Considerations for Navigating Current State and Future Federal Regulations of Pharmacy Benefit Managers (PBMs)

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Pharmacy Benefit Managers (PBMs) have been an important piece of the prescription drug supply chain for decades. With their advent in the 1960s, these entities were initially created to negotiate drug prices with drug manufacturers on behalf of their clients, which included insurance companies and self-insured employers. Despite these modest beginnings, PBMs have substantially expanded their presence and profit margins within the healthcare industry. PBMs now act as powerful middlemen in the process of approving the use and price of prescription drugs covered by health plans or self-insured employers. From constructing the formularies that determine what drugs will be covered by an insurance company, to negotiating prices for these drugs, to even owning multiple components within the drug supply chain, PBMs have significantly expanded their role in the modern-day healthcare industry.

PBMs in the Healthcare Industry

The current role that PBMs play in the prescription drug chain and healthcare industry at large has raised concerns for legislators on both sides of the aisle as well as the American public. The main question being asked is “What do PBMs do?”

It is clear that PBMs exercise an increasing amount of control over multiple steps in the prescription drug process, including the approval of the type of drug covered by an insurer, setting the pricing of drugs that are prescribed by physicians, consumed by patients, and paid for by employers, as well as determining which pharmacies are allowed to dispense certain medications. Despite the expanded role and influence within the prescription drug industry, there is a perceived lack of transparency and oversight over how PBMs operate. Significant profits leave consumers and their elected officials calling for more transparency about PBMs; how they operate and how they are paid.

Rebates and “Spread Pricing”

PBMs utilize two main practices to maximize their revenues: rebates and “spread pricing.” PBMs negotiate prices between drug manufacturers and health insurers in the prescription drug chain and sometimes keep a portion of the rebates that they negotiate.

Rebates

Some federal and state legislators believe that PBMs should pass more of these rebate savings on to the insurer and patient. PBMs are responsible for the compilation of the formularies that determine what drugs a health insurer will cover. These formularies are tiered lists, with less expensive drugs being higher up and subsequently preferred by patients. Drug manufacturers will negotiate a “rebate” with the PBM in order to get their drug higher on the formulary.

This results in the pharmacy paying less for the drug and the PBM potentially keeping some of that rebate. For example, if there is a high-priced drug, the PBM will negotiate a large discount and subsequently make a profit from the difference in price between the acquisition cost and the amount charged to the insurer. Due to the lucrative nature of this rebate practice, PBMs could be incentivized to direct patients to more expensive drugs which results in higher rebates for the PBMs, instead of the full discount being passed down the drug supply chain. Often, patients bear the brunt of this difference because they are charged for the drug at a higher rate, as set forth by the insurance company, than the price the PBM negotiated with the drug manufacturer.

“Spread Pricing”

Spread pricing is a practice in which the PBM will receive higher payments for a drug from a payer-insurer than the amount the PBM will ultimately pay the retail pharmacy for dispensing the drug. Thus, the PBM may retain the difference for itself as profit. This can be considered a markup on prescription cost. If PBMs have the power to dictate pricing and to steer patients to certain affiliated pharmacies, the impact of spread pricing can become more controversial.

Recently tracked dispensing patterns suggest that PBMs may be directing the more profitable prescriptions to their own affiliated pharmacies. Some states and members of Congress are concerned that this practice can increase insurance premiums while unduly burdening smaller, local, independent pharmacies. This could ultimately cause greater difficulty for patients who have to pay higher prices and for smaller independent pharmacies who dispense those medications.

Federal Regulation of PBMs

The United States Congress has been focused on the operation of PBMs for some time. Nonetheless, Congress has been unable to pass comprehensive federal legislation addressing PBM reform. In early 2025, the Bipartisan Health Care Act (the “Act”), which would have addressed remedying the lack of transparency by PBMs when billing payer-insurers, prohibited spread pricing, prohibited PBMs that contract with Medicare from receiving anything beyond “bona fide service fees,” and discontinued PBM rebate practices, failed to pass the U.S. Senate. In 2023, Senators introduced the Pharmacy Benefit Manager Transparency Act in an effort to require increased transparency by PBMs during pricing negotiations with manufacturers and regarding rebates, ultimately requiring PBMs to pass along those savings to health plans and patients and report spread pricing practices to the Federal Trade Commission; however, despite being the Senate Calendar, the Act has not moved forward. Most recently, the “Big Beautiful Bill”, the newest and most comprehensive piece of federal legislation, also failed to address PBM reform, despite proposed provisions to prohibit spread pricing and implement pass through pricing.

In the absence of federal regulation and reform of PBMs, states have begun the effort to regulate and reform the PBM industry. Recently, there has been a trend toward state legislatures taking PBM reform into their own hands, with all 50 states enacting some form of PBM regulatory legislation since 2017. In 2024 alone, 33 bills were enacted in 20 states related to the regulation of PBMs. These pieces of legislation included a variety of tactics to address PBM activity, including spread pricing prohibitions, the promotion of 340(b) pharmacies that have been adversely affected by PBM practices, and mandates for increased reporting of PBM activity.

