The Paperwork Empire: How Pharmacy Benefit Managers Reshaped the Price of Medicine Kindle Edition

by Timothy Lesaca MD (Author)  Format: Kindle Edition

Link to book here https://a.co/d/07ZSz2gs 

Introduction

In 2024, the United States spent $5.3 trillion on health care, about 18 percent of the entire economy. At the same time, Americans were carrying at least $220 billion in medical debt. Those numbers belong to a rich nation and a frightened one. We spend more on medicine than any society in history, yet millions of people still approach illness with the old American dread that a diagnosis may arrive attached to a financial trap. The problem is not only what care costs. It is who, along the way, acquires the power to decide what counts as covered, affordable, available, necessary, or worth the wait.

Prescription drugs make that problem unusually vivid because they sit at the intersection of science, commerce, and survival. A drug can be brilliant in the laboratory and ruinous at the pharmacy counter. It can be indispensable to the patient and yet still be treated, within the system that delivers it, as a bargaining chip. Nearly 30 percent of Americans surveyed in the FTC’s 2024 PBM inquiry reported rationing or skipping prescribed medicines because of high costs. That is not a marginal inconvenience. It is a measure of the distance between what modern medicine can do and what the structure around it allows ordinary people to reach.

One of the clearest names in that distance is Alec Smith. After aging off his mother’s insurance, Smith, a 26-year-old Minnesotan with type 1 diabetes, began rationing insulin he could no longer afford on his salary. He died in 2017 of diabetic ketoacidosis. Minnesota later named its insulin affordability law after him. His mother, Nicole Smith-Holt, carried the story into the state capitol and into the country’s conscience. The state attorney general said the point of the law plainly: no one should have to die like Alec did for lack of a drug that keeps a person alive.

This is not another story about the disappearance of the local pharmacy, though the local pharmacy stands downstream from all of it. It is a different story, narrower in subject and larger in implication. It is the story of the Pharmacy Benefit Manager, the PBM, an institution that began in the late 1960s as a claims processor and matured into one of the least understood governing forces in American medicine. The PBM does not invent drugs, diagnose disease, or console the sick. It decides formularies, reimbursement, network access, prior approval structures, and the financial path a medicine must travel before it reaches the patient. In time, that administrative authority became something close to sovereign power.

There is a temptation, in telling this story, to settle for villains. Drug manufacturers raise prices. Insurers deny or delay. Employers hunt for savings. Regulators arrive late. All of that is true, and none of it is enough. The PBM matters because it learned how to turn opacity itself into a business model. It acquired leverage over access, then tied compensation to the deals struck inside that leverage. It became, in effect, the broker of a market too complicated for most of its participants to see clearly. Once that happened, the price of medicine was no longer merely the product of scientific cost or patent law or ordinary bargaining. It became the product of an administrative machine whose incentives were often misaligned with the interests of the patients it claimed to serve.

If the article that follows reaches a moral conclusion, it does so only after the facts have earned it. The modern PBM did not simply streamline the American drug market. It helped reorganize it around hidden contracts, inflated list prices, vertical self-preference, and a style of cost control that too often shifted the burden of the system onto the person least able to bear it.

That burden is measured in money, certainly.

It is also measured in delay, confusion, rationing, and, sometimes, death.

Chapter One

The Quiet Invention

The PBM began without grandeur. In the 1960s, as employer-sponsored insurance expanded and prescription drug benefits became more common, the system for handling pharmacy claims was still primitive. Paper forms moved by mail. Pharmacies waited for reimbursement. Coverage rules varied. Early ventures such as PAID Prescriptions, founded in the United States in 1965, and Pharmaceutical Card System, formed in 1969, were designed to impose order on that clutter. They were not born as empires. They were born as administrative tools, fiscal intermediaries that could process claims, build pharmacy networks, and replace paper lag with something closer to real-time adjudication.

That original role matters because it explains why PBMs were tolerated, even welcomed. They solved a genuine problem. A modern insurance benefit is useless if the pharmacy cannot tell, at the moment of dispensing, whether a claim will be paid. The first PBMs made the transaction legible. They transmitted information, matched eligibility to claims, and reduced friction in a system growing too large for carbon copies and filing cabinets. Their work sat in the background. They did not yet present themselves as makers of policy inside medicine.

