Over the years I have worked on projects defending the role of drug middlemen, known as pharmacy benefit managers (PBMs). PBMs are essentially volume purchasers of drugs who manage drug benefits for insurers, Medicare, Medicaid, and health plans. PBMs negotiate deals with drug makers, wholesalers, and pharmacies. At least in theory, health plans benefit from the PBM’s buying power, getting most of the drug rebates and negotiated discounts PBMs arranged with drug makers. Over the years I especially recommend doing away with so-called Medicaid carve-outs. Carve-outs are when state Medicaid programs hire managed care companies to administer Medicaid medical benefits but manage their own Medicaid drug benefits separately. In doing so, states tend to overpay for Medicaid drugs. For example, Walmart will count, package, and dispense a month’s supply of many generic drugs for a fee of $4.00. Yet, many state Medicaid programs will pay fees nearly four times that amount for the same prescription. By contrast, PBMs can negotiate down the prices to near what Walmart would charge. Of course, small independent pharmacies lobby state legislatures to keep prices high.
About a dozen years ago PhRMA, the trade association for drug companies, began a $100 million public relations campaign to blame PBMs for high drug prices. At the time I thought that was ironic, considering drug makers were the guiltiest party for high drug prices. Drug makers had a point, however. In the past two decades the PBM industry has consolidated to the point that the three biggest PBMs now control 80% of the market for retail drugs. When three PBMs control that much market share, they can extract lower prices from drug makers while also capturing a greater percentage of the discounts for their own revenue.
The Wall Street Journal reports that the pharmaceutical industry’s ongoing investment in negative PR is paying off, saying:
When President Trump signed an executive order this month to try to reduce drug prices, the pharmaceutical industry scored a big win.
Within 90 days, the order said, Trump’s staff should put together a report “re-evaluating the role of middlemen,” who have been the target of one of the most sweeping and expensive lobbying campaigns in recent years.
Drugmakers spent a record $31 million to lobby in Washington last year, and about $13 million in the first quarter of 2025, according to public filings. Millions more went to donations to political groups and ads, many of which blamed benefit managers for the high price of drugs.
“Pharmaceutical companies have been pretty successful in shifting a disproportionate amount of blame to the PBMs,” said Steve Knievel, a health-policy expert with Public Citizen, a nonprofit consumer-advocacy group.
Granted, PBMs deserve a lot of criticism heaped on them lately. When Humera, a blockbuster biologic drug (finally) lost patent protection and faced generic competition in 2023, most experts assumed the generic would take a huge share of the market. It did not happen because the maker of Humera offered PBMs huge rebates and threatened to withhold rebates on its other drugs if cost-sharing was not equal for both the expensive name brand and cheaper copycat biosimilar. Rather than steer their clients’ members to the cheaper generic, PBMs took the big rebates instead.
PBMs generally earn revenue either through management fees or retaining some of the drug rebates. Historically most rebates passed through to their health plan clients or were retained with permission in lieu of management fees. In decades past whenever health plan members filled a prescription PBMs used low-cost sharing to steer members to cheap generics. Nowadays the cheap generic drug often costs members more than paying cash or using a Good Rx discount card. PBMs have gotten to the point they can act in their own self-interest rather than compete for clients by providing superior services.
The solutions to the problem of PBM market power are complex. A difficult method is breaking up the market concentration of PBMs. Another is requiring a fiduciary duty for PBMs. In addition, banning the use of large rebates and bundled sole-source contracts could increase both price transparency and competition. Finally, in 2020 the federal government removed the anti- kickback regulations safe harbor for rebates. This only applies to federal health programs, however. Some anti-kickback regulations should be extended to the private sector.
Read more at WSJ: Drugmakers Have Spent Millions Targeting ‘Middlemen’—and It’s Paying Off