Prescription drug spending in the United States is expected to rise sharply in 2026, prompting increased scrutiny of the pharmaceutical supply chain. Pharmacy benefit managers (PBMs), which negotiate discounts and rebates with drug manufacturers on behalf of insurers and employers, have come under fire for their role in driving up healthcare costs. Critics argue that PBMs act as unnecessary middlemen, ultimately leading to higher prices for consumers.
In response to these concerns, policymakers at both the federal and state levels are proposing reforms aimed at increasing transparency in PBM operations. These reforms include mandates for 100 percent pass-through of manufacturer rebates and the prohibition of “spread pricing,” where PBMs charge payers more for drugs than they pay pharmacies, pocketing the difference. Legislation introduced in the U.S. House of Representatives reflects the growing momentum behind these initiatives.
While these reforms may seem like common-sense corrections to reduce drug costs, their impact on the market dynamics remains uncertain. Critics of the PBM market point out that it is dominated by a few large firms but also includes independent and mid-sized PBMs that offer customized benefit designs and pricing arrangements. Mandating a uniform compensation structure could stifle competition and limit choices for purchasers.
Advocates of mandatory rebate pass-through argue that it promotes transparency, but its economic impact may disproportionately affect smaller PBMs. Larger PBMs with diversified operations can easily shift margins to offset lost revenue from rebates, while independent PBMs may struggle to adapt. Mandates could also infringe on employer autonomy in selecting service providers and limit their ability to negotiate performance-based contracts.
The unintended consequences of blunt regulation could lead to the exit of smaller PBMs from the market, further consolidating power among larger firms. This consolidation could limit choices for purchasers, reduce competition, and potentially harm manufacturers by narrowing the pool of intermediaries.
Effective PBM reform should prioritize empowering purchasers to make informed decisions rather than dictating business models. Policies that preserve contractual flexibility are more likely to sustain competition and innovation in the market. Lawmakers should be cautious not to inadvertently dismantle the competitive landscape that drives market discipline. By designing reforms that take market structure into account, policymakers can achieve the goal of reducing drug costs while promoting a competitive and diverse pharmaceutical supply chain.
