Comments on Improving Transparency into Pharmacy Benefit Manager Fee Disclosure
Schaeffer scholars submitted comments to the U.S. Department of Labor supporting a proposed rule to improve visibility into pharmacy benefit manager (PBM) compensation. They recommended several targeted improvements to ensure the final rule delivers meaningful transparency that strengthens fiduciary oversight, promotes competition, and better aligns incentives with the interests of patients and plan sponsors.
Their recommendations include:
Standardize disclosures for comparability and usability
Require drug-level and claim-level transparency
Tighten definitions of compensation to prevent reclassification
Enhance disclosure of formulary decision drivers
Require independent third-party audit of PBM disclosures.
Editor’s Note: This op-ed was originally published in STAT+ on March 30, 2026.
Consumer groups, independent pharmacies, and drugmakers rightly complained for years that pharmacy benefit managers (PBMs) have used their position as supply chain middlemen to benefit themselves at the expense of patients and payers.
At last, relief is in sight. Congress and the Department of Labor are now poised to align PBMs’ incentives with employers and patients, including making PBMs legally accountable as fiduciaries.
I’ve been studying PBMs for as long as the complaints have been piling up. My research with colleagues at the USC Schaeffer Center shows that PBMs negotiate, but patients and payers too often do not benefit from it. For example, between 2014 and 2018, PBMs’ share of insulin expenditures nearly tripled with no overall savings to payers. At the same time, higher rebates led to higher list prices — roughly $1.17 in higher list price for every additional dollar in rebates — which inflates out-of-pocket costs for patients whose cost-sharing is tied to list prices.
It’s clear that disclosure plus enforceable fiduciary responsibility will do what years of piecemeal reforms have not. Employers and other health plan sponsors need to be able to compare PBMs on real, all-in costs. Payment structures that profit from higher list prices must end. And plans should have meaningful remedies if a PBM is self-dealing. As I told the Senate Committee on the Judiciary, transparency helps employers identify when they’re being overcharged, and fiduciary responsibility ensures PBMs can be held accountable in court.
The FAIR Act would impose fiduciary duties on PBMs for their core functions — formulary design, pharmacy network management, rebate negotiations — and ensure the right to sue when PBMs self-deal, including steering patients to pharmacies owned by their parent company. The Department of Labor’s proposal would require clearer disclosure of PBM compensation and strengthen employers’ ability to audit and evaluate whether it is reasonable.
Both initiatives add to actions in Washington this year. President Trump signed legislation mandating that PBMs pass through rebates in their entirety to employer health plans. The Federal Trade Commission also announced a landmark settlement with Express Scripts requiring the company to overhaul its business model, promising up to $7 billion in patient savings on drugs like insulin over a decade.
As encouraging as these steps appear, however, past behavior suggests PBMs will work around the new guardrails in the absence of a requirement to act expressly in the interest of employers and patients.
The PBM lobby says its members “negotiate directly with drug companies,” “promote competition,” and “manage prescription drug benefits efficiently” to keep medications affordable. These functions require significant discretionary decisions by PBMs while the employers have very little transparency or oversight into those decisions. PBMs can’t have it both ways: If they truly shape formularies, networks, and rebate arrangements that influence what plans and patients pay and which drugs are used, they are exercising the kind of discretion that should come with fiduciary responsibility.
PBMs also warn that fiduciary obligations would “upend” existing contracts. If your business model depends on keeping your client in the dark on how you get paid — or on avoiding legal accountability when your financial incentives diverge from the client’s best interests — then yes, fiduciary duty will upend that model. That’s the point.
We have done this before. Congress and regulators applied compensation disclosure to retirement plan service providers when many 401(k) participants lacked visibility into embedded fees. After the rules took effect, research found that defined contribution plan fees fell, more low-fee plans became available, and participants reallocated toward better value. The parallel is direct: When an intermediary is paid in hard-to-see ways and faces conflicts between its own revenue and the client’s goals, transparency and fiduciary accountability are the tools that realign incentives. We can do the same for prescription drug benefits.
If PBMs want to claim they save employers and patients billions, they should be willing to prove it — and to be held responsible when they don’t. Like it or not, that means fiduciary responsibility.
Neeraj Sood, Ph.D., is a senior scholar at the USC Schaeffer Center for Health Policy and Economics and a professor at the USC Sol Price School of Public Policy.
Trump Admin Takes Pro-Patient Approach to Drug Prices
Editor’s Note: This perspective was originally published in Newsweek on Feb. 26, 2026.
For years, the drug-pricing debate in Washington has revolved around a familiar question: how much should the government intervene to lower costs? Democrats favored direct negotiation, while many Republicans warmed to international reference pricing. Both approaches assumed that Washington would ultimately set the terms. A series of recent policy moves, however, suggests the Trump administration may be testing a different strategy, one aimed less at dictating prices than at forcing them to compete.
This approach reflects a governing perspective that could be described as favoring “Big Patient.” Health care policy is typically shaped by powerful institutional voices—insurers, pharmaceutical benefit managers (PBMs), drug manufacturers, hospital systems and physician groups—each advancing priorities that invite accusations of self-interest. By contrast, the administration’s recent drug-pricing actions signal an effort to shift leverage toward consumers themselves.
The clearest example is TrumpRx, unveiled this month as part of an effort to foster a more competitive marketplace for prescription drugs—one in which consumers may gain access to lower prices without relying solely on government rate-setting or opaque intermediary negotiations.
At the heart of the initiative is a government-backed website offering more than 40 high-demand prescription drugs at steeply discounted cash prices through participating pharmacies. The platform is poised to expand, incorporating generics and additional medications in the months ahead.
For the uninsured, those navigating health savings accounts or enrollees facing coverage gaps in their insurance plans, TrumpRx represents a lifeline. It empowers patients to take the reins of their drug expenditures, bypassing the opaque machinations of intermediaries. In some cases, prices could rival those negotiated by Medicare itself—and, in rare but telling instances, undercut what insured patients might pay through their own plans.
A critical limitation—that TrumpRx purchases do not currently apply toward insurance deductibles or out-of-pocket maximums—is on the cusp of resolution. Coinciding with the program’s launch, the Federal Trade Commission secured a settlement with Express Scripts, the home-delivery pharmacy giant, over alleged violations of the FTC Act. Under its terms, Express Scripts must credit TrumpRx out-of-pocket costs toward patients’ deductibles and caps, pending regulatory adjustments to shield these prices from Medicaid “best price” mandates and 340B program calculations.
The settlement also imposes stringent transparency obligations on Express Scripts, aligning closely with forthcoming U.S. Labor Department rules that will bind all PBMs to similar standards.
Complementing this move, President Trump signed an appropriations bill imposing fresh curbs on PBM practices. These entities, which arose in the 1960s amid expanding federal involvement in health care, initially served as a check on rising costs and regulatory complexity. Yet over time, they have shielded patients from true medication prices, exacerbating market distortions and inflating overall spending.
The new law mandates that PBMs furnish group health plan sponsors with granular data on drug expenditures, compelling them to defend their network designs and benefit structures. Enrollees, too, will receive detailed breakdowns of coverage, costs and utilization—equipping consumers to make savvy choices about their benefits.
Yet expanding patient power is not without hazards. There is one area in which the Trump administration can deliver sorely needed oversight. In a marketplace already strained by soaring drug costs, the rise of compounded medications—custom-mixed alternatives to branded therapies—presents a seductive but perilous shortcut. Telehealth giants such as Hims & Hers Health have capitalized on this lack of regulation, peddling knockoff versions of blockbuster GLP-1 drugs such as Novo Nordisk’s Wegovy at a fraction of the price, exploiting regulatory loopholes amid shortages. This shadow industry demands stricter oversight, as it erodes the foundations of pharmaceutical innovation and distorts fair competition.
