Prescription drug spending in the United States is projected to rise sharply again in 2026, intensifying scrutiny of every intermediary involved in the pharmaceutical supply chain. Pharmacy benefit managers (PBMs), which negotiate with drug manufacturers and administer pharmacy benefits on behalf of employers and insurers, have become a primary target for legislative intervention.
PBMs secure discounts and rebates to reduce the cost of prescription medications. These savings are passed on to insurers and, ultimately, to consumers in the form of lower premiums and out-of-pocket expenses. This role is crucial, especially in a market where pharmaceutical companies can exercise significant pricing power due to patent protections.
However, some critics of PBMs argue that they are mere “middlemen” and that the money they take out of the market comes directly from consumers through higher healthcare bills. Without them, the argument goes, costs would decline.
In response, members of Congress and several state legislatures are advancing reforms ostensibly aimed at increasing “transparency.” Most notable are proposals requiring 100 percent pass-through of manufacturer rebates and banning “spread pricing,” the practice in which a PBM charges a payer more for a drug than it pays the pharmacy, retaining the difference. The legislation recently introduced in the U.S. House of Representatives reflects the growing momentum behind one such approach.
At first glance, these reforms appear to be common-sense corrections aimed at eliminating opaque revenue streams to reduce drug costs. The question is not about intent, but whether the resulting market dynamics will ultimately deliver the promised savings.
Competition In A Concentrated But Not Static Market
Critics of the PBM market complain that it is dominated by three large, vertically integrated firms, but it also includes a diverse ecosystem of independent and mid-sized PBMs. These firms serve self-insured employers, public purchasers and regional markets by offering customized benefit designs and alternative pricing arrangements that the large PBMs are often too rigid to provide.
The robustness of the market depends crucially on the ability of purchasers to choose among multiple business models. When regulation mandates a single, uniform compensation structure, it does not just change how PBMs are paid; it eliminates the primary way smaller players differentiate themselves.
Why Pass-Through Mandates Are Not Neutral
Advocates of mandatory rebate pass-through portray it as a neutral transparency measure. Economically, however, its impact is highly regressive.
For the largest PBMs with diversified operations, rebates are just one lever in a massive machine. If one revenue channel is capped or eliminated by law, they have the scale and infrastructure to shift those margins elsewhere with relatively little disruption.
Smaller, independent PBMs do not have that luxury. Many are pure-play service providers that rely on a narrower set of pricing mechanisms to finance their fixed costs, such as technology platforms and clinical management programs. For these firms, a uniform ban on certain pricing models acts as a “compliance tax.” It is far easier for a multibillion-dollar enterprise to pivot its entire accounting and legal structure to meet new federal mandates than it is for a mid-sized PBM.
Beyond the PBMs themselves, these mandates infringe employer autonomy in choosing service providers. Many sophisticated purchasers deliberately choose models in which the PBM has “skin in the game.” In these arrangements, the PBM’s compensation is tied to its performance in extracting deeper discounts from manufacturers.
From a fiduciary standpoint, an employer may determine that a “shared savings” rebate model or “spread” model provides more predictable administrative costs or a more powerful alignment of interests than a flat fee-for-service model. A blanket ban on these structures strips business owners of a performance-based tool, replacing market-driven negotiations with a government-dictated model shorn of incentives for PBMs to bargain for higher discounts from pharmaceutical companies.
The Risk of Fewer, Not Better, Choices
The unintended consequence of blunt regulation is a familiar one: rules designed to discipline dominant firms would instead accelerate the exit of their smaller rivals. Boutique and mid-sized firms would exit the market or be absorbed by larger entities because they cannot survive on the razor-thin administrative fees dictated by the new regulatory regime, and employer choice narrows.
The implications of banning certain contracting options would extend throughout the supply chain: mid-sized self-insured firms may lose access to vendors that specialize in tailored benefit design, public purchasers may face less competition in procurement and manufacturers may find themselves negotiating with an even smaller, more powerful group of intermediaries.
Designing Reform With Market Structure In Mind
Meaningful PBM reform should focus on empowering purchasers — ensuring they know what they are paying for — rather than having the government decide which business models are allowed to exist.
Policies that preserve contractual flexibility are more likely to sustain competition than blanket prohibitions that eliminate entire ways of doing business. In markets characterized by massive scale advantages, one-size-fits-all rules often have one-sided effects. As lawmakers pursue transparency, they must be careful not to inadvertently dismantle the very market discipline that a diverse competitive landscape provides.