Over time, however, administrative position became economic position. The same companies that handled claims began to assemble the functions that now define the PBM: negotiating rebates and discounts with manufacturers, creating formularies, reimbursing pharmacies, structuring networks, and designing utilization rules for employers, insurers, Medicare Part D plans, and other payers. In other words, the PBM stopped being merely the messenger between buyer and seller and became the author of much of the traffic between them. KFF’s 2026 overview of PBMs lists the modern role plainly: adjudication, reimbursement, network design, formulary construction, utilization management, and cost-sharing rules. That is not clerical work in any meaningful sense. It is governance by contract.

The crucial expansion came when drug spending rose sharply enough that claims processing alone no longer satisfied the buyers of coverage. Employers wanted leverage. Insurers wanted discounts. Manufacturers wanted preferred access to large covered populations. The formulary became the instrument through which those desires met. A drug placed on a preferred tier had an easier path into the hands of patients. A drug excluded or burdened with higher cost sharing had a harder one. A list that appeared administrative acquired the power to shape market share. And once the formulary mattered that much, the intermediary that managed it mattered far more than its original name suggested.

No one needed to announce a constitutional change for the change to happen. The power came in increments. First the PBM handled the claim. Then it managed the list. Then it negotiated the payment behind the list. Then it learned that a company standing between a manufacturer and tens of millions of covered lives possesses something more than convenience. It possesses leverage strong enough to bend the rest of the market around it. By the early 2020s, that leverage was concentrated in a handful of firms so large that the old language of “middleman” had become inadequate to describe what they were.

Chapter Two

When the Discount Became the Business

The rebate system is where the PBM ceased to be merely helpful and became historically dangerous. In the simplest telling, a manufacturer pays a rebate to secure favorable formulary placement, and the savings reduce costs for plans. That description contains enough truth to survive in public debate. It does not contain enough truth to explain what followed. What mattered was not the existence of the rebate but the way PBM compensation came to depend on it. The Department of Labor’s proposed PBM transparency rule, issued in January 2026, stated the matter bluntly: PBMs generate a significant portion of their revenues through their negotiated share of rebates, and many self-insured plans often do not know how much money is being refunded or retained.

The arithmetic behind the problem is not mysterious. Suppose a drug carries a list price of $100 and produces a rebate of $10. If a PBM keeps part of that rebate, its reward is modest. But if the list price climbs to $500 and the rebate climbs with it, the pool from which the PBM is paid becomes much larger, even if the manufacturer’s final net revenue does not change proportionally. The system begins to value the size of the discount more than the honesty of the starting price. That is the perversity at its center. The intermediary can present itself as having extracted a better deal precisely when the visible price has become more inflated.

KFF’s 2026 PBM brief captured the dynamic in careful policy language. PBMs, it noted, may favor higher-priced drugs with higher rebates over lower-priced drugs with smaller or no rebates. That can inflate drug pricing, increase systemwide costs, and raise out-of-pocket expenses for people whose cost sharing is tied to the list price, especially the uninsured and those in high-deductible or coinsurance-based plans. The point is easy to miss because premiums and plan-level savings can move in one direction while point-of-sale burdens move in another. A plan sponsor may see aggregate rebate savings. The patient at the pharmacy counter may see only the list price.

By now the scale of that distortion is enormous. Drug Channels Institute estimated that the gross-to-net bubble, the difference between manufacturers’ gross brand-drug revenues at list prices and what they actually keep after rebates, discounts, and other concessions, reached $356 billion in 2024. That estimate comes from industry analysis rather than a regulator, but it is widely cited because it names the central reality of the market: the list price visible to the public has drifted ever farther from the net price negotiated in secret. The bubble is not a metaphor merely for excess. It is a description of how the market now hides itself from view.

No drug exposes the human cost of this more starkly than insulin. In its September 2024 complaint against the major PBMs, the FTC said the average list price of Lilly’s Humalog was only $21 in 1999 and had risen to more than $274 by 2017, an increase of over 1,200 percent. In March 2023, amid public pressure and renewed scrutiny, Lilly announced a 70 percent cut in the list price of Humalog and said its non-branded insulin lispro would be priced at $25 a vial. The astonishing thing about that sequence is not merely the rise. It is the implied confession that the previous price had never been morally or economically inevitable.