Developing a new drug like semaglutide requires billions in R&D, rigorous FDA trials and patent protections to recoup investments. Compounded variants bypass these hurdles, mass-producing unapproved copies without comparable safety data or clinical validation. The result? Pharma firms, facing eroded revenues from patent circumvention, may curtail risky bets on future breakthroughs—stifling advancements in obesity, diabetes and more.
Market tilting exacerbates the issue. While branded drugs endure stringent scrutiny, compounders operate in gray zones, potentially introducing impurities, dosing inconsistencies, subpar efficacy and suspect sourcing. Patients lured by affordability risk health hazards, while innovators shoulder disproportionate burdens. Regulation must close these gaps, enforcing FDA standards on mass compounding to safeguard incentives and level the playing field. Without it, America’s drug ecosystem risks devolving into a race to the bottom, where shortcuts trump science.
Trump has already instituted reforms across multiple departments that shift power toward patients, sidelining the vested interests of insurers, pharmaceutical companies, hospitals and lobbyists. In the short term, Wall Street may greet these with skepticism, viewing health care through the lens of investment returns rather than human need. But the president rightly grasps that ordinary Americans are not hedge funds or day traders—they are working families who deserve reliable, affordable medicine. In delivering on this front, he advances his vision to “Make America Healthy Again.”
Big Patient may prevail after all.
Qato discusses how new PBM reforms may protect pharmacies and patient access
Schaeffer Research Helps Reshape Federal Oversight of Pharmacy Benefit Managers
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.”
PBM Markets for Medicare Part D or Medicaid Are Highly Concentrated in Nearly Every State
Just three pharmacy benefit managers (PBM) dominate retail prescriptions in Medicare Part D and Medicaid managed care across much of the country, with markets in nearly every state considered highly concentrated for at least one program, according to a new study from the USC Schaeffer Center for Health Policy & Economics.
The study, published Feb. 6 in JAMA Health Forum, provides one of the most detailed examinations to date of PBM competition within states. Based on a federal antitrust index, the authors find:
40 states have highly concentrated PBM markets within Part D, and 37 states have highly concentrated Medicaid managed care markets.
Both Part D and Medicaid managed care PBM markets are highly concentrated in 31 states. This includes 10 states that also have highly concentrated commercial insurance markets.
93% of Medicaid managed care prescriptions and 75% of all Part D prescriptions are filled in states where those PBM markets are highly concentrated.
The study comes as policymakers and regulators continue to scrutinize industry practices over concerns about how these middlemen contribute to higher drug costs, pharmacy closures and restricted patient access to medicines. The spending package passed by Congress earlier this week includes new restrictions on industry practices, and states have been increasing regulation of PBMs in recent years.
“When a few PBMs dominate a market, they hold outsized power over how much patients pay for drugs, where they can fill their prescriptions and whether their essential medications are covered,” said lead author Dima Mazen Qato, a senior scholar at the Schaeffer Center and the Hygeia Centennial Chair at the USC Mann School of Pharmacy and Pharmaceutical Sciences.
“These findings can guide federal and state policies to improve PBM accountability and transparency, particularly in Medicare Part D and Medicaid. They can also inform ongoing efforts to address PBM market concentration, including recently enacted legislation, new regulatory proposals, and federal enforcement actions focused on PBM conduct.”
About this Study
The study was co-authored by Yugen Chen and Karen Van Nuys. Please see the study for author disclosures.
PBM Profits Obscured by Mergers and Accounting Practices, USC Schaeffer White Paper Shows
Requiring more financial transparency from PBMs would help policymakers understand how money flows through the large healthcare companies that now own them
Pharmacy benefit managers (PBMs) under the microscope for their role in high drug prices have often cited their reportedly slim profit margins as evidence that they do not drive up costs. The three leading PBMs, which control about 80% of the prescription drug market, have historically reported profit margins of 4% to 7%, among the lowest in the healthcare industry.
A new white paper from the USC Schaeffer Center for Health Policy & Economics demonstrates that these slim margins are dramatically influenced by the accounting practices PBMs elect to employ. The paper also shows how efforts to assess PBM profits have become more challenging after these companies merged with healthcare conglomerates that own other players in the pharmaceutical supply chain.
States in recent years have advanced or considered numerous measures seeking to increase PBM transparency, and Congress is currently pursuing legislation to reform PBM practices. The Federal Trade Commission, meanwhile, continues to scrutinize PBMs after accusing leading firms of inflating drug costs through strategies like rebates, markups and preferential treatment of affiliated pharmacies.
“Accounting practices make it difficult to judge the health and efficiency of the PBM market, particularly as dominant firms have become part of larger, more complex companies,” said lead author Karen Mulligan, a research scientist at the Schaeffer Center. “Greater financial disclosure requirements for PBMs are needed to develop a better picture of how PBMs make money and the extent to which these practices may raise costs for consumers.”
How accounting choices drive margins
PBMs sit at the center of the pharmaceutical supply chain, acting as intermediaries that pay pharmacies and negotiate rebates with drug manufacturers on behalf of insurers. PBMs retain transaction fees and a portion of manufacturer rebates while passing along payments between manufacturers, insurers and pharmacies.
Historically, PBMs have included these “pass-through payments” in financial reporting. This may also include the share of rebates sent directly to the insurer. While allowed under professional accounting guidelines, this practice may add hundreds of billions of dollars to PBMs’ reported revenue or expenses without affecting their actual earnings. This obscures key determinants of PBMs’ profitability, including the role of rebates, fees and other payments.
Using a simplified example with typical transaction fees and rebates, the white paper illustrates how accounting choices can produce vastly different profit margins for a hypothetical drug listed at $360. If pass-through payments were reported as revenues or expenses, the PBM’s margin would be 10% – or slightly higher at 13% if manufacturer rebates passed to the insurer were not reported. However, the margin jumps to 87% if pass-through payments were not reported at all.
Flow of funds for PBM accounting and assumptions with rebate negotiations
Notes: GPOs and pharmacy services administrative organizations are not shown since they have contractual arrangements but no financial flows. Dashed arrows represent flows that may be excluded from financial statements depending on whether the principal or agent framework is used.
PBM accounting statement
Vertical integration in the healthcare industry has further blurred PBMs’ financial picture. In the past decade, the three dominant PBMs have become part of diverse healthcare corporations that also own insurers, specialty pharmacies and group purchasing organizations (GOPs) that negotiate discounts.
Under this structure, payments between the PBM, insurer and the specialty pharmacy become internal transfers invisible to the public. Using the same hypothetical $360 drug as the previous example, the white paper shows how the publicly reported profit margin can be half of what’s recorded internally, as dollars are shifted to other units within the PBM’s parent company. (See the white paper for the accounting statement.)
Flow of funds for a vertically integrated healthcare conglomerate
Transparency reforms should illuminate revenue streams
The researchers suggest that policymakers consider requiring PBMs to exclude pass-through payments from financial reporting, as regulators have done for intermediaries in other industries.
Policymakers should also consider reforming financial reporting requirements so that healthcare conglomerates provide separate reporting for each distinct business unit, rather than allowing PBM operations to be combined with other units like specialty pharmacy. Further, requiring disclosure of internal transfers and pass-through payments in these companies would provide clarity about what’s driving profits.
“True transparency requires greater visibility into profit flows hidden inside increasingly complex corporate structures,” said co-author Darius Lakdawalla, chief scientific officer at the Schaeffer Center and the Quintiles Chair of Pharmaceutical Development and Regulatory Innovation at the USC Mann School. “Building a more efficient and sustainable pharmaceutical supply chain starts with a better understanding of where dollars are flowing.”
