The Morphing of Pharmacy Benefits Managers: From Claims Processing to Vertical Integration and Emerging Conflicts of Interest

Introduction: Understanding the Evolving Role of Pharmacy Benefit Managers

Pharmacy Benefit Managers (PBMs) are third-party companies that operate as intermediaries between insurance providers and pharmaceutical manufacturers.¹ Initially created to assist insurers in managing the burgeoning cost of prescription drugs, their role has expanded considerably over time.² The primary function of PBMs involves managing prescription drug benefits for a wide array of clients, including health insurers, large employers, unions, and government entities.⁵ Their responsibilities now encompass a broad spectrum of activities, such as creating and managing formularies (lists of covered drugs), negotiating rebates (discounts paid by drug manufacturers), processing claims, establishing pharmacy networks, and conducting drug utilization reviews.²

The trajectory of PBMs has witnessed a significant “morphing” from their foundational role in claims processing to becoming intricate entities deeply involved in vertical integration within the healthcare system. This evolution has led to a situation where the initial purpose of PBMs – to contain drug spending – is being critically examined due to the escalating cost of prescription drugs and the resultant effects on consumers.² A central issue that has emerged from this transformation is the potential for conflicts of interest arising from the increasing vertical integration of PBMs with other key players in the pharmaceutical supply chain, including pharmacies and health insurers.⁸ These conflicts of interest have far-reaching implications for the entire healthcare ecosystem, affecting patients, pharmacies, physicians, employers, and health plans alike.

The core function of PBMs has indeed expanded significantly beyond their original mandate. Initially focused on setting reimbursement rates, processing claims, and paying pharmacies, their responsibilities have grown to include the development and management of formularies, negotiation of rebates with manufacturers, creation of pharmacy networks, review of drug utilization, and even the management of mail-order and specialty pharmacies.³ This expansion indicates a substantial evolution from their initial role as primarily administrative entities. Furthermore, the increasing scrutiny faced by PBMs is directly attributable to the persistent rise in healthcare costs, particularly the escalating prices of prescription drugs.² News coverage has often highlighted the unaffordability of essential medications like insulin and EpiPens, forcing patients to make difficult choices, thus bringing the role and impact of PBMs into sharp focus. The consolidation within the PBM industry has also been a key factor in shaping the current landscape, leading to significant market power concentrated in the hands of a few major players.⁶ The fact that nearly 80% of the prescription benefits market in the U.S. is controlled by the three largest PBMs – CVS Caremark, Express Scripts, and OptumRx – underscores the potential for these entities to exert considerable influence and potentially engage in practices that raise concerns about conflicts of interest.

The Genesis of PBMs: From Claims Adjudication to Early Benefit Management

The inception of PBMs dates back to the 1960s, a period when insurance companies began incorporating prescription drug coverage into their health plans.² Recognizing the need to manage the financial implications of this new benefit, insurers turned to third-party administrators, which would eventually evolve into the PBMs we know today.² Their initial functions were primarily focused on claims processing and the rudimentary management of formularies.² In these early stages, PBMs essentially acted as intermediaries to ensure smooth transactions between insurers and pharmacies, minimizing errors and streamlining payments.

The 1970s marked a further evolution in the role of PBMs, as they began to function as fiscal intermediaries responsible for adjudicating prescription drug claims.² This involved electronically processing drug claims, determining patient eligibility for medications in real-time, and ensuring that pharmacies would be reimbursed for the dispensed drugs.⁴ A significant milestone during this era was the introduction of the plastic drug benefit identification card.⁷ This innovation simplified the process for patients at the pharmacy counter and streamlined the payment system between PBMs and pharmacies.¹⁵ The 1980s witnessed the advancement of information technology, leading to the development of online, real-time electronic drug claims processing.⁷ This transition from paper-based to electronic systems enhanced the efficiency of claims adjudication and provided PBMs with access to valuable data on prescription records.¹³

The initial value proposition of PBMs was indeed centered on providing administrative efficiency and achieving cost savings for payers.¹¹ By handling claims processing and negotiating with pharmacies, PBMs offered a clear value to employers and insurance companies seeking to manage their prescription drug expenditures. The shift from manual, paper-based claims processing to sophisticated electronic systems significantly enhanced the data management capabilities of PBMs.¹³ This increasing ability to collect and analyze prescription data laid the groundwork for their expanded roles in formulary management, drug utilization review, and other advanced functions that would emerge in later years. Even in these early stages, the focus on formulary management and the establishment of pharmacy networks provided PBMs with the foundational power to influence drug access and utilization.² By deciding which drugs would be covered and contracting with specific pharmacies, PBMs began to shape the landscape of prescription drug benefits.

