THE MIDDLEMEN SERIES

The Middleman: Pharmacy Benefit Managers

Pharmacy Benefit Managers (PBMs) wedge themselves between insurers and the rest of the drug supply chain. Their pitch: “we’ll keep prescription costs down for your members.” In reality they juggle three big jobs:

• Price negotiator. PBMs pool the buying power of every life they manage—think millions of UnitedHealthcare members—and use it to squeeze discounts and rebates out of drugmakers. Manufacturers pay up because landing on a “preferred” tier means lower copays, fewer prior-auth hassles, and ultimately more scripts.

• Formulary architect. Running a drug list for a million-member health plan is messy, so plans hand the chore to PBMs. These middlemen decide which drugs make the cut, what tier they land on, and whether prior authorization or step therapy applies. Pricey brands like Humira often get shoved onto a high tier—or booted entirely for a cheaper biosimilar.

• Network builder & claim adjudicator. PBMs sign contracts with chains and independents to create a pharmacy network and dictate reimbursement terms. When a patient fills Lipitor at “Huddle Pharmacy,” the PBM’s system instantly applies the plan rules, sets the patient’s copay, and tells the pharmacy how much it will be paid—say 10 % of the drug’s cost—before the pills ever hit the bag.

Together, those roles give PBMs outsized influence over which drugs reach patients and at what price—power that makes them indispensable middlemen… at least for now.

Where PBMs Sit in the Food Chain

Picture the drug supply chain as a three-way handshake—manufacturers, insurers, and pharmacies. PBMs plop themselves right in the middle and sign a separate deal with each party:

1. Drugmakers → PBM. Manufacturers pay rebates to secure a friendly spot on the PBM’s formulary tiers.

2. Insurer ↔ PBM. Health plans outsource benefit design and pay the PBM an admin fee (plus let it keep part of those rebates).

3. PBM → Pharmacy. When a prescription is filled, the PBM adjudicates the claim in real time and reimburses the pharmacy at pre-negotiated rates.

Money zips in a loop: from drugmakers to PBMs (rebates), from insurers to PBMs (fees), and from PBMs to pharmacies (reimbursements)—with a slice of the rebate often cycling back to the insurer.

I sketched what this flow looks like:

By centralizing all that cash flow, PBMs promise “efficiency,” but the setup also gives them outsized power to decide which drugs patients actually receive and at what price.

Origin Story

PBMs didn’t burst onto the scene fully formed—they crept in as a simple paperwork fix.

• 1960s-1970s: Employer plans and a few Blue Cross outfits begin covering outpatient drugs. Someone has to process all those handwritten Rx receipts, so early PBM-like companies pop up as mail-order claims shops that speed reimbursements.

• 1980s-1990s: Drug spend climbs, and the back-office clerks spot leverage: “Give us rebates and we’ll put your drug on our preferred formulary.” Rebates are born, formularies become a thing, and PBMs layer on prior auth, step therapy, and mail-order fulfillment. Caremark, Express Scripts, and Medco vault to the front of the pack.

• 2000s: An M&A frenzy follows the specialty-drug boom. CVS acquires Caremark (2007); Express Scripts grabs Medco (2012). Medicare Part D (2006) hands PBMs millions of new lives to manage.

• 2010s: The line between insurer, PBM, and pharmacy disappears. CVS Health absorbs Aetna (2018). Cigna swallows Express Scripts (2018). UnitedHealthcare scales OptumRx. By decade’s end, the “Big Three” (Caremark, Express Scripts, OptumRx) control roughly 80% of all U.S. prescriptions.

• 2020s: PBMs are under the microscope, landing in Washington’s crosshairs. In 2022 the FTC launched a sweeping inquiry into PBM tactics. The report pointed at consolidation and conflicted incentives for inflating costs and gutting independent pharmacies.

What began as a niche claims processor now sits at the center of America’s drug-pricing debate.

How the Money Flows

Four revenue streams keep the lights (and bonuses) on:

1. Admin fees: Health plans pay a per-member or per-script fee for the PBM to design formularies, run prior auths, and handle claims plumbing.

2. Rebates: Drugmakers cut checks to land on a preferred tier. Those checks totaled about $334 billion in 2023 for brand-name drugs. PBMs say ~90% is passed back to plans, and they keep the 10%.

3. Spread pricing: For many generics, the PBM bills the plan more than it reimburses the pharmacy and pockets the “spread.” An FTC dive into 51 specialty generics found the Big Three PBMs cleared ≈ $1.4 billion in spread profit (2017-2022).

4. In-house pharmacies: The same conglomerate that owns the PBM often owns a mail-order or specialty pharmacy. By nudging members to “stay in the family,” the PBM captures dispensing margins that would have gone to independents.

Add it up and the PBM gets paid at every step: a fee to manage the benefit, a slice of the rebate, a margin on the claim, and retail profit if it fills the script itself.

Impact Analysis

Patients

When PBMs use their buying power to push cheaper generics and gather rebates—premiums and copays can fall. But the same opaque tactics often come back to haunt patients at the counter. Prior-authorization roadblocks delay therapy for patients. Meanwhile, rebate deals tied to a drug’s list price can keep out-of-pocket costs stubbornly high, because discounts negotiated in the back room rarely flow to the person at the pharmacy window.

Physicians

For clinicians, PBMs are less “cost manager” and more “paperwork factory.” Doctors and staff work on prior-auth forms just to get the meds they ordered.  That administrative burden leads to frustration, fuels burnout, and can force prescribers to switch to insurer-preferred drugs that may be clinically second-best.

Health System

At scale, PBMs do provide infrastructure: real-time claims adjudication, national pharmacy networks, and the leverage to extract sizable discounts. But decades of consolidation mean three vertically integrated giants—Caremark, Express Scripts, and OptumRx—now steer nearly 80% of U.S. prescriptions.  The FTC’s 2024 interim report argues that this concentration, plus self-dealing with PBM-owned pharmacies, inflates drug costs and starves independent pharmacies.

Could We Live Without Them?

Someone has to quarterback drug claims, haggle with manufacturers, and keep the pharmacy rails running. That’s the operational reality. If PBMs vanished tomorrow, every insurer would scramble to build one in-house—or strike thousands of one-off deals with drugmakers and pharmacies. Chaos. That’s why the big plans just bought a PBM instead of reinventing the wheel.

PBMs skim a big chunk of profit from rebates that tag along with a drug’s list price. Higher list price means fatter rebate, which means bigger PBM payday. Hard to play “cost cop” when your bonus swells every time the list price jumps.

I’ve already shown what a PBM-free lane can look like. Take Cost Plus Drugs: cash-pay, wholesale + 15%. No rebates, no spread pricing, no blackout curtains. Patients love the lower prices, docs love the simplicity, independents aren’t boxed out. (If you missed that deep dive, circle back—I lay it all out.)

So could we toss PBMs altogether? Depends on what fills the gap:

• Do nothing. Drugmakers regain leverage, pharmacies drown in separate negotiations, and prices probably spike.

• PBM 2.0. Keep the central clearinghouse but force full pass-through pricing (rebates) and ban the self-dealing.

• Government muscle. Medicare’s new price-negotiation powers cut straight through the rebate maze. If that expands, the private PBM model shrinks—fast.

Overall, I’ll say we can live without today’s PBMs, but not without the plumbing they provide. The real challenge is rewiring that middle layer so savings land in patients’ wallets—not on a corporate balance sheet.

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