The FTC’s case against Caremark, Express Scripts, and OptumRx did not argue that PBMs alone invented insulin inflation. It made the stronger and more precise claim. The agency alleged that the PBMs created a rebate system that rewarded manufacturers for maintaining high list prices and that, even when lower-list-price insulin products became available, the PBMs excluded or disadvantaged them in favor of highly rebated alternatives. That matters because it shifts the argument from theatrical blame to institutional design. Drugmakers raised the prices, yes. But the rebate architecture made those high prices useful to the intermediaries who controlled formulary access.

This is where Alec Smith’s story belongs. It should not be asked to explain the entire insulin market, and it should not be sentimentalized into a symbol so broad that it loses its truth. What it does explain is what happens when an inflated list price meets a human life stripped of bargaining power. Smith did not die because the American system lacked insulin. He died in a country awash in insulin, contracts, and purchasing power. He died because the price that confronted him at the wrong moment in his insurance status had ceased to bear a humane relation to the medicine itself. Minnesota’s attorney general later said the legislature passed the Alec Smith Insulin Affordability Act so that no one would have to die the way he did. The sentence was both tribute and indictment.

There is a tendency in policy writing to let euphemism soften the moral pressure of such events. One reads of incentives, distortion, pass-throughs, formularies, access design. All of that language has its place. But a pricing system is ultimately judged by what it permits to happen when a person needs a drug without delay, leverage, or savings. A rebate model that can coexist with death by rationing is not merely complicated. It is disordered at the level that matters most.

Chapter Three

The Merger Years

Administrative leverage alone did not make the PBMs what they became. Consolidation did. By 2023, according to the FTC and KFF, the three largest PBMs, OptumRx, Express Scripts, and CVS Caremark, managed 79 percent of U.S. prescription drug claims for roughly 270 million people. A market with many claims processors can still preserve bargaining uncertainty. A market in which three firms govern nearly four-fifths of claims begins to look less like competition than centralized administration wearing a commercial disguise.

The mergers that built this concentration were not hidden. CVS completed its combination with Caremark in 2007, and CVS’s own annual report celebrated the result as a “transformational merger” that made the company the largest integrated provider of prescriptions and related health services in the country. In 2018, the Department of Justice closed its investigation of Cigna’s acquisition of Express Scripts without challenging the deal. The same year, DOJ allowed CVS to acquire Aetna after requiring divestiture of Aetna’s Medicare Part D business for individuals. By then the architecture was becoming clear: a retail chain with a PBM would own an insurer; an insurer would buy a PBM; UnitedHealth would continue building OptumRx inside its own corporate system. What had once been a service sector was becoming a set of vertically integrated health conglomerates.

The antitrust logic of the period is revealing. DOJ said the Cigna–Express Scripts merger was unlikely to substantially lessen competition, pointing to changed market conditions and the absence of evidence that Cigna would be able to disadvantage rival insurers in a way that mattered under prevailing doctrine. In its CVS–Aetna public Q&A, DOJ said the merger was unlikely to cause CVS to increase costs to Aetna’s rivals for PBM or retail pharmacy services. Those conclusions were not frivolous. They were the product of a legal framework unusually tolerant of vertical integration so long as direct horizontal overlap appeared limited and theoretical efficiencies could be invoked. The trouble was not that the government failed to think. It was that it thought in a language too narrow to see how administrative control, data control, reimbursement control, network design, and owned dispensing channels might combine into something more coercive than any one piece alone.

The FTC’s 2024 PBM report reads, in part, like the after-action report of that era of confidence. It found that all of the top six PBMs were vertically integrated downstream, operating mail-order and specialty pharmacies, while one also owned the nation’s largest chain of retail pharmacies. It also found that pharmacies affiliated with the three largest PBMs accounted for nearly 70 percent of all specialty-drug revenue, and the second interim report later put the shift in sharper form: PBM-affiliated pharmacies received 68 percent of the dispensing revenue generated by specialty drugs in 2023, up from 54 percent in 2016. That change is not a side effect. It is what vertical integration looks like after several years of consolidation, steering, and market adaptation.

Why does that concentration matter? Because specialty drugs are where modern pharmaceutical spending increasingly lives. They are expensive, often lifesaving, frequently used for cancer, autoimmune disease, multiple sclerosis, HIV, transplant medicine, and other serious conditions, and they tend to be managed through highly controlled distribution channels. If the same corporate family designs the formulary, negotiates the rebate, adjudicates the claim, insures the patient, and owns the specialty pharmacy that fills the prescription, the old image of an independent middleman becomes almost comical. The intermediary is no longer in the middle. It is everywhere that matters.

