We Need Congress to Get Serious About Lowering Drug Costs

Rising prescription drug prices aren’t just a headline or voting issue – they hinder Americans’ ability to manage chronic conditions, adhere to treatment plans, and avoid hospitalization.

Behind rising drug prices are pharmacy benefit managers, middlemen in the prescription drug industry. Originally intended to liaise between health insurers, drug manufacturers, and pharmacies to save health insurers (i.e., their customers) money, they increasingly put profits ahead of patients. CVS Caremark, Express Scripts, and OptumRx, the three largest pharmacy benefit intermediaries, manage about 80% of prescription drug claims and generated over $400 billion in revenue in 2022.

These middlemen work for health insurers and ideally save them money by negotiating lower prices from drug manufacturers and managing prescription drug benefits, among other functions. However, the savings they generate are rarely shared with patients.

In 2024, out-of-pocket spending on prescription drugs reached $100 billion. That leaves some low-income or under-insured patients with conditions like diabetes, heart disease, and arthritis no choice but to ration medicine, skip doses, or go without. 

Policy reform is necessary to rein in pharmacy benefit managers’ influence over the drug supply chain, lower costs, and improve health outcomes for patients. While states have led the charge, a patchwork of state laws means little uniformity and unequal benefit.

Only Congress has the authority to create national change. A few basic reforms could go a long way.

Ban spread pricing

First, drug middlemen should be required to pass savings to insurers and enrollees. One way is to ban spread pricing.

Drug middlemen work for health insurers and use their money to pay pharmacies for dispensing medication to health plan enrollees. But middlemen sometimes charge health insurers more than what they pay the pharmacies to dispense medicine, which is called spread pricing. Middlemen often pocket the difference, or the spread, leaving patients with higher drug prices and insurance premiums.

This practice allowed the three largest pharmacy benefit management companies to generate about $1.5 billion in additional profit from about 50 drugs in just five years.

Congress is considering a few bills that address spread pricing. Analyses from the Congressional Budget Office suggest that banning spread pricing in Medicaid alone could save taxpayers anywhere from $700 million to $1 billion over the next decade.

Drug middlemen wield a great deal of power over the prescription drug industry and, thus, Americans’ health.

Disrupt vertical integration

Second, disrupting vertical integration will minimize pharmacy benefit managers’ control over the market.

Vertical integration occurs when one company owns multiple parts of the drug supply chain, such as the health insurer, the middleman, and the pharmacy. For example, CVS Health owns Aetna (the health insurer), Caremark (the middleman), and CVS Pharmacy.

Pharmacy benefit managers take advantage of this setup by restricting patients’ access to medication and steering them to their own pharmacies. This lets middlemen charge higher prices and keep profits in-house. From 2017 to 2022, the big three marked up specialty drugs for cancer, hypertension, and multiple sclerosis at their affiliated pharmacies by 1200% to 7700%, resulting in over $7 billion in profit.

Prohibiting parent companies from owning both a middleman and a pharmacy concurrently could fix this problem. Patients would enjoy greater access to medication, more choice, and lower costs.

There are no bills this year aimed at vertical integration, but Congress could look to the states for examples of successful legislation.

Realign Financial Incentives

Banning spread pricing and disrupting vertical integration aren’t enough. Drug middlemen should also be incentivized to put their customers first.

One way is to designate middlemen as fiduciaries, who have the legal duties of good faith, loyalty, and prudence. A fiduciary, such as an attorney, must always act in the best interest of their client.

Pharmacy benefit managers currently have no such guardrails. Designating them as fiduciaries under federal law, however, will force them to act in the interest of their customers and, in turn, health plan enrollees.

There are no federal bills this year designating pharmacy benefit managers as fiduciaries. However, Congress could follow the lead of states like Vermont, which requires these companies to be categorized as fiduciaries when doing business within their borders.

Squash Shapeshifting

Drug middlemen will inevitably find ways to maximize profits despite new laws and regulations. Anticipating this “shapeshifting” will be critical to sustained reform.

Middlemen shapeshift when they rename revenue or reshuffle operations to evade regulation. For example, the three largest middlemen have created subsidiaries that perform some pharmacy benefit manager functions but sit outside the scope of regulation.

Experts suggest writing reform laws that encompass all intermediaries in the drug supply chain instead of restricting the language to drug middlemen. Congress could also require drug middlemen to report certain financial data from themselves and all subsidiaries under their purview. Several bills this Congress mandate increased transparency and could be amended to broaden their scope.

Drug middlemen wield a great deal of power over the prescription drug industry and, thus, Americans’ health. Reform is necessary to ensure they are putting customers first. But effective and lasting reform will require both federal and state policy. The states are already doing their part, and it’s time for Congress to join.