The PBM Effect: Regulatory And Market Implications For Life Sciences Companies And Healthcare Providers

Pharmacy Benefit Managers (PBMs) occupy a powerful and increasingly scrutinized position within the U.S. drug distribution and reimbursement system. Originally established to manage prescription drug benefits and negotiate manufacturer rebates on behalf of payors, PBMs have evolved into vertically integrated entities that influence nearly every stage of the pharmaceutical supply chain—from manufacturer contracting to pharmacy reimbursement and patient access. Their expanding role has triggered regulatory inquiries, litigation, and market instability that now demand the attention of every stakeholder in the life sciences and healthcare sectors.

The recent Life Sciences & Healthcare Summit held in Philadelphia examined these dynamics through the lens of compliance, transparency, and market reform. The discussion underscored that understanding the PBM model is no longer optional for manufacturers, plan sponsors, and providers—it is essential to mitigating risk and safeguarding profitability.

Vertical Integration and Market Control

The modern PBM bears little resemblance to its original administrative purpose. Over the past decade or two, mergers between PBMs, health insurers, and specialty pharmacies have created vertically integrated conglomerates that now dominate the prescription drug market. The three largest PBMs — Caremark (CVS Health), Express Scripts (Cigna), and OptumRx (UnitedHealth Group) — control an estimated 80 percent of the U.S. prescription drug claims.

These entities manage formularies, determine which pharmacies may participate in networks, negotiate rebate contracts with manufacturers, and influence both list and net pricing through opaque financial flows. In practical terms, PBMs are no longer intermediaries; they are market makers whose decisions dictate cost structures across the entire system.

Such concentration of power has produced profound downstream consequences. Independent pharmacies face declining reimbursement and increased audit exposure. Plan sponsors and employer health plans encounter rising drug spend that bears little correlation to true market prices. Manufacturers, meanwhile, must navigate rebate demands and formulary pressures that can distort pricing and access decisions.

The Gross-to-Net Bubble

At the center of these distortions lies the "gross-to-net bubble," the widening gap between a drug's list price and the actual net revenue received by manufacturers after rebates and fees. This bubble has grown exponentially as PBM rebate structures have expanded in both scale and complexity. According to Drug Channels Institute, the gross-to-net reduction for all brand-name drugs reached $356 billion.¹

Manufacturers often raise list prices to offset escalating rebate and administrative payments. The inflated list prices then cascade through the system, leading to higher patient cost-sharing, distorted plan spending, and suppressed pharmacy margins. The resulting feedback loop benefits PBMs—whose compensation frequently depends on the size of negotiated rebates—while creating inefficiencies that burden every other participant.

The gross-to-net bubble illustrates a core dysfunction in the drug channel: the absence of transparent value transfer. Without clear disclosure of rebate retention and spread pricing practices, neither regulators nor payors can evaluate whether PBM cost-containment strategies are actually reducing spend or merely redistributing profit.

Regulatory and Enforcement Landscape

Regulatory scrutiny of Pharmacy Benefit Managers has intensified at both the state and federal levels, marking a turning point in how these entities are monitored and held accountable. What was once a largely unregulated segment of the healthcare system has become a focal point for enforcement agencies, lawmakers, and litigators seeking to address the systemic drivers of high drug costs and limited market transparency.

At the federal level, the Federal Trade Commission (FTC) has taken unprecedented action. Following a multi-year investigation into the largest PBMs and their affiliated rebate aggregators, the agency recently issued its second interim staff report, which outlined extensive evidence that PBM business practices contribute to increased prescription drug costs, restricted competition, and reduced access for patients. The report described how vertically integrated PBMs leverage control over formularies, specialty pharmacies, and rebate negotiations to steer utilization and extract revenue at multiple points in the supply chain.

The FTC's findings culminated in the filing of a lawsuit against major PBMs and their parent companies, alleging anticompetitive conduct and market manipulation that distort drug pricing and harm both consumers and competitors. The Commission's action signals a major shift in federal enforcement strategy—from information gathering and oversight to direct litigation designed to reshape the structure of PBM operations nationwide.

At the state level, attorneys general, insurance regulators, and Medicaid agencies have initiated a wave of enforcement actions and audits focused on PBM transparency, spread pricing, and rebate pass-through obligations. While the approaches vary, the objectives are consistent: to uncover opaque pricing arrangements, prevent self-dealing among vertically integrated PBM entities, and protect public and private payors from inflated costs.

