater?

Because formulary placement is existential. A manufacturer that lowers list price without a PBM deal risks exclusion from formularies covering tens of millions of patients. Higher list price plus a bigger rebate is the price of admission. This dynamic, sometimes called the "rebate trap," is widely cited by health economists as a structural driver of list price inflation in the US. See the Congressional Budget Office's overview of PBM economics for a non-partisan primer.

The power mapmapUsing software to automate repetitive marketing tasks and campaigns, enabling personalisation at scale across channels like email, web, and social.View full definition →

| Player | Source of power | Constraint |

|---|---|---|

| PBMs (CVS Caremark, Express Scripts, Optum Rx) | Control formulary access to huge pools of covered lives; vertical integration with insurers and pharmacies | Increasing regulatory and legislative scrutiny; state-level PBM laws |

| Manufacturers (Lilly, Novo Nordisk, Pfizer, etc.) | Patent-protected products, especially for drugs with no substitute | Dependent on PBM formulary access; price competition among branded rivals in same class |

| Insurers/employers | Ultimate payers; increasingly own PBMs directly | Limited visibility into actual rebate flows in many contracts |

| Retail pharmacies (independent and chain) | Patient-facing relationship | Squeezed on reimbursement rates; many independents have closed |

| Regulators (FTC, CMS, state legislatures) | Antitrust and transparency authority | Slow-moving; industry lobbying is heavy |

| Patients | None structurally; price-takers | Bear list-price-linked cost sharing |

The FTC (Federal Trade Commission) has been the most active recent regulator. Its interim staff report in 2024 found the six largest PBMs marked up prices for many specialty generic drugs dispensed at their own affiliated pharmacies, extracting significant margin beyond acquisition costacquisition costCustomer Acquisition Cost (CAC) is the total sales and marketing spend divided by the number of new customers gained in a period. It measures how efficiently you grow.View full definition → (see FTC's PBM report summary). This is a genuinely novel piece of public evidence, not an invented figure, and it's worth reading directly.

Why vertical integration matters more than any single rebate

The deeper competitive story isn't really about rebates. It's about consolidation. When the PBM, the insurer, and a specialty pharmacy all sit inside the same corporate parent (CVS Health, Cigna/Express Scripts, UnitedHealth Group), that parent controls:

• Which drugs get covered (PBM)
• Who pays for coverage and at what premium (insurer)
• Where the prescription gets filled (owned pharmacy/mail order)

This lets the parent capture margin at multiple links of the same chain simultaneously, a classic vertical integration play analogous to a studio owning production, distribution, and the cinema. Independent pharmacies and smaller manufacturers have no equivalent countervailing scale.

Challengers trying to break the model

A few players are testing alternative structures:

• Mark Cuban Cost Plus Drugs, a direct-to-consumer pharmacy model, prices drugs at cost plus a transparent flat margin, bypassing PBM rebate negotiation entirely.
• GoodRx and similar discount card platforms let cash-paying patients bypass insurance-linked pricing in some cases.
• Some large employers (e.g., through coalitions) are contracting directly with PBMs on "pass-through" models where 100% of rebates flow back to the plan, with the PBM paid a flat administrative fee instead of keeping a spread.

None of these has meaningfully dented the Big Three's share as of 2026, but they represent the competitive pressure points regulators and employers are watching.

What's changing: regulation catching up

• State laws: many states have passed PBM transparency or licensure laws requiring disclosure of rebate retention and spread pricing.
• Federal action: Congress has repeatedly proposed (but not fully passed, as of early 2026) legislation to delink PBM compensation from drug price (i.e., ban rebate-percentage-based fees, forcing flat fees instead). The FTC has also filed enforcement actions against the three largest PBMs over insulin rebate practices.
• Inflation Reduction Act (2022): while primarily about Medicare price negotiation for a defined list of drugs, it indirectly pressures the rebate system by giving CMS (Centers for Medicare and Medicaid Services) direct negotiating power for the first time on select high-spend drugs, reducing PBMs' relative bargaining monopoly on those specific products.

The direction of travel is toward more transparency and delinked compensation, but the Big Three's structural position (controlling formulary access for most insured Americans) is not going away soon.

🎬 [VIDEO: "How Pharmacy Benefit Managers Make Money" - https://www.youtube.com/results?search_query=how+pharmacy+benefit+managers+make+money - search this term on YouTube; look for explainer content from outlets like Kaiser Health News, Wall Street Journal, or Peterson Center on Healthcare for a visual walk-through of the rebate flow described above]

Key Takeaways

• PBMs (CVS Caremark, Express Scripts, Optum Rx) control formulary access for an estimated 70 to 80% of US prescription claims, making them the central gatekeeper in drug pricing, not manufacturers.
• Rebates negotiated between manufacturers and PBMs explain why US list prices stay high: lowering list price without a rebate deal risks losing formulary access to millions of covered patients.
• Vertical integration (PBM plus insurer plus pharmacy under one parent, e.g. CVS Health, Cigna, UnitedHealth Group) lets a single company capture margin at multiple points in the same drug's journey.
• Patient cost sharing is often tied to list price, not the discounted net price, which is why patients can pay more than the "true" system cost of a drug.
• Regulatory pressure (FTC investigations, state transparency laws, delinked-compensation proposals) is building but has not yet restructured the Big Three's core market position as of 2026.