The Economic and Legal Problems With PBM Pharmacy Ownership Bans
Updated: 3 days ago
State PBM pharmacy ownership bans leave the government distortions behind high drug prices intact.
State lawmakers have found a convenient villain for high prescription drug prices: pharmacy benefit managers (PBMs). Arkansas enacted a pharmacy ownership ban; Tennessee followed with restrictions on common ownership of pharmacies, insurers, and PBMs, beginning in July 2028. But breaking up these businesses does not establish that patients will pay less.
States should abandon ownership bans. At a minimum, they should assess the effects of existing interventions before adding another.
Recent congressional action and Federal Trade Commission (FTC) settlements address practices cited to justify these bans. Their results remain to be seen. Meanwhile, ownership restrictions leave deeper government distortions intact. Respect for the rule of law and freedom of contract should guide policymakers in Washington and state capitals alike: enforce contracts and address unlawful conduct, but require evidence before prescribing how businesses must organize or price their services.
What PBMs do for patients and purchasers
An employer or insurer hires a PBM to manage prescription drug benefits. The PBM negotiates manufacturer discounts, establishes covered-drug lists and contracts with pharmacies to dispense prescriptions at agreed reimbursement rates. The patient pays the pharmacy any required copayment, coinsurance or deductible; the PBM processes the claim and typically reimburses the pharmacy on the plan's behalf. Manufacturers may later pay rebates through the PBM, which passes those amounts to the employer or insurer under their contract.
By pooling purchasing power, PBMs can negotiate terms unavailable to individual patients. But a patient's deductible or coinsurance may reflect a price before manufacturer rebates. A later rebate lowers the plan's cost without necessarily lowering that patient's pharmacy bill. The FTC has also reported substantial markups by leading PBMs on selected specialty generic drugs. Those concerns warrant examination; they do not establish that pharmacy ownership causes the harm or that divestiture will remedy it.
Common ownership can coordinate dispensing and specialty care, while creating incentives to favor affiliated pharmacies. Separation changes how that work is organized; it does not eliminate the need for it. Replacing an integrated arrangement with separate contracts may introduce costs or disrupt access. Patient welfare depends on those tradeoffs.
Government rules shape the prices PBMs negotiate
From an applied Austrian economics perspective, government's direction of drug markets is the central structural problem. Consider Medicaid's best-price rule: a deeper discount to a commercial buyer can trigger larger mandatory rebates on Medicaid sales. The Congressional Budget Office explains that this can discourage discounts and raise average brand-name prices. Under 340B, eligible providers buy drugs at mandatory discounts but may receive much higher reimbursement. The resulting margin can encourage use of more expensive drugs and increase spending. These are incentives created by government rules, not by PBM ownership.
Medicare Part D combines public subsidies with coverage requirements. Requiring coverage of most drugs in protected classes limits a purchaser's ability to bargain by excluding a product. PBMs negotiate within those constraints. Their bargaining cannot recreate the choices the rules remove.
The Inflation Reduction Act adds government-set maximum prices for selected Medicare drugs. Foreign governments also impose price controls through publicly financed health systems. The Trump administration's most-favored-nation pricing materials highlight the gap between U.S. and foreign drug prices. Governments can suppress prices; they cannot legislate away drug-development costs. Sustained innovation requires recovering those costs across successful products. Reduced foreign contributions to that recovery put upward pressure on U.S. prices while diminishing expected returns on developing new medicines.
Ludwig von Mises described this recurring sequence in his analysis of interventionism: government changes incentives, businesses adapt, and officials respond to the adaptations with further controls. PBMs provide a market response to purchasers' demand for affordable coverage within this distorted system. Their conduct remains open to criticism. But regulating the adaptation while retaining the underlying distortions risks another round of unintended consequences. Political incentives reinforce that tendency: protecting an organized constituency can be more rewarding than removing the rules that created the problem.
What federal action changes and why states should wait
Congress and the FTC have already undertaken interventions directed at specific PBM practices, without requiring pharmacy divestiture. Section 6224 of the Consolidated Appropriations Act, 2026 requires specified Medicare Part D PBM compensation to consist of bona fide service fees, generally flat amounts unrelated to drug prices or rebates. It also requires manufacturer price concessions to pass through to plans, and adds reporting and audit access. The compensation requirements apply to plan years beginning January 1, 2028. The first annual reports, covering the previous plan year, are due by July 1, 2028.
