One Split Doesn't Fit All: What CVS' Breakup Really Says About PBM Reform
CVS' planned split puts one business model to the test. It is not a prescription for every PBM.
CVS Health plans to split in two, but its pharmacy benefit manager would still own a pharmacy business. That complicates any attempt to cast the breakup as an endorsement of laws banning such ownership. CVS wants to separate some services and keep others together. Should lawmakers let companies and their customers test those choices—or make the decision for them?
The details of CVS’ Nov. 4 plan illustrate that distinction. Retail and mail-order pharmacy would move to a separate, publicly traded company called CVS Pharmacy. Caremark—its pharmacy benefit manager (PBM), which administers prescription-drug benefits and negotiates with drugmakers and pharmacies—would remain within CVS Health alongside CVS Specialty, its specialty-drug pharmacy business, and other operations. CVS expects to complete the split in the first half of 2028, subject to final board approval and other conditions.
Keeping some operations together while separating others reflects a judgment about where common ownership adds value. Whether CVS has judged correctly remains to be seen. The announcement establishes no savings for patients, and purchasers will need to compare the resulting prices and services with competing offers.
Making those comparisons requires information. The U.S. Department of Labor’s new PBM disclosure rule could help by showing employers and others responsible for managing health plans what drugmakers pay PBMs and their affiliates. That information could strengthen purchasers’ bargaining position. But disclosure costs money, and even well-informed purchasers must navigate the government rules that helped shape this market.
Ownership bans leave those underlying rules intact, too, as I argued in a recent National Law Review article. Arkansas banned PBMs from owning pharmacies, and Tennessee adopted its own common-ownership restrictions. These measures narrow purchasers’ options while preserving public financing rules, mandatory discounts, and barriers to developing competing treatments. CVS’ decision to try a different structure hardly makes it a prescription for every competitor.
Assessing these policies therefore requires looking beyond corporate boundaries to the incentives on either side of them. Applied Austrian economics asks how government rules shape business decisions and which useful arrangements further restrictions might prevent firms from discovering. Public choice—the study of incentives in politics—asks who benefits when government restricts a rival’s business. Both approaches help assess CVS’ restructuring and the policies surrounding it. Neither PBM conduct nor the latest regulatory fix deserves a free pass.
The Middleman Earns His Keep. Sometimes.
Employers that fund their own health plans and insurers that provide coverage hire PBMs to help purchase medicines for employees and members. PBMs negotiate with manufacturers, administer benefits, and organize pharmacy networks. Bargaining across many plans can secure better terms, while specialization can lower administrative costs. At a March Competitive Enterprise Institute discussion, Sen. Rand Paul (R-Ky.) posed a useful question: Why would purchasers hire PBMs if they only increased costs? Answering it requires understanding both the work purchasers want done and the conflicts that can arise when they delegate it.
Intermediaries earn their keep by reducing transaction costs—the time and resources spent finding suppliers, comparing options, assessing quality, and negotiating terms. Paying an intermediary can lower the total cost of obtaining a product if customers would otherwise have to do that work themselves or hire someone else. A visible fee or margin doesn’t, by itself, establish an unnecessary expense.
For PBMs, that work includes bargaining over net prices—what purchasers pay after rebates and discounts—and other purchasing terms. Those negotiations don’t necessarily lower manufacturers’ list prices. Owning pharmacies can also help PBMs coordinate dispensing and patient care but it creates opportunities to favor affiliated businesses. Opaque contracts can hide those incentives or make switching providers difficult. Assessing the effects on consumers requires weighing these potential harms against efficiencies, within the regulated market where PBMs operate. Common ownership alone settles neither side of that inquiry.
An organization chart can’t tell us whether coordination saves more than it costs. Bringing services under one roof can reduce negotiations between firms while adding management costs and competing demands for capital. Separation can ease those internal burdens while creating new contracting costs. The balance requires evidence.
A January 2025 Federal Trade Commission (FTC) staff report gives those concerns some concrete support. It found that the three largest PBMs—Caremark, Express Scripts, and OptumRx—reimbursed their own pharmacies several times (and in some cases, dozens of times) the drugs’ estimated acquisition costs for numerous specialty generic drugs, including treatments for cancer and HIV. The PBMs also generally paid their affiliated pharmacies more than independent pharmacies for the same drugs.