About this study
This white paper was supported by the Schaeffer Center. A complete list of supporters of the Schaeffer Center can be found in our annual report.
Eye on PBMs
Following the Money
Schaeffer research reveals how inefficiencies in the drug supply chain increase costs and limit access
This paper introduces two accounting frameworks for reporting revenues in financial statements—known as the principal and agent models—and explores their implications for pharmacy benefit manager (PBM) profitability. We then extend these frameworks to a more contemporary accounting and market environment to reflect extensive vertical integration in the pharmaceutical supply chain. The results suggest that the historically low profit margins in the PBM industry result from discretionary accounting practices that allow recognition of pass-through payments rather than a competitive PBM marketplace.
Key Takeaways
PBM profit margins may be misleading due to accounting choices. Current accounting rules allow PBMs to choose whether to count pass-through payments (like rebates) as revenue – a choice that can make their profit margins appear artificially low without affecting actual profitability.
Vertical integration hides where profits are generated. As major PBMs have merged with insurers and pharmacies, their financial results are bundled together in broad business segments. This limits the degree to which research can be conducted on PBM profitability.
Low margins don’t necessarily mean fierce competition. When the same PBM business can show either razor-thin or robust margins depending solely on accounting treatment, reported margins become unreliable indicators of market competitiveness or efficiency.
A press release covering this white paper’s findings is available here.
Policy Context
The PBM market has become increasingly consolidated, with the top three PBMs now controlling nearly 80% of the U.S. prescription drug market. Some argue that PBM reform might have a limited impact on drug prices or insurance companies that contract with PBMs because PBMs already operate at relatively low profit margins. This paper adds to the policy discussion by exploring how accounting practices could potentially mask the true profitability of PBMs by presenting three stylized examples, one of which considers the additional role of vertical integration. We suggest the following policy considerations:
Implement financial reporting transparency reform that addresses pass-through payments and revenue sources: A requirement for PBMs to report revenues net of pass-through payments would result in better insight into their profitability. However, as PBMs shift to a business model where more of their revenues are earned from fees rather than rebates or other pass-through payments, full visibility into PBM profitability drivers requires knowledge into the source of their income streams.
Take vertical consolidation into account when developing PBM reforms: The largest PBMs are now part of extensive healthcare conglomerates, which means their financial reporting is aggregated into broader business segments containing other functions such as specialty pharmacy. Requiring more disaggregation of financial reporting would provide better transparency into PBM profitability for policymakers.
1. Introduction
The top three pharmacy benefit managers (PBMs) now control nearly 80% of the U.S. prescription drug market1 and manage hundreds of billions of dollars in prescription spending each year.[1] Despite this scale and influence, historically their reported profit margins have been strikingly low—typically between 4% and 7%.2[2,3] Low margins are generally suggestive of relatively inefficient operations, aggressive price competition or limited market power.[4–6] Theory also suggests that low margins, and the vigorous competition that drives them, result in more value accruing to consumers and less to shareholders. Notably, however, PBMs maintain slim margins with a high degree of market consolidation. This paradox has fueled a growing debate over PBMs’ apparent efficiency and whether it reflects a competitive, consumer-driven PBM marketplace or some other cause, perhaps related to accounting conventions that may obscure the level of economic profitability.[2,7]
Apart from concerns regarding market consolidation, policy debate around PBMs has largely focused on their lack of transparency, spread pricing and rebate practices, and the extent to which the aforementioned issues play a role in high drug prices.[1,8–16] Some argue that PBM reform might have a limited impact on drug prices or insurance companies that contract with PBMs because PBMs already operate at relatively low profit margins.[3,17,18] However, profitability is often linked to market power. Importantly, PBMs have used their historically low profit margins to minimize scrutiny from the Federal Trade Commission (FTC).[3] When the entities managing most of the nation’s drug spending appear less profitable than retail grocers, it raises a fundamental question: How do we reconcile PBM profit margins with other evidence of PBM market concentration and power?
McLean and Garis (2005) present a stylized example to demonstrate PBM profitability under Generally Accepted Accounting Principles (GAAP), which are the rules for how firms report revenues and expenses when preparing financial statements.[19] They then show that PBMs—which predominantly serve as middlemen that manage transactions between insurers and pharmacies—would have higher profitability rates if they followed an accounting reporting framework that better aligned with this role. This result stems from the fact that while the level of profits is the same irrespective of the chosen accounting principles, profit margins (i.e., the ratio of profits and revenue) are deflated when pass-through payments are recorded in financial statements. While McLean and Garis (2005) present a well-executed analysis of PBM accounting and profitability, their study was published in an era where the major PBMs operated as stand-alone companies. Furthermore, their financial presentation did not include an important role of PBMs: rebate negotiation.
This paper introduces the primary accounting concepts and their implications for PBM profitability following the simplified conceptual framework of McLean and Garis (2005). Next, we extend the conceptual framework to incorporate manufacturer rebates. Finally, we position financial flows within the contemporary accounting and market environment to reflect extensive vertical integration. Our analysis demonstrates that the profitability effects identified by McLean and Garis (2005) persist—and have arguably intensified—as vertical integration in the healthcare sector has led to PBMs becoming subsidiaries of diversified healthcare conglomerates that also own insurers, specialty pharmacies and rebate aggregators. By translating these accounting mechanics into a transparent framework, this paper provides clarity around how GAAP-compliant reporting can obscure the true economic returns of PBMs and motivation for potential reform in financial disclosures and oversight.3
The remainder of our paper is structured as follows. Section 2 provides a refresher on the flow of funds in the pharmaceutical supply chain and explains how these flows change with realistic vertical consolidation. Section 3 introduces key accounting principles and revenue recognition in a stylized PBM industry using conceptual diagrams to demonstrate the flow of funds. Section 4 expands these diagrams with illustrative accounting statements to show how different accounting frameworks interact with pharmacy and rebate pass-throughs and intercompany transactions in vertically integrated healthcare conglomerates. Finally, Section 5 concludes by summarizing the policy implications of PBM accounting and profitability and by providing direction for future research.
2. A Refresher on the Flow of Funds in the Pharmaceutical Supply Chain
Before examining the accounting treatment of PBM revenues, it is useful to revisit the flow of funds within the pharmaceutical supply chain. The reality is complex: Dollars move among manufacturers, wholesalers, pharmacies, insurers and PBMs through a mix of rebates, discounts and reimbursement arrangements that vary by product and payer. The purpose of this section is not to capture every contractual nuance but to clarify the broad financial relationships that underlie drug pricing. We first present the pharmaceutical supply chain in its traditional, horizontally organized form, then contrast it with the vertically integrated structures that now dominate the market. In both cases, we focus on the payments and other financial flows that get captured in financial statements.4
Figure 1 shows the financial flows in the pharmaceutical supply chain. This diagram clarifies the role of PBMs as intermediaries—they reimburse pharmacies on behalf of insurers and negotiate rebates with manufacturers on behalf of insurers. When the supply chain is horizontally organized, each stakeholder operates as a distinct company that files its own financial statements, providing visibility into its overall profitability. However, even in this context, specific transaction-level details remain opaque because individual financial flows are usually aggregated within total revenues or expenses rather than reported as separate line items. For PBMs, copay clawbacks—which can be a significant source of PBM revenue [24]—direct and indirect renumeration (DIR)5, and rebates are examples of flows obscured by aggregate reporting.
Notes: GPOs and pharmacy services administrative organizations (PSAOs) are not shown since they have contractual arrangements but no direct financial flows in the horizontal setup.
