Pharmacy benefit managers were under the microscope from the Federal Trade Commission (FTC), lawmakers and states in 2024.
But outside of potential inclusions in an end-of-the-year health package on the Hill, the traditional “Big 3” PBMs managed to escape the toughest reforms. Business practices by Optum Rx, Express Scripts and CVS Caremark could change, should bipartisan efforts bear fruit. The industry’s trade group, the Pharmaceutical Care Management Association, spent millions to lobby Congress in its favor this year.
Today, the industry’s vertically integrated PBMs overwhelmingly dominate pharmacy transactions. There are signs, however, of that beginning to change.
Fierce Healthcare spoke with drug pricing consultants and leaders at alternative PBMs to find out where the industry is headed and what reform may be around the corner.
Powerful PBMs face new threats
In the last year, dozens of bills designed to rein in PBMs have been introduced, the FTC decided to sue PBMs and their accompanying group purchasing organizations over, allegedly, artificially raising the price of insulin drugs, and states took the companies to court over their role in the opioid crisis.
Escaping some of the blame are drug manufacturers. Partly why criticism toward PBMs feels so compelling is because PBMs are supposed to help reduce drug prices, but many critics say that is not the true mission of these companies any longer. Policymakers are beginning to view PBMs, and healthcare broadly, with more nuance, said Antonio Ciaccia, CEO of 46brooklyn Research and president of 3 Axis Advisors.
“We brought PBMs in to act as a counterweight,” he said. “Why are we still seeing so many problems in the system? That is because of rampant conflicts of interest, not just within the PBM line of business, but within all of the layers of the vertically integrated PBM enterprises. It puts their incentives in conflict with their goal on paper to control unnecessary utilization and spend on prescription drugs.”
PBMs have existed for decades, but it wasn’t until the last 20 years that big insurers acquired its current PBMs, a study in JAMA Health Forum summarizes.
“Over the last seven to 10 years—through growing their vertical and horizontal integration and then expanding all of their businesses, mostly overseas—they’ve turned into real profiteering enterprises that in our opinion harm the U.S. economy and employers,” said Greg Baker, CEO of public benefit corporation and alternative PBM AffirmedRx.
One of a PBM’s most common tactics is to accumulate rebates for drugs on its formulary. Instead of the rebate going to consumers, the rebate instead is pocketed by PBMs or sent to other insurer-owned subsidiaries for the purpose of financial workarounds. The government also uses rebates for its general revenue fund or to lower the cost of federal healthcare programs.
Spread pricing, particularly in Medicaid, is another oft-used approach by PBMs to pay pharmacies one price and then bill the payer a higher price. Managed care plans adhere to medical loss ratio requirements mandating approximately 85% of invested dollars is spent on care. When pharmacy claims are inflated, states pay more money per member each month, said Ciaccia,
Only 16 states have banned spread pricing, though federal legislation could expand the ban nationwide.
Reform meets reality
It’s an open question how the next Trump administration will approach PBM reform, as it was under President Joe Biden.
The Department of Justice has operated with skepticism regarding PBMs. Trump recently named Vice President-elect JD Vance’s policy adviser Gail Slater to replace Jonathan Kanter as head of the antitrust division. Vance has spoken positively of FTC head Lina Khan.
Lawmakers on both sides of the aisle are open to reform of the industry, but it’s not certain which provisions will be prioritized. There is danger that some reform could prove toothless.
“You can’t legislate your way out of this,” said Baker. “They’re creating overseas entities and moving healthcare data overseas, which I think is unconscionable. They’re creating all these shell organizations to hide the money and insulate the PBM, so if you sue the PBM, there’s a firewall.”
Cigna controls Switzerland-based Ascent Health Services and Cayman Islands-based Quallent Pharmaceuticals. CVS owns Cordavis and UnitedHealth Group manages Emisar Pharma Services, both operating in Ireland. These countries are known for low tax rates, a report (PDF) by the House Committee on Oversight and Accountability found.