The FTC, to its credit, chose explicit language. It said vertically integrated PBMs appear to have both the ability and the incentive to prefer their own affiliated businesses, disadvantaging unaffiliated pharmacies and increasing drug costs. The report also described “self-preferencing,” steering patients toward affiliated pharmacies and retaining dispensing revenue above estimated acquisition cost.

That phrase, self-preferencing, is dry and correct. The thing it describes is older than the jargon.

When a referee can profit from who wins, the game changes even before the whistle blows.

Chapter Four

The Hidden Ledgers

If the rebate system warped incentives at the top of the market, spread pricing exposed what opacity could look like on the ground. KFF defines spread pricing simply: a PBM pays one amount to the dispensing pharmacy, charges a higher amount to the insurer or plan sponsor, and keeps the difference as profit. As a practice, it is almost embarrassingly straightforward. Its power comes not from complexity but from the fact that the two sides of the transaction often cannot easily see one another. The plan sponsor sees what it is billed. The pharmacy sees what it is paid. The intermediary sees both.

Ohio made the practice legible in 2018. The state auditor found that Ohio’s Medicaid managed-care system had paid spreads totaling $224.8 million to PBMs in one year. The deepest markups were on generics: $208.4 million, or 31.4 percent, on $662.7 million spent for generic drugs. Specialty drugs and brand-name drugs produced smaller percentage spreads, but they, too, were part of the picture. The report did something more important than embarrass a few companies. It gave the public a number large enough to break through abstraction. Two hundred twenty-four million dollars is no longer a theory about misaligned incentives. It is a statement about money that went somewhere.

Ohio’s later experience suggested that the practice was not economically necessary in the strong sense its defenders implied. The Ohio Department of Medicaid’s “Next Generation” overhaul, which included a Single Pharmacy Benefit Manager model and the elimination of spread pricing, was later credited by the department with saving $140 million while increasing dispensing fees and broadening pharmacy participation. One should read such state reform claims with ordinary caution. Governments flatter themselves too. But the basic point stands: the old spread-pricing structure was neither inevitable nor costless, and at least in one major Medicaid program, greater transparency and altered reimbursement did not produce the catastrophe its defenders warned of.

The FTC’s 2024 and 2025 PBM reports widened the indictment beyond Medicaid spread pricing and into the specialty-drug market, where the amounts were still larger and the visibility still worse. In the July 2024 report, the agency found that PBM-affiliated pharmacies had generated nearly $1.6 billion in additional revenue on just two cancer drugs in under three years by retaining dispensing revenue well above estimated acquisition costs. That was not an isolated anecdote from a rogue contract. It was an early glimpse of what vertically integrated control could yield when the drugs involved were expensive, specialized, and channelled through affiliated pharmacies.

The second FTC report, issued in January 2025, widened the lens from two drugs to 51 specialty generic drugs. It found that the Big Three PBMs and their affiliated pharmacies generated more than $7.3 billion in revenue above the National Average Drug Acquisition Cost, or NADAC, over the study period, with dispensing revenue of $10.0 billion against estimated acquisition costs of $2.7 billion. The report noted that revenue above NADAC grew at a compound annual rate of more than 42 percent from 2017 to 2021. Oncology drugs accounted for $3.3 billion of the total; multiple sclerosis drugs, $1.8 billion. These are not cosmetic overcharges on over-the-counter merchandise. They sit inside treatment for diseases that reorder entire lives.

The report also described the pattern of steerage with unusual clarity. PBM-affiliated pharmacies, it said, received 83 percent of dispensing revenue from commercial claims on specialty generic drugs marked up more than $1,000 over NADAC per 30-day prescription, compared with 72 percent overall. The implication was not subtle. The more lucrative the prescription, the more likely it was to be captured inside the affiliated channel. The old defense of vertical integration was that common ownership would reduce friction and create efficiencies. But efficiencies for whom? The patient rarely sees lower price, fuller choice, or simpler navigation in such arrangements. What the patient sees is often a narrower path, one already lined with owned entities before the prescription is ever filled.