The Shift Towards Vertical Integration: Motivations and Key Players

The landscape of the PBM industry began to undergo significant transformation in the 1990s. Initially, drug manufacturers started acquiring PBMs during this period.² However, concerns about potential conflicts of interest arising from manufacturers owning entities that could influence drug utilization led to federal orders for divestment from the Federal Trade Commission (FTC).² This sparked a trend of mergers and acquisitions within the PBM field itself, resulting in increased industry consolidation.²

More recently, the PBM industry has witnessed a pronounced trend towards vertical corporate integration.³ This involves PBMs merging with various entities across the pharmaceutical supply chain, starting with mail-order pharmacies, then extending to retail pharmacies, and ultimately including health insurers.¹⁸ Key players have been central to this vertical integration trend. CVS Health’s acquisition of Caremark in 2007 and later Aetna in 2018 created a healthcare giant with integrated pharmacy, PBM, and insurance operations.⁶ Similarly, Cigna’s acquisition of Express Scripts in 2018 brought together a major insurer and a large PBM.⁶ UnitedHealth Group’s ownership of OptumRx represents another significant example of vertical integration, combining a major insurer with a substantial PBM.⁶

The motivations behind this shift towards vertical integration are multifaceted. Increased negotiating power is a primary driver, as larger, integrated entities can leverage their size to secure more favorable terms from drug manufacturers and pharmacies.³ Control over the supply chain offers opportunities for greater efficiency and coordination across different stages of drug delivery and payment.³ Furthermore, vertical integration presents the potential for increased profits through synergies, such as streamlined operations and reduced transaction costs, as well as through self-preferencing, where the integrated entity favors its own components in various transactions.³

The consolidation wave within the PBM industry was largely motivated by the desire of these entities to enhance their leverage in negotiations with both drug manufacturers and pharmacies.¹⁶ By increasing their size through mergers and acquisitions, PBMs aimed to wield greater bargaining power to secure better prices and rebates. Vertical integration, on the other hand, represents a broader strategic move to capture value at multiple points along the pharmaceutical supply chain.³ While proponents argue that this integration can lead to efficiencies and better coordination, it also creates inherent conflicts of interest and the potential for anticompetitive practices. The initial divestment trend in the 1990s, where manufacturers were compelled to separate from PBMs due to conflict of interest concerns, followed by the subsequent wave of vertical integration involving insurers, PBMs, and pharmacies, suggests a complex and evolving dynamic within the industry.² This cycle indicates that the industry’s approach to managing potential conflicts is influenced by both market forces and regulatory pressures, with ongoing debates about the optimal structure and oversight of PBMs.

Manifestations of Conflicts of Interest in Vertically Integrated PBMs

The vertical integration of PBMs has led to several manifestations of conflicts of interest across various aspects of their operations.

Impact on Formulary Design and Drug Selection: Vertically integrated PBMs face the potential conflict of favoring drugs that offer higher rebates, even if more cost-effective or clinically superior alternatives are available.³ Since rebates are often calculated as a percentage of a drug’s list price, there is an inherent incentive to prefer higher-priced medications. Furthermore, the practice of formulary exclusions, where certain drugs are excluded from the list of covered medications, can be strategically used by PBMs to enhance their negotiating leverage with manufacturers, potentially restricting patient access to specific therapies.³ The emergence of private-label biosimilars, developed and marketed by PBMs themselves, presents another area of potential conflict, as these products may be preferentially placed on formularies over other biosimilars or even the original reference biologics.⁹¹

Influence on Pharmacy Networks and Patient Steering: Vertically integrated PBMs can incentivize patients to utilize their affiliated pharmacies – whether retail, mail-order, or specialty pharmacies – through various mechanisms such as differential cost-sharing (e.g., lower co-pays at preferred pharmacies) and network restrictions.³ This practice of patient steering can disadvantage independent pharmacies, which may not be part of the preferred network or may face lower reimbursement rates, potentially leading to the creation of pharmacy deserts, especially in rural and underserved areas.³ Furthermore, vertically integrated PBMs may have the incentive and ability to reimburse their own pharmacies at higher rates compared to unaffiliated pharmacies for the same medications, further distorting competition.³

Mechanisms of Price Inflation and Rebate Management: The rebate system, a cornerstone of PBM negotiations, can inadvertently contribute to the inflation of drug list prices.³ Since PBMs often negotiate rebates as a percentage of the list price, there is a potential incentive for them to favor drugs with higher list prices, as this would result in larger rebates. Another significant mechanism is “spread pricing,” where PBMs charge health plans or employers a higher amount for a prescription drug than they actually reimburse the pharmacy, pocketing the difference as profit.² A major concern surrounding PBM operations is the lack of transparency in rebate negotiations.³ It is often unclear how much of the negotiated rebate is ultimately passed on to payers or patients, raising questions about whether the savings achieved by PBMs are fully realized by those who bear the cost of prescription drugs. The emergence of rebate aggregators, also known as Group Purchasing Organizations (GPOs), affiliated with the largest PBMs, adds another layer of complexity to this landscape.²⁷ These entities negotiate rebates with drug manufacturers on behalf of the PBMs, and their operations often lack transparency, further obscuring the true flow of funds within the pharmaceutical supply chain.