Many states have enacted or proposed legislation requiring PBMs to disclose rebate data, operate under fiduciary standards, or eliminate spread pricing altogether. Others have used consumer protection and antitrust statutes to pursue investigations and litigation aimed at recovering overpayments or penalizing deceptive conduct. This state-level enforcement surge reflects a growing consensus that federal oversight alone is insufficient to address the structural conflicts inherent in the PBM model.

Together, these developments illustrate a regulatory environment that is no longer willing to accept opacity as the status quo. The combined weight of federal litigation, FTC enforcement, and coordinated state investigations represents a sustained effort to recalibrate the balance of power within the drug distribution chain. The coming years are likely to see continued convergence between federal and state actions—creating both compliance challenges and strategic opportunities for life sciences companies, plan sponsors, and pharmacies that proactively align with emerging transparency and reporting standards.

Litigation Exposure for Plan Sponsors

One of the most consequential trends emerging from PBM reform is the rise of fiduciary-duty litigation against plan sponsors. Recent class actions filed against large employers allege that plan fiduciaries breached their ERISA obligations by failing to monitor PBM relationships, verify pricing accuracy, and ensure rebate pass-through.

These cases illustrate that employers can no longer rely on PBM self-reporting or assume contractual compliance. The Consolidated Appropriations Act of 2021 (CAA) reinforced this principle by granting plan sponsors the right to access detailed drug-pricing and rebate data. Failure to exercise this right may constitute imprudence under ERISA.

To mitigate exposure, plan sponsors should:

1. Conduct independent PBM audits at least annually;
2. Require full transparency regarding rebates, fees, and third-party aggregator relationships;
3. Consider designating an independent fiduciary to oversee pharmacy benefit arrangements; and
4. Revisit PBM contracts to ensure compliance with CAA disclosure requirements and fiduciary-duty standards.
5. Proactive governance in this area not only reduces litigation risk but also positions employers to achieve measurable drug-spend savings.

Implications for Pharmacies and Healthcare Providers

For pharmacies and healthcare providers, PBM oversight manifests through aggressive audit practices, reimbursement clawbacks, and network terminations. These actions often arise from alleged invoice discrepancies, prior-authorization documentation gaps, or dispensing irregularities identified through PBM algorithms.

Providers must therefore treat PBM compliance as an operational imperative. Key defensive measures include maintaining meticulous transaction documentation, contesting improper audit findings within contractual timeframes, and leveraging state pharmacy audit-fairness laws where applicable.

Forward-looking pharmacies are moving beyond reactive defense and adopting enterprise-level strategies to enhance sustainability. These include optimizing reimbursement analytics, persifying payer mix, expanding into clinical service lines, and investing in staff training to manage PBM audit interactions effectively. Such initiatives reflect a broader industry shift—from survival to profitability—within a regulatory environment that increasingly rewards transparency and operational discipline.

Moving Toward Transparency and Alignment

Across the life sciences continuum, the PBM effect is driving a realignment of incentives. Transparency is emerging as the defining principle for sustainable reform. Manufacturers are reevaluating channel strategies to ensure that rebate arrangements align with patient access objectives. Plan sponsors are reclaiming control through contract restructuring and independent oversight. Pharmacies are implementing compliance frameworks designed to withstand scrutiny and capture fair reimbursement.

This convergence of regulatory action, litigation pressure, and market adaptation points toward a new equilibrium—one in which value creation is measured not by rebate size but by verifiable cost reduction and patient benefit.

While the road to reform remains complex, stakeholders that embrace transparency and data integrity will be best positioned to thrive. Those that cling to opaque or outdated models will face growing compliance and reputational risks as federal and state authorities continue to unravel the financial architecture of the PBM system.

Conclusion

The PBM effect extends far beyond reimbursement mechanics; it represents a systemic challenge to fairness and accountability within the pharmaceutical marketplace. For life sciences companies, plan sponsors, and healthcare providers alike, understanding and addressing PBM influence is now a matter of strategic necessity.

As legislative and enforcement efforts accelerate, organizations that proactively adapt—through contractual transparency, operational rigor, and fiduciary diligence—will not only mitigate risk but also help restore integrity to the nation's drug-benefit landscape.

Footnote

1. Gross-to-Net Bubble Hits $356B in 2024 – But Growth Slows to 10-Year Low, Adam Fein, available at: https://www.drugchannels.net/2025/07/gross-to-net-bubble-hits-356b-in.html.

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