When the supply chain becomes vertically integrated, the financial flows still represent real transfers of revenues and costs within a single corporate structure, but become less transparent externally because they are often invisible in consolidated financial reporting. Figure 2 demonstrates this in a supply chain where the vertically consolidated healthcare conglomerate includes the insurer/health plan, a PBM that owns a group purchasing organization (GPO) handling rebates and a specialty or mail-order pharmacy. All the financial flows from Figure 1 are present, but the orange arrows represent internal transfers between business segments of a single company. Another practical implication of vertical integration is that it may result in PBMs taking physical control of drugs, which can impact their accounting decisions. We will return to this issue in the next section.
Notes: Orange arrows denote financial flows that represent internal transfers within the vertically integrated conglomerate, rather than transactions between different firms as depicted in Figure 1. Orange arrows are observed by the vertically integrated conglomerate, but typically not reported in publicly available financial statements.
Although conglomerates sometimes report segment-level financial metrics, these segments often contain multiple functions (e.g., the PBM, GPO and specialty pharmacy are combined into a single reporting segment), which can mask the profitability of each component within a segment.
Additionally, our diagram does not capture forms of integration such as in-house healthcare providers (e.g., CVS Minute Clinic) and manufacturer subsidiaries (e.g., Quallant Pharmaceuticals) that are now common among major conglomerates. As support for these conclusions, in the appendix we provide a summary of vertical integration across the four major healthcare conglomerates (CVS, Cigna, UnitedHealth Group and Humana) and their financial structures.
3. Background: PBM Accounting Principles and Revenue Recognition
3.1. Simplified Conceptual Framework of PBM Transactions and Accounting
To introduce key accounting concepts in a simplified framework, we start by assuming PBMs perform a single function: serving as intermediaries between insurers/health plans and pharmacies.6 In particular, PBMs process prescription drug claims from pharmacies and obtain appropriate reimbursement from insurers. The basic conceptual framework with the flow of funds relevant to PBM accounting is shown inFigure 3.
Figure 3. Simplified conceptual framework for PBM accounting
Notes: Each red and blue arrow corresponds to a line item in the corresponding PBM accounting statement. Dashed arrows represent flows that may be excluded from the accounting statement depending on which accounting framework is used (discussed in Section 3.2). GPOs and PSAOs are not shown since they have contractual arrangements but no direct financial flows.
In addition to the drug cost, the pharmacy may charge an administrative fee, which we illustrate as a per-prescription payment, though it could also be structured as a flat fee. This administrative fee is passed through to the insurer so that the total cost of each prescription (i.e., the total reimbursement amount) is the drug cost plus the administrative fee. In exchange for processing each claim, the PBM usually collects a transaction fee from the insurer. Additionally, the PBM may charge the insurer a markup on the total reimbursement amount, which generates revenue; this is also referred to as “spread pricing” for the PBM.7[28] The PBM keeps any transaction and markup fees from the insurer and transfers the drug reimbursement from the insurer to the pharmacy—these transfers are known as “pass-through payments” and are denoted by dashed lines in the figure.
To highlight how this conceptual framework can translate into different reported revenues (and therefore profit margins) for PBMs, we need to understand two different accounting frameworks that PBMs can use and their specific implications. Of particular relevance is the treatment of pass-through payments in financial reporting.
3.2. Overview of Accounting Standards and Revenue Reporting
All companies, regardless of industry (this includes PBMs and healthcare conglomerates), currently follow a unified approach to revenue recognition, outlined in Accounting Standards Codification (ASC) 606, which we revisit later in this section.[29] Prior to 2014, there were separate pieces of GAAP and industry-specific guidance, but the Financial Accounting Standards Board (FASB) had not issued specific guidance or regulations related to PBMs. As a result, PBMs historically drew guidance from EITF 99-19 and SAB 101 to justify their accounting methods.[19]
EITF 99-19 provided guidance on whether companies should report revenues on a gross or net basis, which we will refer to as the principal and agent frameworks, respectively.[30] In the PBM context, a principal framework implies that pass-through payments should be counted as revenues in financial statements. However, in the agent framework, any cash transfers between insurers and pharmacies that are managed by the PBM (i.e., pass-through payments) are not recognized as revenues of the PBM. In this framework, only transaction fees and markups are recorded as revenues. The differing treatment of revenues across these two frameworks ultimately affects public reports of firm profitability.
Whether PBMs should follow a principal or agent model under EITF 99-19 is less clear. In practice, a firm could justify using the principal framework by demonstrating that it assumed general risk from transactions.[31] This could include taking physical possession of goods (e.g., inventory risk), incurring credit risk (e.g., financial liability if the transaction failed), or having discretion in price setting. However, EITF 99-19 noted that these were qualitative indicators as opposed to a strictly enforced checklist, and ultimately the selected framework remained partly at the discretion of the firm.8[30] On the one hand, PBMs rarely physically handle the drugs sold in their pass-through transactions and thus would seem to fit the “agent” framework more closely. However, one could still justify a principal approach by asserting transactional or pricing risks—for example, by reimbursing pharmacies before receiving repayment from the insurer.9[32]
In 2014, the FASB introduced ASC 60610, which provided a unified framework for revenue recognition across all industries, including how to determine whether to take a principal or agent approach. Prior to ASC 606, firms had to demonstrate that they assumed “enough” risk to justify taking a principal approach. In comparison, under ASC 606, firms had to determine whether they controlled11 the good or service before it went to the customer.[31] While firms can still apply discretion under ASC 606, the control-based standard aimed to provide consistency across industries compared with the risk-based logic from previous GAAP standards.
In the case of PBMs, the concept of control is inherently ambiguous. The most intuitive interpretation of control would be a case in which PBMs physically take control of and store drugs on behalf of insurers, which in reality is rare unless a PBM is integrated with a pharmacy. Even though they do not own or store drugs for insurance beneficiaries, control can be interpreted to stem from PBMs’ ability to dictate where and how prescriptions are filled, since they can select which pharmacies are in-network or set formularies. Historically, PBMs have followed the principal framework for revenue recognition [2,19], which can inflate reported revenues by hundreds of billions of dollars annually given the scale of pass-through payments in the pharmaceutical supply chain (see appendix Table 4 for current revenue recognition statements for the major healthcare conglomerates).12 In practice, the choice of a principal framework shapes how PBM performance appears in financial statements and, by extension, how policymakers and analysts interpret their profitability. Moreover, the vertical integration of PBMs into healthcare conglomerates further complicates transparency in reported PBM margins. The next section illustrates these effects by linking the conceptual framework in Figure 3 with simplified accounting statements.
4. Accounting Conventions and Reported PBM Profitability: A Stylized Comparison of Principal and Agent Frameworks
We now illustrate the implications of accounting rules for reported profitability by means of a simple numerical example. We begin with the simplified conceptual framework as presented in Figure 3. Next, we expand it to incorporate rebates that reflect how PBMs manage pass-through payments between pharmacies and insurers, as well as between manufacturers and insurers.13 Finally, we explore the implications of the PBM as part of a vertically integrated healthcare conglomerate, which hides many of these pass-through payments from view in financial statements.
4.1. Comparison of Revenue Reporting Under a Simplified Framework
Figure 4 shows a more detailed version of the conceptual framework from Figure 3 including a full set of numeric assumptions. Next, we enter the various payments shown in Figure 4 into the PBM’s accounting statement under both the principal and agent frameworks (Table 1). Irrespective of the accounting framework, all payments denoted with blue arrows (non-pass-throughs) are recorded as revenue. Under the principal framework, pass-through payments from the insurer to the PBM are counted as revenues, and pass-through payments from the PBM to the pharmacy are recorded as expenses (costs). In contrast, under the agent model, pass-through payments are not recorded on the accounting statement because they simply represent cash flows between the insurer and the pharmacy, not revenues or expenses for the PBM.