The FTC announced an Express Scripts settlement in February 2026 and a proposed Caremark settlement in July. In June, it withdrew the OptumRx proceeding from adjudication to consider a proposed consent agreement. The published Express Scripts and Caremark terms address several concerns invoked by ownership-ban proponents:
Rebate-driven drug selection and patient costs. The terms restrict favoring higher-list-price versions of identical drugs on standard covered-drug lists, subject to conditions. Standard offerings must connect patients' payments to net prices and provide rebates at the pharmacy counter.
Spread pricing and price-linked fees. Spread pricing is the difference a PBM retains between what it charges a plan and what it pays a pharmacy. The standard offerings eliminate that practice and delink certain manufacturer fees from list prices.
Transparency and pharmacy reimbursement. The terms require more detailed reporting and standard community-pharmacy contracts based on acquisition cost plus a dispensing fee, subject to specified conditions.
These provisions have limits. The settlements do not bind every PBM, and specified procedures permit purchasers to request alternative terms. Certain affiliated fully insured plans face stricter requirements. Calling the actions targeted describes their focus on conduct rather than ownership; it does not establish that every mandated contract term improves patient welfare.
The published orders generally set January 1, 2027, as the implementation deadline, with earlier implementation possible. Several requirements, including point-of-sale rebates, reporting, and community-pharmacy reimbursement, may take until January 1, 2028.
States should therefore not impose ownership bans while these measures are still being implemented and before their effects can be assessed. Existing state measures deserve assessment too.
Assessment must examine total costs, premiums, and access. Passing rebates directly to patients may lower their pharmacy bills while leaving less money to reduce premiums. Higher pharmacy reimbursement may produce offsetting fees or network changes. Announced savings are projections; compliance is not proof of lower overall costs. Adding another mandate now also makes each prior intervention's effects harder to quantify.
Enforcing a promise differs from dictating the terms parties may negotiate. Every additional restriction must independently justify its costs and the disruption it would cause.
Ownership bans also face legal obstacles
In July 2025, the district court in Express Scripts v. Richmond preliminarily enjoined Arkansas Act 624, finding likely violations of the Dormant Commerce Clause and federal TRICARE preemption. The court identified evidence of protectionism favoring local pharmacies and interference with federal selection of pharmacy-service contractors for the military healthcare program.
These were preliminary findings, not a final judgment on every claim. The court rejected several other theories at that stage. Federal regulation also does not automatically preempt state law: the Supreme Court's Rutledge decision upheld a different Arkansas reimbursement law against a challenge under the Employee Retirement Income Security Act (ERISA). Neither ruling resolves every ownership-ban dispute.
Tennessee's FAIR Rx Act likewise faces challenges. CVS's May 2026 complaint contests the law on constitutional and federal-preemption grounds. Express Scripts' June complaint argues that restrictions on commercial operations would undermine infrastructure supporting TRICARE, despite federal-program exceptions. That remains an allegation, but it exposes the operational question: can lawmakers preserve a service while dismantling arrangements that support it?
Preserve choice and address the underlying distortions
Friedrich Hayek explained why competition matters under dispersed knowledge: purchasers and businesses discover useful arrangements by trying them. Employers differ in budgets and patients in their needs. Competing business arrangements can test different combinations of services, fees, and pharmacy access. An ownership ban forecloses those experiments before their value can be discovered.
The burden belongs to officials proposing restrictions. They must connect the alleged harm to the remedy and account for lost alternatives. Genuine unlawful conduct warrants action; ownership alone does not establish it. Protecting independent pharmacies from competition is not the same as protecting patients.
PBMs cannot negotiate away Medicaid pricing rules, Medicare coverage mandates, 340B incentives or domestic and foreign price controls. Blaming them for failing to overcome those interventions mistakes a constrained market response for the source of the problem. States should reject ownership bans and, at minimum, assess prior interventions before adding new ones. Lower costs and better access require restoring competitive choice and unwinding the underlying distortions. The task is to reverse interventionism, not prescribe its next chapter.
