How DTC Drug Sales Undermine the PBM Rebate Machine

If you wanted to design a health insurance system to keep drug prices high, you’d build exactly what the United States has today: a marketplace where patients never see real prices, can’t compare options, and are steered toward expensive drugs because pharmacy benefit managers (PBMs) profit the most from them. Instead of competition disciplining prices, backroom negotiations determine what medicines people take and how much they pay—and consumers bear the cost.

Drug prices can be inflated by various factors, but the most important today is that most medicines are disconnected from the market forces that would drive prices down. The medicines patients routinely take—and what those medicines cost—are determined not only by doctors, but also by PBMs and pharmaceutical manufacturers behind closed doors. Patients are cut out, often leaving them purchasing more expensive drugs that generate larger rebates for PBMs instead of less expensive generic alternatives. This disconnect prevents consumers from choosing lower-cost medicines.

The reason PBMs favor higher-cost drugs is the rebates manufacturers offer—which PBMs are not required to pass on to patients. If a PBM can facilitate the purchase of a $5 generic or a $50 brand-name that includes a $30 rebate, the PBM has a clear financial incentive to push the latter even though it is not aligned with patients’ best interests. In the first case, the PBM charges a patient’s insurer $5. In the second, it can charge $50 and keep the $30 rebate. When PBMs charge insurers, it increases their costs leading insurers to raise premiums to pay for it.

Obscuring the true price of medicines behind opaque negotiations, insurance cost-sharing, and copays severs consumers from prices and prevents competition from driving costs down. Most prescriptions Americans buy are routine, repeated transactions—the exact type of purchases where markets are most effective at lowering prices. When patients can see that the brand-name drug costs ten times more than an equivalent generic costs and choose accordingly, brand-name manufacturers are pressured to reduce prices, and generics are pressured to compete with each other. The result is competitive prices instead of negotiated high ones.

While it may sound fanciful that patients would shop around for prescriptions, it is exactly what happens in the over-the-counter medicine market all the time, and there is no reason to think it couldn’t work for routinely taken prescriptions. In fact, direct-to-consumer (DTC) pharmaceutical sales are already doing just that. Companies like Eli Lilly, Pfizer, and more have already begun selling some medicines directly online, but the number of drugs offered must grow for DTC to become a viable alternative for more consumers and to encourage insurers to design plans that incorporate it.

Health insurance has taken over so much of routine care that it isn’t real insurance; it is a prepayment system for predictable care and medicines. By moving routine purchasing decisions back into patients’ hands, PBMs lose much of their ability to inflate drug prices, insurers face lower costs, and competitive pressure pushes premiums down. With downward pressure on both drug and insurance prices, patients keep more of their money while still receiving the medicines they need.

Even for those who stay within the current insurance system, the patients who choose lower-cost plans paired with cash purchases of pharmaceuticals help create real prices—benchmarks patients can use hold insurers accountable, and insurers can use to hold PBMs accountable. As in other industries, PBMs will need to justify charging more than a drug’s retail price based on the services they provide. Instead of hiding true prices, PBMs will be forced to operate in a market where everyone knows what a drug should cost, exposing artificial markups.

The rapid expansion of DTC pharmaceutical sales shows that competitive drug pricing emerges when PBMs are removed from the equation. Their central role is not a necessity; it is a consequence of an insurance system stretched far beyond its proper function. As more patients purchase medicines directly—and more insurers redesign plans around transparent, upfront pricing—the PBM model will collapse under its own inefficiencies. Empowering consumers and restoring real market forces is the surest way to lower drug prices and end the rebate-driven distortions that have plagued the system for decades.

Justin Leventhal is a senior policy analyst for the American Consumer Institute, a nonprofit education and research organization that advocates for consumers through evidence-based analysis and data. Visit www.TheAmericanConsumer.Org or follow us on X @ConsumerPal.