This is where the language of hidden ledgers becomes more than rhetoric. The modern PBM does not simply process an agreed price. It may sit astride several differently priced versions of the same transaction: the rate paid by the plan, the amount reimbursed to the pharmacy, the rebate paid by the manufacturer, the service fee retained by the PBM, the data or administrative payments flowing through affiliates, and the out-of-pocket charge faced by the patient.

A system with that many internal prices can make nearly any participant feel saved or squeezed depending on which document he is allowed to see.

Transparency is not a slogan in such a market. It is the difference between oversight and theater.

Chapter Five

The Offshore Layer

By the time Congress and federal regulators were turning serious attention toward PBMs, the largest firms had already begun adding another layer to the structure: affiliated group purchasing organizations, or GPOs, sometimes called rebate aggregators. In 2023, the FTC expanded its PBM inquiry to include a third GPO and noted that Zinc and Ascent described themselves as GPOs negotiating rebates with manufacturers on behalf of PBMs. Zinc, the commission said, had been founded in 2020 for CVS Caremark; Ascent had been founded in 2019 for Express Scripts and several other PBMs. Optum’s counterpart, Emisar Pharma Services, launched in 2021 and was described in industry reporting as based in Ireland. Ascent was based in Switzerland. Zinc, by contrast, was U.S.-based. The geography matters less than the structural move itself: drug-manufacturer contracting was being routed through related entities that added distance between the PBM, the plan sponsor, and the rebate stream.

One should be careful here. The existence of a GPO does not prove illegality, and the mere fact that Ascent and Emisar had overseas homes does not, by itself, establish a tax-avoidance plot. Serious writing should resist the temptation to infer too much from a postal address. The stronger claim is also the more durable one: these entities added complexity at precisely the point in the supply chain where opacity was already most valuable. The FTC’s insulin complaint eventually named Zinc, Ascent, and Emisar alongside the PBMs themselves, alleging that the GPO respondents had participated in the rebating practices at issue. By then, the extra layer had become part of the formal legal story, not merely a curiosity noticed by trade publications.

Industry observers noticed the timing long before the legal system fully caught up. In 2022, Managed Healthcare Executive described the creation of Ascent, Zinc, and Emisar and asked the obvious question: why do firms that already control the bulk of covered lives need separate rebate-aggregating entities to do business with drugmakers? The article did not pretend to answer the question decisively. But the question itself was telling. When an industry already criticized for secrecy inserts new contractual bodies between itself and the public, suspicion is not hysteria. It is a reasonable civic reflex.

The federal response in 2026 suggests that lawmakers and regulators had come to see those layers as more than incidental. KFF’s summary of the PBM provisions enacted in the Consolidated Appropriations Act of 2026 said Congress required PBMs to pass through 100 percent of rebates to ERISA-governed employer health plans, expanded transparency and reporting requirements, and delinked PBM compensation in Medicare Part D from the price of a drug or the rebates attached to it, replacing that structure with flat bona fide service fees beginning in 2028. The same brief noted that the law expanded the definition of covered service providers under ERISA and increased data-reporting duties to plan sponsors and HHS. Laws do not write themselves to this level of detail unless a market has already demonstrated a talent for hiding money in the gaps.

The Labor Department’s proposed PBM fee-disclosure rule, issued days earlier, carried the same implication. The department said PBMs would have to disclose rebates, spread-pricing arrangements, payments received from pharmacies, and other direct or indirect compensation to fiduciaries of self-insured group health plans. That is a remarkable sentence when one stops to hear it clearly. A quarter-century into the age of data abundance, federal officials were still having to propose rules requiring the entities that manage prescription benefits to tell the people paying for those benefits how they are actually compensated. This is not a sign of a well-ordered market. It is a sign of a sector whose financial architecture had outgrown the visibility of its own clients.

Chapter Six

The Government Wakes Up

The legal backlash against PBMs did not begin in Washington. It began, as so much American reform still does, in the states. In Rutledge v. Pharmaceutical Care Management Association, decided unanimously in 2020, the Supreme Court held that Arkansas could regulate PBM reimbursement rates without being preempted by ERISA in the way the PBM trade group had argued. For reform advocates, the decision seemed to open a door. It suggested that states were not powerless to police at least some of the commercial practices that had made PBMs so controversial.