The rebate system, while intended to reduce the net cost of drugs, has created a situation where PBMs may be incentivized to favor drugs with higher list prices because these typically come with larger rebates.³ This dynamic can lead to increased overall drug spending, as the focus shifts from the lowest net cost to the highest rebate potential. The vertical integration of PBMs significantly amplifies the information asymmetry that exists within the pharmaceutical supply chain.³ The complex relationships and financial arrangements within these integrated entities make it exceedingly difficult for payers and patients to gain a clear understanding of the actual costs of drugs and the value provided by PBM services. This lack of transparency hinders accountability and makes it challenging to determine whether PBM practices are truly benefiting consumers. Patient steering, a direct consequence of the financial incentives within vertically integrated PBMs, can significantly impact patients’ healthcare experiences.³ By directing patients to their own pharmacies, PBMs may limit patient choice, create inconvenience, and potentially compromise the quality of care if patients are forced to switch from long-standing local pharmacies to unfamiliar or less accessible options.

Perspectives on the Impact of PBM Vertical Integration

The vertical integration of PBMs has had a multifaceted impact on various stakeholders within the healthcare system, each experiencing the effects in distinct ways.

The Patient Experience: Access, Cost, and Choice: Patients often bear the brunt of the conflicts of interest arising from PBM vertical integration. They may face higher out-of-pocket costs for their medications due to the prioritization of high-rebate drugs over lower-cost alternatives, as well as through practices like spread pricing which can inflate the overall cost of prescriptions.³ Access to certain medications or preferred pharmacies can also be restricted as vertically integrated PBMs favor their own formularies and pharmacy networks.³ This can lead to a limited choice of pharmacies, potentially causing inconvenience and disrupting established relationships with local pharmacists.³

The Pharmacist’s Dilemma: Reimbursement and Competition: Independent pharmacies often find themselves in a precarious position due to the practices of vertically integrated PBMs. They may face significantly lower reimbursement rates for dispensing medications compared to the PBMs’ own affiliated pharmacies, making it difficult to remain financially viable.³ Patient steering further exacerbates this issue by directing patients away from independent pharmacies towards the PBMs’ own facilities, reducing their customer base and revenue. Additionally, PBMs can impose unfair contract terms and various fees on pharmacies, adding to their financial strain.³ The possibility of PBMs conducting audits and retroactively charging fees can create further instability for pharmacies.³⁰

The Physician’s Role: Prescribing Autonomy and Patient Care: Physicians may experience constraints on their prescribing autonomy due to formulary restrictions and prior authorization requirements imposed by PBMs.³ There are concerns that PBMs may override physicians’ clinical judgment through utilization management policies ¹² and that drug selection might be influenced by rebate agreements rather than the best interests of the patient.³

The Employer and Health Plan Perspective: Cost Management vs. Quality: Employers and health plans initially relied on PBMs as a tool to manage the rising costs of prescription drugs.² However, the vertical integration of PBMs has raised concerns that these entities may be contributing to, rather than mitigating, cost increases through practices like spread pricing and the retention of a significant portion of rebates.³ There is a growing demand from employers for greater transparency in PBM operations and a move towards exploring alternative PBM models that prioritize pass-through pricing and more direct cost savings.⁸

The vertical integration of PBMs has fundamentally altered their focus, potentially shifting their primary allegiance from solely serving the interests of payers to prioritizing the financial performance of their parent companies. The various perspectives highlight a consistent concern that the financial incentives within vertically integrated PBMs can lead to practices that benefit their affiliated entities, sometimes at the expense of patients, independent pharmacies, and even the payers who initially contracted with them. A significant barrier to addressing these issues is the pervasive lack of transparency in PBM operations. The opacity surrounding pricing, rebate structures, and contractual agreements makes it exceedingly difficult to hold PBMs accountable and to ensure that any cost savings they achieve are actually passed on to consumers. This lack of visibility hinders efforts to understand the true value of PBM services and to identify and address potentially harmful practices. The inherent tension between managing costs and ensuring quality of care is also amplified by the vertical integration of PBMs. While the initial goal was to control drug expenditures, the pursuit of cost savings within integrated systems may sometimes result in restrictions on access to necessary medications or preferred pharmacies, potentially compromising patient well-being.

Regulatory and Legislative Responses to PBM Vertical Integration and Conflicts of Interest

The increasing concerns surrounding PBM vertical integration and the potential conflicts of interest have prompted a growing wave of regulatory and legislative responses at both the federal and state levels.

