Pharmacy Benefit Managers (PBMs) play a large role in deciding which drugs patients receive and how much they pay. Yet their fees, rebates, and contracts remain largely hidden from employers, insurers, hospitals, and pharmacies. Opaque practices have led to PBMs favoring high-cost medicines instead of less expensive options. The solution is transparency: when the rest of the market can see how PBMs operate, competition can encourage real savings.
In today’s market, PBMs profit when list costs and rebates are large. In a practice called spread pricing, PBMs make a profit by charging the insurer or employer the full cost and pocketing the savings from a rebate. If employers and insurers could compare PBMs, the share of low-cost drugs they favor, the discounts they pass through, and fees they charge, lower-cost models could win business and force imitation in the market.
Consider a simple example. A PBM can make a $50 brand name drug the default for prescriptions because it caries a $30 rebate, which the PBM pockets, while a $5 generic offers no rebate. The PBM’s profits rise if the brand name is prescribed, but the patient pays less for the generic. In a healthy market, the PBM would favor the generic tier over the name brand to reduce price. However, in many cases drugs are classified such that the high-cost name brand is given priority.
One survey of U.S. companies found that more than 60 percent of companies are concerned about PBMs’ lack of transparency. Almost 70 percent would prefer another model to one driven by rebates. Delinking PBMs profits from high-cost drugs and instead rewarding them for providing low-cost medicine would realign PBM’s incentives with patients’ needs.
Pharmacies do not go unnoticed by PBMs either. PBMs levy unpredictable, retroactive performance fees on pharmacies—independent pharmacies in particular—based on opaque metrics and audits that are assessed weeks after dispensing, potentially leaving them unprofitable and force them to close. At the same time, PBMs can steer patients to pharmacies they own, draining independent pharmacies of patients.
Again, transparency can solve many problems. If all fees were known when a prescription is dispersed pharmacies could plan accordingly and reject bad terms. Transparency has the potential to force PBMs to compete for both insurers’ and pharmacies’ business. Pharmacies can avoid contracts that financially drain them at the same time insurers can refuse to do business with PBMs that don’t work with the independent pharmacies most accessible to their customers.
Some states are trying to address the problem. Texas requires PBMs to report rebates, fees, and payments collected. The aggregated data is then published to protect confidentiality.
Starting in 2027, California will require PBMs to report similar practices as Texas does and make available “information from the data collected.” Aggregation protects confidentiality but limits usefulness: insurers and pharmacies negotiate with specific PBMs, not with an abstract “average PBM.” State legislatures should require reports that preserve trade secrets, yet still provide market-facing comparisons of rebate pass-through rates, total fees per claim, use of generics over name brands so insurers and pharmacies can evaluate actual choices.
As poor as anonymized data may be, New York goes even further in the wrong direction by deeming the reports confidential, with no requirement the public be provided any information. Even imperfect transparency is better for the market than none.
The goal is simple: pay PBMs for adding value, not for inflating prices. Transparency in the market would restore competition and align profits with lower costs. Agencies can facilitate that knowledge, but hording it doesn’t help. State legislatures should require transparency where it matters most: during negotiation and at the point of sale.