Those findings warrant scrutiny, but they don’t establish that forcing PBMs to sell their pharmacies would remedy the conduct, or that PBMs account for most high drug prices. Because CVS plans to keep specialty dispensing alongside Caremark, the retail split would leave those concerns relevant.
Nor does announced independence settle how the businesses will operate. Their eventual governance and commercial agreements will matter, including whether the separated pharmacy can choose among partners. Separate ownership can still leave plenty of room for contractual cooperation.
Purchasers’ ability to assess performance and change suppliers matters just as much. Concealed compensation, weak oversight, or restrictions on alternatives can offset bargaining gains. Hiring a PBM demonstrates demand for its services but it doesn’t prove that every contract serves every beneficiary well. Competition among purchasing arrangements needs credible information and practical opportunities to choose something better. Shielding incumbents from challenge undermines that process, just as dictating their structure by law can.
Rebates, Spreads, and Patient Costs
When a PBM favors a drug with a higher list price, the rebate may help explain why. Manufacturers offer rebates that reduce the drug’s cost after the sale. The PBM’s contract determines how much of that money goes to the employer or insurer purchasing coverage and how much the PBM keeps. Patients may miss out on those savings. If their plan bases their share of the bill on the drug’s list price, they pay a portion of the price before rebates. A larger rebate can therefore save the purchaser money or boost the PBM’s earnings without reducing what the patient owes.
Consider two equally suitable drugs. One lists for $300 and carries a $200 rebate. The other lists for $150 with a $30 rebate. To isolate the rebate’s effect, assume the patient and purchaser together pay the list price before rebates, with no other fees or charges.
If the PBM passes through the full rebate, the patient and purchaser together pay $100 for the first drug and $120 for the second. But a patient who owes 20% of the list price pays $60 for the first and $30 for the second. After rebates, the purchaser pays the remaining $40 or $90. Choosing the higher-list-price drug saves the purchaser $50 while costing the patient $30 more.
Now let the PBM keep half of each rebate. It earns $100 on the first drug and $15 on the second. The patient still pays $60 or $30, but the purchaser’s cost rises to $140 or $105. Combined patient and purchaser spending reaches $200 or $135. The PBM now earns more from the $300 drug, while the purchaser saves money with the $150 alternative. The same contract gives them reasons to prefer different drugs.
Spread pricing adds another payment to the picture. Suppose the purchaser pays the PBM $100 for a prescription, the PBM pays the pharmacy $90, and the patient pays nothing. The PBM keeps the $10 difference—the spread. It could pass through every dollar of manufacturer rebates and still collect that $10. Purchasers therefore need to compare rebates, spreads, and separate fees together.
The PBM’s $10 spread tells us nothing about the pharmacy’s profit. The pharmacy receives $90, plus any separate fee for filling the prescription. From that revenue, it must cover the cost of buying the drug, filling the prescription, and paying any fees to participate in the PBM’s network. It makes money only if those costs total less than it receives.
The Labor Department’s rule aims to make these arrangements easier to assess. It requires PBMs and other covered service providers to tell the plan’s fiduciary—the person or entity responsible for managing the plan—how much they expect to retain from manufacturer payments and how much they’ll pass through. Providers must also disclose net drug prices and incentives for placing drugs on the formulary, the plan’s list of covered medicines.
When a provider expects to retain a payment from a manufacturer or rebate aggregator—a business that negotiates rebates—for a covered drug, it must identify reasonably available, therapeutically equivalent alternatives and explain their exclusion. Those alternatives include biosimilars, which closely resemble approved biologic medicines. Reporting requirements and audit rights help fiduciaries check the numbers.
Purchasers could use this information to challenge costly coverage choices, renegotiate contracts, or switch PBMs. But disclosure alone won’t change how a plan divides costs. Even with full rebate pass-through, the patient in our example still owes $60 for the $300 drug. Patients’ gains depend partly on what purchasers do with the information and how they design benefits.