Federal Scrutiny and Investigations (FTC, DOJ): Federal agencies, particularly the Federal Trade Commission (FTC) and the Department of Justice (DOJ), have intensified their scrutiny of PBM business practices.³ The FTC launched an inquiry in 2022 into the business practices of the six largest PBMs to assess their impact on the accessibility and affordability of prescription drugs.²⁷ This investigation has led to interim reports highlighting concerns about increasing vertical integration and its potential to enable PBMs to profit at the expense of patients and independent pharmacists.³³ Notably, the FTC filed a lawsuit in 2024 against the three largest PBMs – CVS Caremark, Express Scripts, and OptumRx – alleging that their anticompetitive practices in negotiating rebates with drug manufacturers have artificially inflated the price of insulin.³⁴

State-Level Regulatory Approaches and Challenges (e.g., Arkansas Model): Recognizing the need for intervention, numerous states have enacted laws aimed at regulating PBM business practices.² These regulations address various aspects of PBM operations, including transparency requirements, bans on spread pricing, limitations on patient steering, standards for pharmacy audits, and restrictions on certain fees and clawbacks. A significant example of state-level action to address vertical integration is the law enacted by Arkansas in 2025, which prohibits PBMs from owning or operating pharmacies within the state.³⁰ This first-of-its-kind legislation aims to eliminate the conflicts of interest inherent in PBMs owning pharmacies and potentially favoring their own businesses. However, states often encounter challenges in implementing and enforcing these regulations due to the complexity of the PBM business model and potential legal challenges, including arguments about preemption by federal laws like ERISA.²

Proposed Federal Legislation and Policy Debates: In addition to state-level efforts, there has been increasing momentum for federal legislation to address the concerns surrounding PBMs.³ These proposals aim to enhance transparency in PBM operations, ban practices like spread pricing, mandate the pass-through of rebates to payers and patients, and address the issue of vertical integration. A prominent example is the bipartisan Patients Before Monopolies Act, introduced in both the House and Senate, which seeks to prohibit the joint ownership of PBMs and pharmacies by large corporations.³¹ This bill reflects a growing concern about the market power of vertically integrated PBMs and their potential to engage in self-preferencing behaviors. However, there is ongoing debate regarding the most effective approaches to regulate PBMs, with discussions focusing on the potential consequences of various proposals for drug costs, patient access, and market competition.⁸

The increasing regulatory scrutiny at both federal and state levels clearly indicates a growing awareness of the potential harms associated with PBM vertical integration and a concerted effort to promote greater accountability and transparency within the industry. The sheer volume of legislative and investigative activity underscores the significant policy focus on reforming PBM practices. While state-level regulations demonstrate a strong desire for change and innovation, their effectiveness can be limited by the complexities of the national pharmaceutical market and the potential for federal preemption. The ongoing debate surrounding federal legislation, such as the Patients Before Monopolies Act, highlights a fundamental disagreement about the optimal structure of the pharmaceutical supply chain and the appropriate role of PBMs. The outcomes of these legislative efforts will likely have significant implications for market competition and patient access to affordable medications.

Conclusion: Navigating the Complex Landscape of PBMs and Vertical Integration

The journey of Pharmacy Benefit Managers from their initial role in claims processing to their current state of significant vertical integration represents a profound transformation within the healthcare landscape. Driven by motivations of increased negotiating power, supply chain control, and enhanced profitability, this evolution has led to a highly consolidated industry where a few major players exert considerable influence over the prescription drug market.

While vertical integration offers potential benefits such as streamlined operations and coordinated care, it has also given rise to significant conflicts of interest. These conflicts manifest in various ways, including formulary design that may favor high-rebate drugs, patient steering towards affiliated pharmacies, and pricing mechanisms like spread pricing that can inflate drug costs. The impact of these practices is felt across the healthcare system, affecting patients through higher costs and limited access, challenging the viability of independent pharmacies, potentially influencing physicians’ prescribing decisions, and raising concerns among employers and health plans about the true value and cost-effectiveness of PBM services.

In response to these issues, both federal and state authorities have increased their regulatory scrutiny of PBMs. States have been actively enacting legislation to address specific PBM practices, with the Arkansas law banning PBM ownership of pharmacies representing a bold step towards tackling vertical integration directly. At the federal level, investigations by the FTC and DOJ, along with proposed legislation like the Patients Before Monopolies Act, signal a growing intent to address the systemic issues arising from PBM market power and conflicts of interest.

Navigating the complex landscape of PBMs and vertical integration requires a balanced approach. While the initial goal of PBMs was to help contain drug spending, their current structure and practices necessitate careful consideration and reform to ensure that cost-effectiveness is achieved without compromising patient well-being, fair competition, and the integrity of the pharmaceutical supply chain. The future of PBMs will likely involve continued regulatory pressure and a potential reshaping of their roles and responsibilities to better align their incentives with the interests of all stakeholders in the healthcare ecosystem.