PBM Reform Could Save Almost $100 Billion in U.S. Drug Spending

Reforming payments to pharmacy benefit managers could lower annual U.S. drug spending by nearly $100 billion, finds a new study from the USC Schaeffer Center for Health Policy & Economics. Specifically, delinking PBM compensation from list prices of drugs would result in significant savings, finds new research recently published in Health Affairs Scholar.

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 Schaeffer Center director of Health Policy Geoffrey Joyce, Ph.D.

Geoffrey Joyce, Ph.D.

“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,” Joyce said in a news release. He is also chair of the Department of Pharmaceutical and Health Economics at the USC Mann School of Pharmacy and Pharmaceutical Sciences.

In his review, Joyce and his colleagues analyzed annual drug spending in the United States from 2018 to 2023 at different levels based on IQVIA's Longitudinal Access and Adjudicated Data (LAAD) Sample Claims Data and CMS National Health Expenditures.

They found that the United States spent $650 billion on prescription drugs in 2023 after factoring in discounts, with about one-third ($215 billion) flowing to PBMs, wholesalers and pharmacies. But Joyce said how this is distributed among PBMs, wholesalers and pharmacies is unclear.

“A lack of transparency and the inability of plan sponsors to assess how much PBMs generate in savings and how much they retain for themselves is the root issue, with plan sponsors and others having little to no ability to monitor PBM behavior,” Joyce wrote in the paper.

He finds that spending on these intermediaries would have dropped to $119.6 billion under fair and transparent compensation models. In his review, here is how that breaks 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 revenue 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.

Related: States Become More Aggressive with PBM Reform

Over the last few years, Congress has tried to pass some type of reform of PBMs. There continues to be bipartisan agreement on the need for change in PBMs’ business practices, but little agreement on what that should look like.

In the void left by the absence of reform at the national level, states have stepped in. In 2024 alone, there were 33 bills passed focused on PBM reform across about 20 states. All 50 states are currently considering bills that would impact PBMs or drug benefits.

But 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. Only delinking compensation from the list price of a drug throughout the supply chain will lower drug spending.