A study by the U.S. Department of Health and Human Services’ inspector general illustrates why these outcomes need separate attention. Across 60 selected drugs, Medicare Part D prescription-drug plans whose sponsors shared ownership with PBMs had similar overall net drug costs to other plans. The integrated plans generally charged lower premiums but left patients with substantially higher out-of-pocket drug costs.
The study’s scope limits what we can conclude. It used 2023 data and examined 60 selected drugs, so its findings don’t necessarily apply to other drugs or later years. It also grouped plans by whether the plan sponsor and PBM shared ownership, rather than whether the PBM owned pharmacies. It therefore doesn’t tell us whether forcing PBMs to sell their pharmacies would raise or lower costs.
A Bargain Is Only as Good as the Drug
Price comparisons also require confidence in what patients are getting. Katherine Eban’s 2019 book “Bottle of Lies” follows whistleblowers and inspectors who uncovered falsified data and manufacturing failures at generic-drug producers. In one central case, Ranbaxy USA pleaded guilty in 2013 to felony charges involving adulterated drugs and false statements to the Food and Drug Administration (FDA). The combined criminal and civil settlement totaled $500 million.
That history exposes failures by both manufacturers and regulators but it doesn’t tell us how common defective generics are today or establish that PBMs caused the misconduct. It does explain why the rebate example’s assumption matters. The two drugs must be equally suitable and reliably manufactured for price alone to settle the comparison. A cheaper drug offers little comfort if patients can’t count on its quality or availability.
Knowing how much a PBM earns helps purchasers evaluate its incentives. They also need to know whether the drugs they’re buying meet quality standards and will remain available when patients need them. Independent testing could help verify quality, while contracts that reward manufacturers for dependable production could encourage reliable supply. The FDA’s 2019 drug-shortage report identified a related problem: Manufacturers receive too little financial reward for investing in systems that prevent quality failures and shortages. It recommended sustainable private-sector contracts to address that gap. Purchasers would, however, still need to assess whether those contracts deliver better quality and fewer supply disruptions.
Transparency Comes With an Invoice
The Labor Department announced the rule Oct. 29 and published it Nov. 2. Under federal employee-benefit law, PBMs and affiliated brokers and consultants serving large, self-insured employer plans must disclose compensation, provide ongoing reports, and allow audits. The detailed requirements apply to plan years beginning on or after July 1, 2027, or Jan. 1, 2028, for calendar-year plans. Broader statutory disclosure duties already cover plans outside this group.
The rule gives plan fiduciaries access to confidential contract terms, including what their plan pays the PBM for a prescription, what the PBM pays the pharmacy, and how much of a manufacturer’s rebate the PBM keeps. It also sets conditions for sharing that information with third parties. These requirements expose spreads and retained rebates for scrutiny, though other laws may restrict those payment arrangements. Their value will depend on how purchasers use the information to compare competing offers.
That information comes with a bill. To qualify for the legal exemption that permits these service contracts, providers must follow government requirements for what to disclose, when to report it, and how purchasers can check the figures. Compliance means estimating payments for individual drugs and calculating how much compensation goes to each service when providers sell several together. The department projects costs of $129.7 million in the first year and $50.4 million annually thereafter. The actual figures may differ, but gathering and verifying this information takes time and money.
Whether the benefits justify those costs remains uncertain. Drawing on earlier Congressional Budget Office (CBO) work, the department’s primary analysis assumes a 1% reduction in drug prices. It acknowledges that its estimates may overstate the effects and omit payments flowing in the opposite direction.
For example, a purchaser could pay less because the PBM keeps fewer rebate dollars or collects a smaller spread. That shifts money between the parties without necessarily reducing the cost of supplying the medicine. The PBM might also replace the lost revenue with other fees. Assessing whether purchasers and patients come out ahead requires following those payments through to the final bill.
Government’s Fingerprints Are on the Price Tag
Government helped build the market in which PBMs operate. During World War II, federal wage controls made health benefits a way for employers to compete for workers when they couldn’t freely raise wages. Congress later codified the exclusion of employer-provided coverage from employees’ taxable income, giving health benefits a lasting tax advantage over cash pay. Those policies helped put employers and insurers at the center of buying care on patients’ behalf.