Figure 4. Flow of funds for PBM accounting and assumptions (simplified framework)
Notes: GPOs and PSAOs are not shown since they have contractual arrangements but no financial flows. Dashed arrows represent flows that may be excluded from the accounting statement depending on whether the principal or agent accounting framework is employed.
Table 1. PBM accounting statement (corresponds to framework and assumptions in Figure 4)
Notes: Example PBM accounting statement following conceptual framework and assumptions shown in Figure 4. Color coding of text in the accounting statement matches the figure.
The choice of accounting framework does not affect the PBM’s net income (total revenues minus total costs) because pass-through payments represent money exchanged between the insurer and the pharmacy, with the PBM serving as the intermediary. However, by recording pass-through payments as revenues and expenses under the principal model, the PBM’s profit margin (net income divided by total revenues) appears almost an order of magnitude lower—only 9.4% in comparison with 82.7% under the agent framework.
4.2. Comparison of Revenue Reporting: Incorporating Manufacturer Rebates
We can extend the previous example by assuming that, in addition to processing claims, PBMs also negotiate rebates between manufacturers and insurers. In this case, the PBM will handle funds passed from manufacturers to insurers and from insurers to pharmacies. Figure 5 incorporates manufacturer rebates and pass-through payments into the conceptual framework and assumptions. In addition to comparing the principal and agent frameworks in the accounting statement (Table 2), we also show how PBMs could use a mix of principal and agent frameworks for reporting manufacturer and pharmacy pass-through payments (“mixed framework”).14 As in the simplified example, how PBMs decide to handle pass-through payments in their financial statements does not affect their net income, but it does change how their profitability will be reported.
Figure 5. Flow of funds for PBM accounting and assumptions with rebate negotiations
Notes: GPOs and PSAOs are not shown since they have contractual arrangements but no financial flows. Dashed arrows represent flows that may be excluded from financial statements depending on whether the principal or agent framework is used.
Table 2. PBM accounting statement (corresponds to framework and assumptions in Figure 5)
Notes: Under the principal framework, we assume all pass-through payments (manufacturer and pharmacy) are reported as revenues and expenses. Under the mixed framework, we assume a principal framework is applied to pharmacy pass-throughs and an agent framework is applied to manufacturer rebate pass-throughs.
4.3. Vertical Integration and Impact on the Visibility of PBM Profitability
Our final example demonstrates how vertical consolidation obscures PBM profitability. Following the vertically integrated flow of funds presented in Figure 2, we assume the vertically integrated healthcare conglomerate consists of an insurer/health plan, a PBM that owns a GPO that handles rebates, and a specialty or mail-order pharmacy. Figure 6 presents the PBM revenues and expenses under three accounting perspectives: the principal framework under a horizontal market configuration, the internal financial statement for the PBM segment of a vertically consolidated firm and the external financial statement for the PBM segment of a vertically consolidated firm. For reference, we also provide example financial statements for all internal segments in the appendix, but these are not relevant to demonstrating PBM profitability.
Figure 6. Flow of funds for a vertically integrated healthcare conglomerate and assumptions
Notes: PSAOs are not shown since they have contractual arrangements but no financial flows. Dashed arrows represent flows that may be excluded from financial statements depending on whether the principal or agent framework is used. Internal transfers (denoted by orange lines) are tracked as part of internal firm bookkeeping but will be excluded from public financial statements.
Total revenues, total costs, net income and profit margins for the PBM are identical between the horizontal configuration and vertically consolidated internal reporting. The key difference is that all financial flows between the PBM and the specialty pharmacy and insurer are internal transfers in the vertically integrated firm, whereas they would represent flows between three different firms in a horizontal configuration. Internal transfers are not shown in the external financial statements for the vertically integrated firm, which further understates the PBM segment’s profitability. Finally, it is important to note that, in reality, the PBM will likely not be its own segment but will be grouped with other segments for reporting purposes, which further masks its particular financial flows. For example, in their most recent 10-K filings, CVS and Cigna report that their PBM is contained in the same segment as their specialty and mail-order pharmacies and their care-delivery organizations, and Humana’s PBM is in the same segment as its insurance operations (see Table 5 in the appendix for details on business segments for the four major healthcare conglomerates).[35–37]
Table 3. PBM accounting statement under horizontal and vertically consolidated configurations (corresponds to framework and assumptions in Figure 6)
Notes: Under the principal framework, we assume all pass-through payments (manufacturer and pharmacy) are reported as revenues and expenses. Internal transfers are denoted by orange text and are not reported in external financial statements. The grey rows are provided to demonstrate that the total external flows are equal to the total internal flows minus internal transfers (in other words, the flows in the internal and external accounting reports are equivalent); these rows would not be reported as part of the financial statement
5. Discussion
This paper demonstrates that relatively low profitability in the PBM industry is potentially an artifact of accounting choices made when compiling public-facing financial statements. Moreover, limited transparency into true PBM profitability has been further masked by widespread vertical consolidation among companies in the pharmaceutical supply chain. Because public financial statements only report aggregated totals for revenues and expenses, policymakers and analysts cannot determine how much PBM cash flow reflects pass-through payments rather than actual earnings. As a result, historically “thin” margins likely reflect accounting conventions rather than true profitability.
From an accounting perspective, we do not offer any judgments regarding the correct approach to accounting for PBMs, but we note one peer-reviewed paper arguing for the agent framework.[19] However, since profit levels are unchanged by how pass-through payments are treated, accounting principles do not affect profitability from an economic perspective. As a result, metrics that rely on profit levels rather than margins will provide an accounting-invariant measure of PBM profitability. To get a better sense of whether individual PBM profits are high or low across the industry, profit levels can be compared against total market revenue. Additionally, wide swings in profit margins caused by changes to accounting rules suggest that reported profit margins may not provide a strong basis for inferences about market power or industry concentration. Our findings also warrant caution when interpreting PBM financial metrics, especially absent more transparent financial reporting regarding funds flowing through PBMs.
To increase transparency in PBMs’ financial reporting, policymakers could mandate PBMs report revenues net of all pass-through payments, which effectively treats PBMs as agents for accounting purposes. Regulators have introduced analogous reporting requirements in other industries to help distinguish principal and agent activity. However, in the case of PBMs, this sort of reform would have a limited impact because many PBMs are shifting to a business model where an increasing share of profits is generated through fees, not pass-through payments such as rebates.[38] Between 2012 and 2020, the share of gross profits generated by rebates decreased from 46% to 14% while the share generated by fees and GPOs increased from 5% to 21%.[26] Beyond fees, PBMs generate expenses and revenue from a range of services that do not involve pass-through payments such as claims processing, formulary management, adherence programs and prior authorization, and therefore would not be affected by changes to accounting requirements. Moreover, in a vertically consolidated setting, PBMs can also direct profit streams by shifting prescriptions to PBM-owned specialty pharmacies.[39] Transparency reforms must therefore address the source of income streams in addition to pass-through accounting.
Beyond the principal/agent classification of revenues, additional reforms might focus on disaggregating reporting by business segment within vertically consolidated health conglomerates. Current reporting requirements permit firms to combine their PBM operations with other segments (e.g., the “pharmacy services” segment might include specialty pharmacy, GPO and PBM), limiting visibility into each component’s financial contribution to profitability. Policymakers could require separate reporting for each unique business function, including disclosure of internal transfers and pass-through payments. This would provide clarity around where profits are generated within the pharmaceutical supply chain, even in an environment with substantial vertical integration. The financial sector provides precedence for disaggregated revenue reporting, where companies must separately report interest income, trading gains and underwriting.[40,41] In addition to improving transparency in financial reporting, disaggregated reporting would allow for direct comparisons of PBM profitability across vertically consolidated firms.15 Rebate payments are often significant items in the financial statements of PBMs and branded pharmaceutical companies, so, in general, the SEC and other regulators may wish to explore the merits and drawbacks of requiring more detail around where and how these cash flows are directed. For example, these details may improve corporate governance and investor oversight. On the other hand, they may also introduce new layers of complexity.