But the law did not move in a straight line after Rutledge. In 2025, the Supreme Court declined to review the Tenth Circuit’s decision in Mulready, leaving in place a narrower view of what states can do when PBM regulation touches plan design and ERISA-covered arrangements. In April 2026, a Sixth Circuit decision involving Tennessee held that ERISA preempted parts of that state’s PBM law as applied to self-funded plans, including provisions involving any-willing-pharmacy access and steering. The result was a reminder that the American system is not merely fragmented; it is governed by overlapping sovereignties in which state reform can advance on one theory, then stall on another. For PBMs, that complexity has often been a shield.

Meanwhile the federal government, after years of relative restraint, began sounding much less polite. The FTC’s July 2024 interim report said the leading PBMs exercised significant power over Americans’ ability to access and afford prescription drugs and could profit by inflating drug costs while squeezing smaller pharmacies. Two months later, the commission sued Caremark, Express Scripts, OptumRx, and their affiliated GPOs over insulin practices, alleging a rebate system that favored high-list-price, high-rebate insulin over lower-list-price alternatives. Whatever one thinks of the commission’s legal theory, the political meaning was unmistakable. A major federal antitrust agency had decided that the PBM was no longer a technical vendor best left to contract lawyers. It was a matter of national economic policy and public harm.

The first major settlement arrived in February 2026, when the FTC announced an agreement with Express Scripts. KFF later summarized the settlement as requiring changes designed to ensure member out-of-pocket costs were based on net rather than list price, to delink compensation from list price, and to increase reporting to plan sponsors. The broader litigation continued against the remaining respondents, but the settlement mattered because it marked a structural concession, not merely a fine or a press release. Once a company agrees that compensation should not hinge on list-price inflation and that net-price information belongs closer to the people paying the bills, the old system has lost at least part of its moral defense.

Congress, for its part, finally enacted some PBM reforms in February 2026. KFF summarized the law’s main elements: delinking Medicare Part D PBM compensation from the price of the drug or rebate arrangements; detailed reporting on utilization, pricing, revenue, and affiliate practices; increased transparency for employer plans; and a requirement that PBMs pass through 100 percent of rebates and discounts to ERISA-regulated employer health plans. The same KFF analysis noted that the Congressional Budget Office estimated only about $2.12 billion in federal deficit reduction over 10 years from the new law. That modest score is not an argument against reform. It is evidence of how hard it is to unwind a mature system of contractual extraction. By the time Congress acts, the market has usually learned to live several moves ahead.

The politics around all of this became strikingly bipartisan. KFF noted that the Trump administration, like the Biden administration before it, had made drug costs a policy target, and the January 2026 White House rollout of the “Great Healthcare Plan” explicitly called for lower drug prices, lower premiums, insurer accountability, and more transparency. One can be skeptical of slogans and still notice the larger fact: by 2026, the PBM had become one of the rare institutions in American health care capable of uniting populists, antitrust progressives, employer groups, pharmacists, patient advocates, and budget hawks in the same general direction of complaint. That consensus did not mean the problem was solved. It meant the problem had finally become too visible to deny.

Chapter Seven

What the PBM Did to American Medicine

The deepest damage done by the PBM is not captured by any single audit, lawsuit, or merger chart. It lies in what happened to the moral shape of the system. An instrument built to administer benefits became a mechanism for governing access. A device introduced to make claims legible became a way of making prices illegible. A cost-control tool gradually learned how to profit from the very inflation it claimed to restrain. That transformation did not require a secret cabal. It required only that every actor inside the system respond to incentives that had become detached from the human purpose of medicine.

Drugmakers are not innocent in this story. They raised list prices, defended patents aggressively, and exploited the lack of centralized bargaining power in the United States. Insurers and employers are not innocent either. They delegated too much to opaque intermediaries while demanding savings they often preferred not to inspect too closely. Regulators are not innocent. For years they treated vertical consolidation as efficiency until evidence of self-preferencing and hidden markups became too large to ignore. But the PBM occupies a special place because it turned intermediation itself into a profit center. The system could not have worked this way without manufacturers willing to play the game. Yet the game was designed and refereed by institutions that grew rich from deciding whose drug would be easy to get, whose would be expensive to reject, and how much of the hidden payments flowing behind those decisions they could keep.

No serious observer believes a modern health system can function without some form of review, negotiation, or purchasing management. The American drug market is too large and too fragmented for pure retail simplicity. But cost control is not the same as organized opacity. A plan sponsor has a legitimate interest in scrutinizing price and value. A patient has a legitimate claim not to have life-sustaining treatment routed through a secretive set of incentives that reward a higher list price over a lower one. Those two truths are not in tension. The moral failure of the PBM system is that it trained the country to accept them as though they were.