Medicare, Medicaid, and Affordable Care Act subsidies expanded publicly financed or subsidized coverage, reinforcing reliance on third-party payment. They also added conditions governing coverage and reimbursement. PBMs grew from claims processors into businesses that negotiate drug prices and manage benefits across private and public plans. Medicare Part D prescription-drug plans use them, as do some state Medicaid programs and Medicaid managed care plans. Without government’s extensive role in financing coverage and shaping prices, PBMs would likely play a much smaller role in how Americans buy medicines.
Medicaid’s “best price” rule shows how those policies affect bargaining. For many brand-name drugs, the formula ties manufacturers’ required Medicaid rebates to certain discounts they offer other buyers. Giving a commercial purchaser a deeper discount can therefore increase what the manufacturer owes on Medicaid sales. CBO explains that these provisions can discourage larger commercial rebates and raise average brand-name prices. Government’s effort to secure its own bargain can thereby make bargains harder to obtain for everyone else.
The federal 340B program requires manufacturers to sell drugs at discounts to eligible hospitals and other healthcare providers. Those providers can then receive payments from insurers that exceed what they paid for the drugs. The difference can help fund patient care, but it also gives providers a financial reason to favor treatments that generate larger margins. CBO identifies incentives to prescribe more drugs, use more expensive ones, and acquire physician practices where those drugs can be prescribed or administered. These incentives exist regardless of whether a PBM owns a pharmacy. Forcing PBMs to sell their pharmacies leaves the underlying discount and payment rules intact.
Medicare Part D limits bargaining by requiring plans to cover most drugs in certain “protected classes.” Ordinarily, a purchaser can seek a better price by threatening to leave a drug off its covered-drug list. When coverage is mandatory, that threat carries little weight, weakening the PBM’s negotiating position. Requiring PBMs to disclose their compensation won’t give them back that bargaining power.
Economist Ludwig von Mises described just such a recurring pattern: Government changes the rules, businesses adapt, and the resulting problems become grounds for further intervention. Here, Medicaid’s best-price rule can discourage deeper commercial discounts, while the 340B reimbursement gap can reward more expensive prescribing. Banning PBM pharmacy ownership leaves those incentives intact and further limits how businesses can respond.
The case for allowing private contracts starts with the ability to learn and change course. Purchasers know their workforce’s needs and bear the costs of poor deals. When they can assess performance and switch providers, they can negotiate better terms or choose a rival’s offer. Mandates narrow those options and can persist long after evidence shows they’re failing. Their proponents should have to explain what a new restriction will improve and what it will cost.
CVS lists greater flexibility to adapt to regulation among the split’s expected benefits. That doesn’t tell us how much regulation drove the decision, but it reminds us that companies choose their structures in a market government has already shaped. Allowing them to adjust preserves room to experiment. Requiring every firm to adopt the same structure narrows it.
Rebates and formulary tiers—which assign different patient payments to groups of covered drugs—reflect that same mix of business choices and government incentives. They can help purchasers negotiate better prices and tailor coverage. They can also reward businesses for exploiting reimbursement rules without making treatment less costly to provide. A sensible business response can still produce a poor outcome. The question is whether another mandate would fix the underlying incentive or simply give businesses a different way to pursue it.
PBMs aren’t the only middlemen in the drug supply chain. Wholesalers buy medicines from manufacturers and distribute them to pharmacies and healthcare providers. Drug Channels estimates that the three largest wholesalers’ gross profits from distributing provider-administered biosimilars will exceed $4 billion in 2026, up from $1.4 billion in 2022. That figure measures revenue minus the cost of the drugs, before other business expenses. It shows neither how much wholesalers ultimately keep nor whether they’ve abused their position.
Rules governing discounts reach beyond PBMs, too. The Robinson-Patman Act restricts certain price differences between competing buyers of goods, although cost-justified volume discounts and prices offered to meet competition can be lawful. Any serious account of drug pricing must examine bargaining power and legal constraints across the supply chain.
Every Restriction Has a Constituency
A rule promoted as consumer protection can also shield businesses from competition. Economist George Stigler studied why industries seek government restrictions on rivals. Gordon Tullock called efforts to gain or preserve advantages through political power “rent-seeking.” These insights don’t prove that any particular advocate has bad motives but they give us reason to ask who gains from a restriction, who bears its costs, and whether consumers benefit.