Our paper has focused on a unique PBM accounting issue, yet this represents only one part of the equation for pharmaceutical supply chain dynamics and drug prices. Even if the U.S. adopted the PBM reforms we propose, the role of rebates—which corresponded to $356 billion in price concessions for branded drugs16 in 2024 [43]—in rising drug prices, formulary placement, and manufacturer and middlemen financial outcomes would remain opaque. To better understand the true flow of funds, additional transparency requirements for pharmaceutical companies’ financials is necessary. Beyond providing aggregate rebate totals, firms would need to report details on where rebates are being paid including which organizations are receiving them, on which drugs and so on. This detailed degree of transparency would give policymakers and shareholders better insight into a major element of manufacturers’ business operations and serve to minimize “surprises.”
In general, while we expect additional transparency will lead to more efficient business decisions and provide policymakers with better information to develop effective regulations and policies, it may also lead to worse market outcomes in some cases. For example, detailed reporting of their contractual details by PBMs could lead to tacit collusion and reduce price competition as well as reduce incentives to encourage lower-cost generic drug utilization, further exacerbating growing drug costs.[42] Similarly, full transparency on net drug prices by manufacturers could potentially reduce incentives for innovation, delay access, or disproportionately impact low- and middle-income countries.[44,45] Transparency requirements will also be ineffective if they are not enforced: A recent study found that despite the presence of price transparency requirements for hospitals, 56% of hospitals did not report prices and 66% of hospitals only partially reported prices.[46] Moreover, these transparency reforms may have minimal impact on the drug prices that consumers face.17
PBMs have used their historically low profit margins to minimize scrutiny from the FTC.[3] The sensitivity of these margins to alternative plausible accounting rules weakens the case for drawing inferences about competition from reported margins. Future regulatory investigations and analyses of market power of PBMs should consider the potential role that accounting frameworks and pass-through payments play in profitability.
Mattingly, T. J., D. A. Hyman and G. Bai. (2023). Pharmacy Benefit Managers: History, Business Practices, Economics and Policy. JAMA Health Forum, 4 (11): e233804.
Mattingly, T. J., K. C. Ben-Umeh, G. Bai and G. F. Anderson. (2023). Pharmacy Benefit Manager Pricing and Spread Pricing for High-Utilization Generic Drugs. JAMA Health Forum, 4 (10): e233660.
Lalani, H. S., A. S. Kesselheim and B. N. Rome. (2025). Benefits and Limitations of Direct-to-Consumer Pharmacies in the US. JAMA Network Open, 8 (8): e2527484.
Cantrell, S. A. (2024). It Is Time for a More Nuanced Discussion About Pharmacy Benefit Managers. Journal of Managed Care & Specialty Pharmacy, 30 (12): 1345–8.
Barlas, S. (2015). Employers and Drugstores Press for PBM Transparency: A Labor Department Advisory Committee Has Recommended Changes. Pharmacy & Therapeutics, 40 (3): 206–8.
McLean, R. A., and R. I. Garis. (2005). Accounting Principles, Revenue Recognition and the Profitability of Pharmacy Benefit Managers. Research in Social and Administrative Pharmacy, 1 (1): 118–25.
Brot-Goldberg, Z. C., C. Che and B. R. Handel. (2022). Pharmacy Benefit Managers and Vertical Relationships in Drug Supply: State of Current Research. NBER Working Paper 29959. http://www.nber.org/papers/w29959.
Feng, J., and L. Maini. (2024). Demand Inertia and the Hidden Impact of Pharmacy Benefit Managers. Management Science, 70 (12): 8940–61.
Ho, K., and R. S. Lee. (2024). Contracting Over Pharmaceutical Formularies and Rebates. NBER Working Paper 32790. https://doi.org/10.3386/w32790.
Express Scripts Holding Company. (2017). Form 10-K: Annual Report for the Fiscal Year Ended December 31, 2016. U.S. Securities and Exchange Commission.
CVS Health Corporation. (2025). Form 10-K: Annual Report for the Fiscal Year ended December 31, 2024. U.S. Securities and Exchange Commission.
The Cigna Group. (2025). Form 10-K: Annual Report for the Fiscal Year Ended December 31, 2024. U.S. Securities and Exchange Commission.
Humana Inc. (2025). Form 10-K: Annual Report for the Fiscal Year Ended December 31, 2024. U.S. Securities and Exchange Commission.
Motheral, B. R., and K. A. Fairman. (2020). Changes in PBM Business Practices in 2019: True Innovation or More of the Same? Journal of Managed Care & Specialty Pharmacy, 26 (10): 1325–33.
Financial Accounting Standards Board. (2014). Accounting Standards Codification (ASC) 606-10-50-5 through 50-6: Revenue from Contracts with Customers — Disclosure.
Danzon, P. M. (2015). Pharmacy Benefit Management: Are Reporting Requirements Pro- or Anticompetitive? International Journal of the Economics of Business, 22 (2): 245–61.
Riccaboni, M., T. Swoboda and W. Van Dyck. (2022). Pharmaceutical Net Price Transparency Across European Markets: Insights From a Multi-agent Simulation Model. Health Policy, 126 (6): 534–40.
Kyle, M. K., and D. B. Ridley. (2007). Would Greater Transparency and Uniformity of Health Care Prices Benefit Poor Patients? Health Affairs, 26 (5): 1384–91.
Mead, M., and A. M. Ibrahim. (2024). Over- and Underreporting of Prices: Most Hospitals Are Not Compliant With the Hospital Price Transparency Rule. Health Affairs Scholar, 2 (9): qxae099.
UnitedHealth Group. (2025). Form 10-K: Annual Report for the Fiscal Year Ended December 31, 2024. U.S. Securities and Exchange Commission.
Footnotes
Measured by total claims processed.
Given the degree of vertical consolidation between PBMs and insurers/pharmacies since 2017, it has become more difficult to discern PBM profit margins.
While our paper’s scope narrowly focuses on the interaction between accounting principles and PBM profitability, there is a growing economic literature related to PBMs that may be of interest to some readers. A working paper by Brot-Goldberg et al. (2022) provides a good summary of the economic research.[20] More recent work has used economic models to explore whether PBMs affect drug prices and spending [21,22] and the role of vertical integration on drug access.[23]
We point readers who are interested in a full depiction of financial flows, product flows and contractual arrangements to Drug Channels.
DIRs usually occur in Medicare Part D plans and are any fee or payment adjustment between pharmacies and PBMs that occurs after the point of sale.[25]
In Section 4, we expand this framework to incorporate other PBM functions such as negotiating rebates as well as the impact of vertical integration. The functionality of PBMs in our simplified framework corresponds to PBMs in their earliest form, which served to process drug claims.[11]
It is worth noting that the role of spread pricing as a contributor to PBM profits has declined since 2016 [26]. This may reflect the proliferation of state-level legislation to prohibit the use of spread pricing in Medicaid and state-regulated plans.[27]
From EITF 99-19: “The Task Force reached a consensus that whether a company should recognize revenue based on (a) the gross amount … or (b) the net amount … is a matter of judgment that depends on the relevant facts and circumstances and that the factors or indicators set forth below should be considered in that evaluation. The Task Force reached a consensus that none of the indicators should be considered presumptive or determinative; however, the relative strength of each indicator should be considered.”[30]
In the case where a PBM is fully integrated with both the insurer and pharmacy, this justification for using a principal approach becomes weaker, since the reimbursements correspond to within-company transfers.