By 2026 the outline of a more defensible order had at least begun to emerge. Congress moved to delink compensation from drug prices in Medicare Part D and to require full rebate pass-through to employer plans. The Labor Department moved toward broader fee disclosure. States, despite legal setbacks, kept attacking spread pricing, steering, and ownership conflicts. The FTC forced the industry to answer, in public, for pricing practices that had long been discussed in euphemism. None of that is a revolution. All of it is late. But lateness does not make reform meaningless. It merely raises the price of delay.

The article began with Alec Smith because a system like this should finally be judged where theory ends. In the abstract, PBMs are efficiency tools. In the record, they are institutions that acquired enough concentrated and vertically integrated power to steer the flow of medicine while extracting revenue from the opacity of the route. In a country already exhausted by medical billing and health-care fear, that is not a neutral development. It is a moral event. The proof is that when the system is described honestly enough, neutrality becomes harder to perform. One can argue about remedies, sequencing, jurisdiction, or the exact share of blame each actor deserves. But one cannot look for very long at a market in which an intermediary profits when the visible price of survival rises and still pretend that all we are discussing is efficient administration.

Chapter Eight

The Case for the Defense and What It Cannot Answer

No account of the Pharmacy Benefit Manager is complete without pausing to consider how it came to be defended, and by whom. For all the suspicion now directed at these institutions, they did not rise in secret, nor did they endure by accident. They were built, expanded, and relied upon because they answered a problem that was real.

The American system of paying for medicines has never been simple. It grew not by design but by accumulation—employer plans layered upon federal programs, private insurers negotiating alongside public ones, each with its own rules, its own limits, its own constituencies. Drug manufacturers, operating within the protections of patent law, set prices largely as they saw fit. There was no single buyer, no central authority to insist upon a national price. What existed instead was a scattered marketplace, rich in resources and poor in coordination.

Into that disorder came the intermediary.

The early Pharmacy Benefit Managers did not present themselves as arbiters of access or architects of price. They were, at first, practical solutions to administrative confusion, companies that could process claims, organize networks, and make it possible for a pharmacist, standing at a counter, to know in real time whether a prescription would be covered. Employers welcomed them. Insurers depended on them. The system, unwieldy as it was, began to function with a new degree of predictability.

Over time, their role expanded, as roles often do when they prove useful. They negotiated discounts. They constructed formularies. They learned to bring the purchasing power of many into a single conversation with the manufacturer. In a country that had chosen not to regulate prices directly, this form of negotiation became one of the few available means of restraint. Those who defend the PBM today often begin there. Without such intermediaries, they argue, the system would not become more just or more transparent. It would become less controlled, and likely more expensive.

There is truth in that claim. One can find employers who saw their costs moderated, insurers who relied on negotiated rebates, and instances in which formularies guided prescribing toward less expensive alternatives. It is not difficult to imagine a system without PBMs that is no easier to navigate and no kinder at the point of sale. Complexity does not vanish when an institution is removed. It redistributes itself.

But history, when read carefully, has a way of distinguishing between what an institution was meant to do and what it has learned to do.

The question is not whether the PBM serves a function. It plainly does. The question is what became of that function as the incentives surrounding it changed. An intermediary paid for reducing costs stands in a different position from one whose revenue grows alongside the prices it negotiates. That distinction, subtle at first, proved decisive.

As the system matured, compensation increasingly attached itself to the mechanisms of negotiation—the rebates, the spreads, the arrangements made out of public view. What had once been a means of securing lower prices could, under certain conditions, reward their inflation. A higher list price paired with a larger concession might yield a better accounting result for the plan while presenting a steeper cost to the patient standing at the counter. The numbers balanced, but the experience did not.

It is here that the defense begins to lose its footing. For the argument that PBMs control costs is, at bottom, an argument about totals—about what is saved across populations and over time. The criticism concerns something more immediate: what happens when those totals resolve into a single transaction between a patient and a pharmacy. A system may succeed in aggregate and still fail in the moment that matters most.

The same pattern can be seen in the use of formularies. No large system can function without some method of organizing choice. A formulary, sensibly designed, can guide treatment toward value and away from waste. Yet when placement within that system becomes entangled with financial arrangements not easily seen from the outside, its meaning shifts. What appears, from one vantage, as careful management may appear, from another, as constraint shaped by considerations the patient cannot know and the physician cannot fully contest.