In Arkansas, the pharmacists’ association publicly supported the ownership ban and identified support for local businesses as an objective. That establishes organized advocacy by a group whose members stand to benefit, although it doesn’t make their concerns about reimbursement or patient choice insincere. At the very least, it invites scrutiny of a remedy that excludes competing owners. Do patients and purchasers gain enough to justify the costs of protecting particular pharmacies? Manufacturers and PBMs deserve the same scrutiny when they seek favorable rules.
Political rewards can be easier to see than the costs, a problem Thomas Sowell explores in “Knowledge and Decisions.” An organized industry group can lobby for a rule that benefits its members, while patients and taxpayers pay through small increases spread across premiums, taxes, and medical bills. Those paying more may never connect the expense to the rule. Officials still answer to voters and oversight bodies, but they don’t face the same recurring budget pressures as purchasers managing health plans. They can claim a policy victory before its costs become clear.
Katherine Eban’s reporting shows how the FDA’s responsibilities can pull it in different directions. Giving manufacturers less warning before inspections helped investigators uncover problems that companies had concealed. But the agency also faced pressure to avoid drug shortages and keep approvals moving. Her epilogue recounts its 2016 return to advance notice for routine inspections in India after experimenting with shorter notice. Rules meant to protect patients still depended on investigators willing and able to challenge manufacturers’ assurances. Effective oversight requires agencies to encourage that work and act on what investigators find.
FTC settlements deserve the same scrutiny as other restrictions. Political pressure and agency incentives may influence a settlement, but its actual requirements and effects determine whether it helps consumers. Stopping deception and requiring companies to honor their promises make contracts more reliable. Requiring a PBM to use a particular payment formula limits the terms it can negotiate with health plans or pharmacies. Those requirements need evidence that they’ll improve outcomes. Calling them “enforcement” doesn’t establish that they work.
Disclosure mandates deserve this scrutiny, too. The Labor Department’s illustrative first-year calculation puts compliance costs at about 2.5% of revenue for a PBM near the applicable small-business size threshold. A large PBM can spread fixed reporting costs across many clients, while a smaller rival has fewer clients to absorb them.
Those costs can also discourage entry. Regulators can’t know in advance what employers might have gained from firms that decide entering the market is too expensive. The rule’s proponents must therefore show that better disclosure justifies its costs, including any competition lost along the way.
You Can’t Negotiate With a Drug That Doesn’t Exist
PBMs’ bargaining power depends partly on the alternatives available. A purchaser has more leverage when it can choose among clinically suitable treatments. A PBM can negotiate among those options, but it can’t bargain a competing therapy into existence.
Developing alternatives requires investment long before anyone knows whether a discovery will work, win approval, or earn a return. CBO identifies expected global revenues, development costs, and policy as factors shaping which projects proceed. Past research costs are already incurred. The investment question is forward-looking: Will the expected return justify committing resources now?
That creates tradeoffs for price regulation. CBO expects Medicare negotiation under the Inflation Reduction Act to lower average Medicare drug prices. Assessing those savings also requires considering how lower expected revenues affect development and the value of treatments that may never reach patients.
Eliminating unnecessary testing requirements can make it less expensive to bring competing medicines to market. The FDA’s October 2025 draft guidance offers an example for biosimilars—medicines that closely resemble an approved biologic drug. In some cases, laboratory comparisons and other evidence can establish that similarity without a separate clinical trial comparing effectiveness. Forgoing a redundant trial could lower development costs without weakening safety standards. Eban’s reporting shows why trustworthy evidence and reliable manufacturing still matter, but the potential payoff from easier entry is substantial. FDA research links greater competition among generic drugs to lower prices.
Patent protection also helps finance new alternatives. Jonathan Barnett explains how enforceable patents allow smaller biomedical innovators to share discoveries and collaborate with firms equipped to develop and commercialize them. Those rights can support investment, while generic competition remains essential after lawful exclusivity ends.