The effective date for ASC 606 was for reporting periods beginning after December 15, 2017, for publicly traded companies and after December 15, 2018, for nonprofits and private companies.[33]
Control refers to the ability to direct the use of a good or service and obtain substantially all of its benefits before transfer to the customer.
In its 2010 annual 10-K report, CVS noted that it determines whether it is the principal or agent for its retail pharmacy network transactions on a contract-by-contract basis and have determined that it is the principal in the majority of its contracts.[32] It is possible that other PBMs have either relied solely on an agent framework or used a mix of principal and agent accounting over time, but a systematic review of all historic annual 10-K filings is outside the scope of this paper. Table 4 in the appendix provides details related to revenue recognition as reported by four large healthcare conglomerates in their 10-K annual filings for 2024.
While we do not consider an example with DIR payments, this extension would modify the payments from the example with rebates.
To simplify the exposition, we log the collected rebates from the manufacturer as PBM revenues and the rebate pass-through payments to the insurer as expenses. However, in reality, firms may record the values differently in their financial statements. For example, the footnotes of Express Scripts’ 2016 financial statements mention that “rebates and administrative fees earned for the administration of this [rebate] program, performed in conjunction with claims processing and home delivery services provided to clients, are recorded as a reduction of cost of revenues and the portion of the rebate and administrative fees payable to customers is treated as a reduction of revenues.”[34]
We should be cautious using disaggregated reporting to compare vertically integrated PBMs with stand-alone ones since internal transfer prices within a vertically consolidated firm might not be reflective of the “true” commercial prices faced by stand-alone PBMs.[42]
The figure is the gross-to-net bubble, which is the gap between list and net prices.
We are unaware of research that links transparency to drug prices. This is a potential area for future work.
Sood explains how newer, alternative PBMs often have business with legacy firms
Joyce explains why patients’ drug costs may vary from pharmacy to pharmacy
Narrower Coverage of MS Drugs Tied to Higher Relapse Risk
Broad formulary exclusions of specialty drugs may make it harder for chronic disease patients to get the treatment that works best for them
Medicare drug plans are increasingly excluding coverage of new specialty drugs that treat complex conditions like cancers and autoimmune diseases. New research from the USC Schaeffer Center shows how these barriers may come at a cost to patients’ health.
In a large study of Medicare beneficiaries with multiple sclerosis (MS), researchers found those in plans with broader coverage of MS treatments had significantly lower risk of developing new or worsening symptoms months later. The findings, published Aug. 1 in JAMA Network Open, suggest that plans with narrower coverage of MS treatments may be linked to worse health outcomes.
Pharmacy benefit managers, who negotiate drug benefits on behalf of plans, often leverage the threat of excluding a new medication from their list of covered drugs, or formulary, to extract deeper manufacturer rebates or discounts. While this can be an effective strategy to contain costs when cheaper generics or similar options are available to patients, it can be problematic for complex conditions since treatments often work differently in each patient.
“Patients with MS may need to try multiple drugs to find what works best for them. Broad formulary exclusions ultimately undermine the individualized care these patients need,” said lead author Geoffrey Joyce, director of health policy at the Schaeffer Center and chair of the Department of Pharmaceutical and Health Economics at the USC Mann School of Pharmacy and Pharmaceutical Sciences.
Widespread formulary exclusions
Numerous medicines have been approved in recent years to help patients manage symptoms of MS, a potentially debilitating disease that attacks the central nervous system. While there is no cure, a growing number of treatments can help slow disease progression, reduce relapses and limit new disease activity.
As of 2022, there were 15 oral and injectable MS drugs across seven types of “classes,” or groups of medication that work in similar ways. These treatments are all pricey, usually costing $5,000 to $10,000 per prescription, though some range much higher. Since they are not included in Medicare’s “protected classes” of drugs, private insurers that administer Part D plans have greater leeway to refuse coverage or impose restrictions on their use.
The researchers examined drug coverage for 85,000 Medicare beneficiaries with relapse-remitting MS—the most common form of the disease, marked by periodic flare-ups of neurological symptoms. The beneficiaries either received Part D coverage through a stand-alone plan or as part of a more comprehensive Medicare Advantage plan in the previous year. Researchers found:
Stand-alone plans most commonly included just four of the 15 available drugs (across four classes) on their formulary. Medicare Advantage coverage was broader, typically covering eight drugs across five classes.
Just a few drugs were covered by nearly all Medicare plans, while many others were excluded by almost all stand-alone plans and most Medicare Advantage drug plans. That includes older drugs like teriflunomide, which was approved in 2012.
For those in Medicare Advantage drug plans, having broader formulary coverage was associated with 8-12% lower odds of MS relapse during the current quarter. For those in stand-alone plans with broader coverage, the odds were 6-9% lower.
Alternative financing options may help expand access
The researchers warned that formulary exclusions for specialty drugs could become more widespread under Part D’s new out-of-pocket cap, which limits beneficiaries’ annual drug spending to $2,000 per year while shifting more costs onto plans. Since only covered drugs count toward the cap, plans may be further incentivized to exclude high-cost treatments.
Creative financing strategies for such medications could encourage broader coverage, the researchers said. For instance, arrangements that link payments to health outcomes or subscription-based models in which insurers pay a flat fee to manufacturers for unlimited access to a specific drug or set of drugs could help plans manage the long-term costs of specialty drugs.
“Innovative new treatments have made it possible to slow or prevent symptoms for some of the most complex diseases, but costs remain a challenge,” Joyce said. “We must find sustainable ways to ensure all patients can access these potentially life-changing treatments.”
About the study
The study was also co-authored by Barbara Blaylock of Blaylock Health Economics LLC and Karen Van Nuys, a retired senior scholar at the Schaeffer Center. The research was supported by grants from the American Medical Association and grant R01-AG055401 from the National Institute on Aging at the National Institutes of Health.
Eye on PBMs
Following the Money
Schaeffer research reveals how inefficiencies in the drug supply chain increase costs and limit access
Delinking PBM Compensation From Drug List Prices Could Unleash Major Savings
Reforming payments to PBMs and other pharmacy middlemen could lower annual U.S. drug spending by nearly $100 billion, analysis finds
Breaking the link between prescription drug list prices and compensation to middlemen like pharmacy benefit managers (PBMs) could cut a significant portion of the nation’s annual drug tab, finds a new analysis from the USC Schaeffer Center for Health Policy & Economics.
PBMs, who negotiate drug benefits on behalf of insurers and employers, are typically paid based on a percentage of a drug’s list price before rebates and other discounts are applied. Federal and state policymakers have proposed delinking PBM compensation from list prices in response to evidence that PBMs often steer patients toward higher-priced drugs — even when cheaper alternatives are available — to boost their own profits.
Shifting instead to a transparent, fixed payment model for PBMs and other intermediaries in the prescription drug supply chain would reduce annual net drug spending by $95.4 billion (or nearly 15%) without undermining pharmaceutical innovation, according to research from Schaeffer Center Director of Health Policy Geoffrey Joyce published July 24 in Health Affairs Scholar.
Fair Compensation
The U.S. spent $650 billion on prescription drugs in 2023 after factoring in discounts, with about one-third ($215 billion) flowing to PBMs, wholesalers and pharmacies — though the exact division of these costs is unclear. However, using simplified estimates, Joyce finds spending on these intermediaries would have dropped to $119.6 billion under fair and transparent compensation models.
Here’s how those costs break down:
PBMs: A fixed administrative fee of $4 per claim would result in total costs of $27.6 billion in 2023. Payments to PBMs could be reasonably adjusted for hitting cost and quality targets.
Wholesalers: Entities that purchase drugs from manufacturers in bulk add about a 3% markup on average to the list price before selling to pharmacies, hospitals and long-term care facilities. Applying that markup to net prices instead would yield $19.5 billion in total revenues, less than the $27.5 billion these firms reported in 2023.