An Overview of How States Have Regulated PBMs over the Past Two Years:

Some examples of this trend can be seen in states including Vermont, Idaho, and West Virginia. West Virginia spearheaded this movement by enacting the first “Share the Savings” law in 2017. This law mandated that insurers and PBMs refrain from keeping the rebates and discounts from the manufacturer as profit and, instead, pass those savings directly to patient-consumers. In 2024, Vermont and Idaho enacted laws which prohibited spread pricing. Most recently, Massachusetts approved a bill, which will go into effect in 2026, that calls for increased data reporting and licensing of PBMs.

In April of 2025, Arkansas enacted “An Act to Prohibit a PBM from Obtaining Certain Pharmacy Permits” or Act 624, which prohibits PBMs from owning or operating pharmacies in the state. This is one of the more stringent examples of PBM regulation that has been seen from a state to date. Subsequently, it has raised questions regarding states’ power to regulate PBMs and potential preemption by federal law. If a state law and existing federal law directly compete, then the federal law will take priority. In other words, it would invalidate the state law and allow the applicable federal law to control.

One of the challenges created from the patchwork of state regulation of PBMs without federal oversight is how PBMs and other industry stakeholders manage the state-to-state regulation across the country. It is often difficult to navigate the differing regulations established by states for companies operating on a national scale. Another consideration is whether states have the authority to regulate PBMs in certain areas. In addition, the issues posed by federal preemption and other federal-state conflicts of law raises the question of whether the regulation of PBMs is best addressed at the federal or state level. Although these recent Congressional efforts have not yet succeeded, there is still bipartisan support for this sort of reform at the federal level.

Another developing trend is that several large insurance companies now own many of the largest PBMs, which fundamentally changes the dynamic of the PBMs’ operation. Some versions of these recent consolidations of insurance companies include one health insurance company who owns the PBM, the specialty drug manufacturer, pharmacy, and the provider network. Some state and federal legislators have asked: If one entity owns the health plan, the pharmacy, and the PBM, is it appropriate to allow that entity to determine the price of pharmaceuticals for the patients and employers? With those functions condensed to one actor, legislators and their constituents are beginning to wonder if PBMs should be allowed to have this much power. State and federal regulations are focused on these scenarios, and we expect to see more proposed state and federal legislation in this area.

PBM Litigation Related to Regulation of PBMs by States

In a 2020 case, Rutledge v. Pharmaceutical Care Management Association, the United States Supreme Court upheld states’ authority to regulate PBM reimbursement rates. Despite this ruling and others which have suggested that states have some power to regulate PBMs, some PBMs continue to challenge the legality of state regulation.

On April 16, 2025, Arkansas enacted Act 624 which prohibits PBMs owning pharmacies in the state of Arkansas. Shortly thereafter, CVS Caremark and Cigna filed lawsuits (separately) seeking to block this legislation. The Plaintiff PBMs claim that this state legislation is unconstitutional, as it is preempted by federal law, ERISA, and is an overall bad policy for the people of Arkansas. If the Court agrees with the PBMs, this could impact states’ power to regulate PBMs. On the other hand, if the Court denies the PBMs' efforts, it is likely that there will be a rise in states regulating PBMs as they will likely find themselves emboldened by the decision.

The federal preemption question differs with each piece of legislation. In the context of ERISA, the extent to which a federal law that covers certain insurance and self-insured companies interfering with a health benefits plan that is regulated by ERISA could be decisive. There are other litigation challenges that PBMs could use to challenge states’ attempts to regulate PBMs such as the dormant commerce clause, which limits the amount of power states have regarding regulating interstate commerce. Other federal programs could also call into question the efficacy of state regulation of PBMs.

PBMs Will Be Regulated: Will It Be by States or The Federal Government?

The trend toward additional regulation of PBMs does not appear to be lessening. In the short term, it seems clear that states will continue to attempt to regulate PBMs in the absence of any applicable federal legislation. It remains to be seen whether the U.S. Congress will pass comprehensive PBM regulation despite popular and bipartisan support for this type of federal legislation. Until then, state-by-state regulation of PBMs will likely remain, with possible litigation challenges by PBMs to such regulation. It is also possible that we could see an Executive Order that addresses PBM regulation issued by President Trump at some point in the near future.

Over time, the states will continue to construct and revise their own regulatory frameworks, which will ultimately pose compliance issues for PBMs and potentially other parties in the drug supply chain. Many states are seeking to regulate PBMs, but the issues they choose to address in their legislation differ. Until federal legislation is passed, PBMs, and the entities which contract with them, will have to monitor the laws and regulations of each state in which the PBM operates to ensure ongoing compliance with these state laws and regulations. This will make PBM operations more complicated and compliance more difficult. Federal legislation would help solve this compliance issue as well as address the concerns of Americans in a more comprehensive way, but until then, states will remain the primary source of PBM regulation.