These policies shape the choices PBMs eventually bring to the negotiating table. CVS’ split may change how it organizes purchasing and dispensing, but it won’t resolve barriers to developing competing treatments. Neither will requiring every PBM to sell its pharmacies. A drug-pricing agenda needs to consider how alternatives reach the market as well as who negotiates their price once they arrive.
CVS Isn’t Writing Everyone Else’s Prescription
Employers want different things from a PBM. Their workforces differ in health needs and geography, and they make different tradeoffs between premiums and what patients pay when they need care. Economist Friedrich Hayek’s accounts of dispersed knowledge and competition help explain why no single arrangement will necessarily serve them all. Rivalry helps purchasers discover which combinations of price, service, and coordination work best. Compensation disclosures can inform those choices, while an ownership ban removes an option before purchasers can compare it.
Economist Israel Kirzner takes the argument a step further. Even well-intentioned regulation can prevent businesses from discovering opportunities nobody has yet considered. For PBMs, that could mean a new contract, partnership, or way to coordinate pharmacy services. We can’t count every useful arrangement a restriction prevents firms from trying. But the difficulty of measuring that loss doesn’t make it disappear.
CVS’ proposed split puts one business model to the test. Management expects the separate companies to focus more effectively on their services and pursue new partnerships. Whether that will prove true remains to be seen. Higher shareholder returns wouldn’t establish lower patient costs or better access to care. Nor would a successful split prove that keeping the businesses together was always a mistake. If the separation goes ahead, purchasers can compare the companies’ prices, services, and pharmacy access with those of integrated and independent rivals. The announcement tells us what CVS wants to try. The results will tell us whether it works.
An ownership ban prevents purchasers from comparing PBMs that own pharmacies with those that don’t. Its proponents must show that the benefits justify losing any useful coordination and blocking new arrangements firms might develop. Existing PBMs should still face competition from rivals with better ideas. The case for permissionless innovation is to let firms try different contracts, benefit designs, and ownership structures while requiring them to honor their promises and answer for wrongdoing. CVS’ decision to separate some operations doesn’t show that every competitor should follow suit. Purchasers need the freedom to compare alternatives and choose what works.
May the Best Model Win
Recent federal PBM legislation and FTC settlements already address concerns about rebates, compensation, and transparency cited to justify ownership bans. Before adding another restriction, policymakers should assess what these interventions deliver alongside state measures and the Labor Department’s rule.
That assessment will take time because the requirements reach different markets on different schedules. Starting in 2028, Medicare Part D generally will require PBMs to earn flat service fees rather than compensation tied to drug prices or rebates. For employer health plans, separate rebate pass-through and reporting requirements apply to plan years beginning on or after Aug. 3, 2028. Their effects also need separating. Reporting helps purchasers compare offers, while compensation restrictions limit the payment arrangements they can choose.
Overlapping requirements make that distinction especially important. The Labor Department acknowledges overlap with forthcoming statutory reporting but argues that its disclosures serve a distinct purpose by informing purchasers before they sign contracts. Policymakers should weigh that benefit against compliance costs and alternatives, including negotiated audit rights, voluntary disclosure, transparent competing business models, and enforcement of existing promises.
The test throughout should be what purchasers and patients gain after costs. That means tracking spending after rebates and fees, premiums, patient payments, drug quality, reliable supply, access, and opportunities for new competitors. Adding ownership bans before evaluating existing measures would further disrupt contracts and make each policy’s effects harder to isolate. CVS’ results will likewise require accounting for changes in benefits, regulation, and market conditions. Disappointing results from other reforms wouldn’t establish that forced separation works. Its proponents must justify that remedy independently.
Even successful reforms to PBM practices would leave broader problems unresolved. PBMs can reduce some costs of a system they didn’t create, but they can’t erase mandatory rebate formulas, finance every competing treatment, or overcome every entry barrier. Better disclosure may help purchasers navigate those constraints without removing them.
A broader reform agenda should therefore tackle rules that discourage discounts and competing treatments, remove avoidable entry barriers, support market pricing at home and abroad, and make patent protection clearer and more dependable. Within that system, purchasers need room to choose among competing offers, and firms need room to change how they organize. Hold them to their promises and judge their arrangements by results.
Let CVS test its model. Let its rivals try to beat it.