By the time consolidation and vertical integration had run their course, the intermediary had assumed a position few could have anticipated at the beginning. It was no longer merely between buyer and seller. It stood at several points along the chain at once—negotiating price, determining access, adjudicating claims, and, in many cases, dispensing the drug itself. Defenders spoke of efficiency, of reduced friction, of aligned incentives. Critics pointed to the possibility that the same structure allowed decisions to be steered inward, toward affiliated channels, with the benefits of that steering remaining largely within the system that produced it.

Again, both observations can be true. Efficiency and advantage are not mutually exclusive. The difficulty lies in determining which has been allowed to prevail, and at whose expense.

There is, finally, the matter of visibility. Those who work within the system often insist that some degree of confidentiality is necessary—that negotiations require discretion if they are to succeed. This, too, is not an unreasonable claim. But the present condition extends well beyond discretion. It has produced a landscape in which those who pay for the system cannot fully see it, and those who depend on it encounter prices whose origins are obscured. A market may tolerate complexity. It does not function well in the absence of intelligibility.

What emerges, when the defense is taken seriously and followed to its conclusion, is not a simple refutation but a narrowing. Yes, the intermediary may be necessary. Yes, the system without it might be worse in certain respects. But necessity alone does not justify structure. An institution may perform an essential role and still do so in a way that departs from the purposes that gave rise to it.

The history of American medicine offers many such examples—arrangements that began as solutions and, over time, acquired habits that no longer served the ends for which they were created. Reform, when it came, did not always require their abolition. It required their correction.

So it is here. The task is not to imagine a system without negotiation, without coordination, without administration. It is to ask whether those functions can be carried out without rewarding opacity, without tying compensation to rising prices, without permitting the same entity to write the rules, guide the transaction, and claim the margin.

The argument, at its most durable, does not insist that the PBM is unnecessary. It insists that the present form is not inevitable.

And that distinction, once seen clearly, has a way of changing what follows.

Epilogue

There are historical moments when a society learns that the institution it had been treating as background was, in fact, one of the engines of the age. The PBM is such an institution. For decades it operated behind the scenes, speaking in acronyms, contract schedules, and reimbursement tables that kept its power invisible to everyone except those already inside the trade. The invisibility was part of the power. People do not revolt against what they cannot see. Employers trust consultants. Patients curse the pharmacy receipt. Legislators stage hearings after the structure has hardened. Meanwhile the machine keeps working, because it was designed to keep working.

The argument against that machine need not be sentimental to be moral. One does not have to believe in some vanished golden age of simple medicine to see that a health system has gone wrong when its administrative intermediaries can benefit from inflated list prices, owned dispensing channels, hidden rebate streams, and contractual distance from the people whose lives depend on the product. The trouble is not bureaucracy in the abstract. Medicine, like any large human enterprise, requires organization. The trouble is a bureaucracy whose incentives have learned to feed on the opacity it creates.

That is why reform limited to improved disclosure will not be enough, though disclosure is necessary. A market can survive the publication of its fees if its structure still rewards the same conduct. The deeper task is structural: delinking compensation from price inflation, forbidding spread pricing where public money is at stake, imposing real fiduciary duties where benefit plans rely on contractors, revisiting the permissive assumptions that governed vertical health-care mergers, and deciding, finally, whether a company should be allowed to write the rules, own the channel, and collect the margin at the same time. Those are not abstract governance questions. They are questions about whether the price of staying alive will continue to be negotiated in rooms whose logic patients never consented to and cannot afford to understand.

American medicine will remain expensive, contested, and uneven even if every PBM disappeared tomorrow. That is worth saying because serious writing ought to resist the false comfort of single-cause explanations. But the PBM story still matters enormously, because it reveals something general about the country that built it. We do not merely tolerate complexity in health care. We monetize it. We wrap power in administration, then speak as though the damage it causes were the weather. The first step out of that habit is descriptive honesty. The next is political will. There is no dignified future for American medicine in which the price of a drug remains one thing in public, another thing in contract, and something else again at the moment a sick person tries to take it home. The paperwork empire was built by human choice. It can be cut back by human choice. Until that happens, the machine will continue to call its own appetite cost control.

References

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