Still, there are policies that, if enacted, could be beneficial to local pharmacies and consumers. They include a ban on spread pricing, delinking PBM compensation from the list of drugs and requiring reporting to the National Average Drug Acquisition Cost survey so PBMs must act more transparently. These policies could be a “very, very good thing” for state Medicaid programs, said Ciaccia.
“Every PBM will tell you they’re scared of reforms that are driving more transparency,” said Danny Sanchez, CEO of EmpiRx Health, another alternative PBM.
Ciaccia is also keeping an eye on the safe harbor rules from the previous Trump administration.
In 2018, months after CVS and Aetna first proposed their merger, Trump announced he would go after the PBM “middlemen.” At the end of his first term, Department of Health and Human Services Secretary Alex Azar finalized the safe harbor rule that would eliminate kickbacks in PBM rebates. The Congressional Budget Office scored the bill as a cost to the government, and the Biden administration delayed the rule’s implementation.
Whether Trump has the appetite to resurrect the rule could be pivotal in how PBM practices are changed over the next four years.
“I think a look at the history of the policy and Biden and Congress’ kicking of the can means that the can now lands back in Trump’s lap,” said Ciaccia. “It’s worth asking the question of what the fate of his landmark drug policy will be now that he is back in a position to get it across the goal line.”
Last month, the Trump-aligned think tank America First Policy Institute published a report on PBMs and said the Affordable Care Act “incentivized” insurance and PBM mergers. It calls for reforming medical loss ratio and amending the Employee Retirement Income Security Act of 1974 so PBMs are designated as fiduciaries for self-funded group health plans.
Sanchez is pessimistic meaningful PBM reform will happen soon, though he wants legislation to protect community pharmacies through fair network rates.
“I think we’re going to be in a stalemate for next year,” he predicted. “ I don’t know that the administration coming in has a solid plan on what they want to do here.”
Alternative PBMs looking to advance reform priorities will likely modify and cater their requests toward the interests of the new administration. But there is concern that even a ban on spread pricing, while positive, could leave room for loopholes and allow PBMs to shift money in different ways.
“A very prominent politician told me, ‘we’re always two, three years behind you guys,’” said Sanchez. “If you were to do an investigative research on what PBMs and rebate aggregators are doing today, they’re just moving things to be fees. By the time some of this stuff is actually brought forward and executed on, PBMs would have already evolved to another way of monetizing those dollars.”
Sanchez described the practice as a word game, where the PBM shifts terms to comply with any new requirements without fundamentally changing the business model.
When will there be a breaking point?
Made possible through the Consolidated Appropriations Act of 2021, employers and health benefit leaders are facing increased legal pressure to ensure the cost of drugs are affordable for the employees. That is exemplified through lawsuits targeting Wells Fargo and Johnson & Johnson, which highlighted the opacity of PBM models, said Ciaccia.
These new legal threats allege employers are not adequately managing employee benefit programs. While certainly a headache for organizations, these lawsuits may be more likely to compel change than any legislation.
Already, large employers are starting to move from traditional PBMs to newer upstarts. Convenience store chain 7-Eleven and Purdue University will be moving to AffirmedRx in 2025. Tyson Foods switched to the PBM Rightway this year.
“I think this risk equation piece for the benefit leaders is going to be the one thing that’s going to help drive change,” said Baker. “They’re going to have to make sure they look at their data and they understand how formulas are being created.
“We’re seeing the early adopters move,” he added. “In 2025 and 2026, we’re going to see the fast followers move. And in 2026 and 2027, I think we’re really going to see a lot of general uptick in full market adoption of these newer, more transparent PBM models.”
Beyond that, there is pressure to separate PBMs from large insurers, so they only act as independent PBMs.
“The only way you have impact … is if we break these things up,” said Baker. “In the last six years, costs continue to spiral out of control and Americans are less healthy than they’ve ever been.”