Pharmacies: A $10.50 per prescription dispensing fee would have generated gross venues of $72.5 billion. That rate is commonly used by state Medicaid programs and aligns with the pricing model used by Mark Cuban’s Cost Plus Drug Company.
Reform Implications
A proposal to delink PBM compensation from list prices was included in earlier drafts of sweeping domestic policy legislation before it was dropped from the final version that was recently enacted. However, policymakers have expressed continued interest in reforming PBM practices amid growing evidence that these firms use their considerable market power to artificially inflate drug prices and restrict access to essential medications.
Joyce warns that some commonly proposed reforms, such as those aimed at curbing consolidation and increasing PBM transparency, are too modest to meaningfully change PBM behavior given how quickly the industry has shifted tactics in the face of heightened scrutiny.
“Delinking compensation from list prices is the clearest and most effective way to tackle the warped incentives in the prescription drug supply chain that drive up costs for patients without adversely affecting manufacturers’ incentive to innovate,” says Joyce, who is also chair of the Department of Pharmaceutical and Health Economics at the USC Mann School of Pharmacy and Pharmaceutical Sciences.
Eye on PBMs
Following the Money
Schaeffer research reveals how inefficiencies in the drug supply chain increase costs and limit access
A substantial portion of what Americans pay for prescription drugs is captured by intermediaries in the distribution system, some of whom neither develop nor directly provide these medications to patients.
Vertically-integrated pharmacy benefit managers-insurers-pharmacies earn higher profits from their investments compared to the average firm in the S&P 500, suggesting lack of competition in these markets. This trend in vertical integration raises significant antitrust concerns.
Our study of the insulin market shows that PBMs are doing part of their job—negotiating lower prices from manufacturers—but failing at another crucial aspect: ensuring these savings benefited patients and the healthcare system more broadly.
The current system of confidential rebates and rising list prices benefits all firms in the pharmaceutical supply chain at the expense of the American patient.
Increasing price transparency, giving PBMs the fiduciary responsibility to act in the best of interests of health plans and their members, reforming rebates, and addressing antitrust concerns from vertical integration can help make the prescription drug market more competitive and work better for the American patient.
Full testimony is available. Schaeffer Center research on PBMs is available here.
Arkansas’ first-in-the-nation law banning PBM ownership of pharmacies should be implemented slowly to ensure access, Qato says
Pharmacies Excluded from Preferred Networks Face Much Higher Risk of Closure
Study reveals how Medicare Part D networks managed by drug middlemen are contributing to widespread pharmacy closures
Retail pharmacies excluded from Medicare Part D networks maintained by drug benefits middlemen were much more likely to close over the past decade, according to new research from USC published in Health Affairs.
Independent pharmacies and those located in low-income, Black or Latino communities were more likely to be excluded from “preferred” pharmacy networks, putting them at higher risk of closure, researchers also found.
The study is the first to examine how substantial growth of preferred pharmacy networks in Medicare’s prescription drug benefit may have contributed to the struggles of retail pharmacies, which the researchers in an earlier study found have closed in unprecedented numbers. Pharmacy benefit managers (PBMs), which control drug benefits on behalf of employers and insurers, steer beneficiaries away from non-preferred pharmacies by imposing higher out-of-pocket costs at those locations.
The use of preferred pharmacy networks tripled to 44% among Medicare Advantage drug plans over the past decade and grew from 70% to 98% among stand-alone Medicare drug plans, researchers found.
This shift coincided with a wave of mergers involving the nation’s largest PBMs and retail pharmacy chains, which may have incentivized PBMs to nudge patients to pharmacies they are affiliated with — and away from competitors. The Federal Trade Commission in an interim report last year alleged that PBMs “routinely create narrow and preferred pharmacy networks” to favor their own pharmacies and exclude rivals.
“Our study demonstrates that pharmacy networks in Medicare Part D — which are designed by PBMs — are contributing to the growing problem of pharmacy closures, particularly in communities that already lack convenient access to pharmacies,” said study senior author Dima Mazen Qato, a senior scholar at the USC Schaeffer Center for Health Policy & Economics and the Hygeia Centennial Chair at the USC Mann School of Pharmacy and Pharmaceutical Sciences.
Disparities in Network Participation
Researchers analyzed pharmacy closures between 2014 and 2023. Among their key findings:
Pharmacies preferred by fewer than half of plans were 1.7 times more likely to close than those preferred by most plans in the past decade, after accounting for factors such as ownership and neighborhood demographics.
Pharmacies not participating as preferred pharmacies for any Part D plan were 3.1 times more likely to close, and pharmacies that were entirely out of network were 4.5 times more likely to close.
While 4 in 10 pharmacies had independent ownership in 2023, just 0.8% of these were preferred by most plans. Meanwhile, 70% of chain pharmacies were preferred by most plans.
About 3 in 10 pharmacies in Black, Latino or low-income neighborhoods were preferred by most plans that year, compared to nearly half of pharmacies in higher-income or white neighborhoods.
Network participation varies considerably across the country. In a diverse group of 13 states that includes New York and North Dakota, fewer than one-third of pharmacies were preferred by most plans.
Policy Implications
“Our findings demonstrate that there is a need for federal PBM reform to expand preferred pharmacy networks,” said the study’s first author, Jenny Guadamuz, an assistant professor of health policy and management at the University of California Berkeley School of Public Health. “New legislation might prove elusive but there may be room for regulator actions.”
The researchers point to actions the Centers for Medicare and Medicaid Services could take, including considering provisions that ensure Part D plans meet preferred pharmacy access standards and mandating preferred status. Regulators and policymakers could also mandate increases in pharmacy reimbursement, especially for critical access pharmacies at risk for closure and if they are serving “pharmacy deserts.”
About This Study
Other authors are Genevieve Kanter of USC and G. Caleb Alexander of Johns Hopkins University. Research reported in this publication was supported by the National Institute on Aging of the National Institutes of Health (R01AG080090). The content is solely the responsibility of the authors and does not necessarily represent the official views of the National Institutes of Health. See the study for author disclosures.
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Medicare Part D Preferred Pharmacy Networks And The Risk For Pharmacy Closure, 2014–23
Abstract
Medicare Part D plans incentivize the use of specific pharmacies through preferred networks. We found that independent pharmacies and pharmacies in low-income, Black, and Latinx neighborhoods were less likely to be preferred by most Part D plans than chains and pharmacies in other neighborhoods. Pharmacies that were not preferred by most plans were 70–350 percent more likely to close than other pharmacies.
The full study can be viewed at Health Affairs. A press release on the study is available here.
Guadamuz, J. S., & Qato, D. (2023, June). Medicare Part D Preferred Pharmacy Networks and Risk of Pharmacy Closure, 2014-2022. Health Affairs.
States are likely to pursue PBM legislation in the absence of federal action, Joyce says
Cost Sharing for Preferred Branded Drugs in Medicare Part D
Most individuals in the US are concerned about prescription drug affordability. For patients facing co-insurance (a percentage of the drug price), out-of-pocket burden increases when list prices increase, as they have for brand-name drugs over the last decade. Manufacturer rebates and discounts, which have also increased, reduce net drug prices but are rarely shared with patients at the pharmacy counter. Moreover, growing rebates and discounts may further increase list prices, exacerbating out-of-pocket burden for patients with co-insurance. Patients with co-payments, which are flat fees, are largely shielded from these dynamics.
The full study can be viewed at JAMA. A press release on the study is available here.
Trish E, Blaylock B, Van Nuys K. Cost Sharing for Preferred Branded Drugs in Medicare Part D. JAMA. Published online February 14, 2025. doi:10.1001/jama.2024.28092
