Major federal actions over the past week marked a policy turning point for pharmacy benefit managers (PBMs), one that closely aligns with the evidence-based research led by Schaeffer scholars.
President Trump signed legislation reforming PBM practices. The U.S. Department of Labor issued a proposal to require new PBM fee transparency. And the Federal Trade Commission (FTC) reached a landmark settlement with Express Scripts, one of the nation’s largest PBMs, over the use of rebates in drug pricing.
“A decade ago, before analysts could accurately measure actual drug prices, we undertook a fulsome examination of the entire pharmaceutical distribution system,” said Dana Goldman, founding director of the USC Schaeffer Institute. “Since then, our researchers continued to follow the data to identify the drivers of drug spending. What they uncovered — misaligned incentives and broken markets — is now being addressed through reform and enforcement.”
Following the Money
The research began with a simple but foundational question: Where does the money go when a patient fills a prescription?
In a seminal 2017 Schaeffer white paper, Karen Van Nuys, Neeraj Sood and Goldman traced the flow of funds across the pharmaceutical distribution system — from patients and health plans to manufacturers, wholesalers, pharmacies, insurers and PBMs. The study found that roughly 41 cents on every dollar flows to intermediaries, including PBMs.
The findings reframed the national drug pricing debate. Rather than attributing rising costs solely to drugmakers, the research highlighted how financial flows, pricing incentives, opaque contracting practices and vertical consolidation in the system can inflate prices and reduce patient access.
“Only with greater financial transparency throughout the drug distribution chain can we assess if and where it is producing inefficiencies and hurting consumers,” the white paper authors wrote in a 2017 STAT First Opinion piece.
The work quickly gained traction with policymakers. Sood presented the findings to the FTC and briefings with congressional staff soon followed.
Building the Evidence on PBM Incentives and Patient Impact
Since then, Schaeffer scholars have authored more than 25 studies and a dozen op-eds on PBM practices, including landmark research on how pharmaceutical middlemen were profiting from rising insulin prices, the scale of prescription drug overpayments known as copay clawbacks, and the intermediaries’ growing demand for rebates.
Schaeffer research findings include:
- Rebates: On average, a $1 increase in manufacturer rebates to PBMs is associated with a $1.17 increase in list price. (Sood, Rocio Ribero, Martha Ryan, Van Nuys)
- Delinking: Delinking PBM and other intermediaries’ compensation from list prices would reduce annual net drug spending by $95.4 billion. (Geoffrey Joyce)
- Spread pricing: The federal government overpaid on more than 40% of prescriptions for the most common generic medicines compared to cash prices at Costco—an efficient system without traditional intermediaries. (Erin Trish, Laura Gascue, Ribero)
- Insulin: The share of net expenditures going to manufacturers decreased in the insulin distribution chain, while the share going to middlemen increased. (Van Nuys, Ribero, Ryan, Sood)
- Access restrictions: PBMs working for Medicare Part D plans significantly increased restrictions on prescription drugs by excluding more compounds or requiring prior authorization. (Joyce, Barbara Blaylock, Jiafan Chen, Van Nuys)
- Pharmacy closures: Independent pharmacies, often excluded from networks by PBMs, are more than twice as likely to face closure compared to chain pharmacies. (Jenny Guadamuz, G. Caleb Alexander, Genevieve Kanter and Dima Mazen Qato)
This research has received widespread attention: More than 500 articles on the pharmaceutical distribution system have quoted a Schaeffer expert, and on social media the research has been shared tens of thousands of times.
Dozens of policy offices — from state houses to Congress to the White House — have looked to Schaeffer experts for insights. Sood, Trish, Van Nuys and Geoffrey Joyce have all been invited to testify before state and federal committees at a total of seven hearings on PBMs, and the work has garnered more than 50 citations in government reports.
Shifting Federal Policy Reflects Decade of Research
This research is now reflected in a series of major federal actions:
—The FTC finalized a landmark settlement with Express Scripts resolving part of the agency’s high-profile case alleging that rebate-driven PBM practices inflated drug prices and disadvantaged patients and pharmacies. The settlement requires Express Scripts to change how it designs formularies, reduce reliance on high list-price drugs when lower-cost alternatives exist, and increase transparency around compensation and drug spending.
—The spending bill signed by President Trump includes significant PBM reforms, such as requiring 100% pass-through of manufacturer rebates to group health plans, prohibiting PBM compensation in Medicare Part D from being tied to drug list prices, and strengthening federal oversight of PBM contracting practices.
—The Department of Labor proposed a rule that would require PBMs serving self-insured employer plans to disclose detailed information about rebates, fees and other compensation, and would grant plan fiduciaries audit rights to verify those disclosures — directly addressing research showing that transparency must be verifiable to be meaningful.
“When we teach about the policy process, we emphasize the importance of three key pillars: legislation, regulation, and litigation,” said Erin Trish, co-director of the USC Schaeffer Center for Health Policy & Economics. “It’s remarkable to see action spanning all three pillars. Together, these reforms address many of the distortions we’ve documented over the years.”
Evaluating Impacts of Reform
Schaeffer researchers will continue to focus on whether reforms improve affordability and access while preserving incentives for pharmaceutical innovation.
For example, a recent Schaeffer white paper from Karen Mulligan and Darius Lakdawalla demonstrates how vertical consolidation in the healthcare industry, as well as PBM accounting choices, have made it more difficult to track PBM profit sources. More transparency around pass-through payments and business lines within conglomerates that own major PBMs would help identify how PBMs make money and whether these practices inflate costs, the white paper authors concluded.
“The pharmaceutical distribution system is dynamic,” said Goldman. “We will continue to produce the evidence policymakers need to assess what’s working, what isn’t, and how reforms can benefit patients in need.”
Schaeffer’s work on PBMs can be found here.
