Introduction

For decades, pharmacy benefit managers (PBMs) have operated as the hidden power brokers of the American prescription drug market. Sitting between drug manufacturers, insurers, and pharmacies, these firms negotiate rebates, manage formularies, and ultimately decide which medications patients can access and at what price. The three largest PBMs (CVS Caremark, Express Scripts, and OptumRx) control nearly 80% of all U.S. prescription drug transactions, shaping costs for hundreds of millions of insured Americans.

Yet their power has come under unprecedented scrutiny. In September 2024, the Federal Trade Commission (FTC) filed a sweeping lawsuit accusing these PBMs of using their market dominance to inflate insulin prices artificially. The agency alleges that rebate arrangements and formulary exclusions created a perverse incentive system, one that rewarded higher list prices while punishing competition from lower-cost biosimilars. The case, the most aggressive federal action against PBMs in history, seeks to unwind what regulators call a “self-reinforcing cycle of inflated drug prices.”

The stakes are immense. If successful, the FTC’s effort could alter not only how insulin is priced but also how nearly every prescription drug rebate in the country is negotiated. The timing of the case, just as insurers finalize plans and formularies for 2025 open enrollment, means its ripple effects could be immediate. Employers, insurers, and state regulators are all reassessing their relationships with PBMs as the government signals a new era of enforcement and transparency.

Why Now

The FTC’s lawsuit, filed on September 10, 2024, lands amid the most volatile period of the year for drug pricing: the Medicare and Affordable Care Act (ACA) open enrollment season. This is when insurers set premiums, update formularies, and renegotiate PBM contracts for the coming year. The Biden administration has made insulin affordability a central talking point of its broader campaign against high drug costs, building on the Inflation Reduction Act’s $35 insulin copay cap.

At the same time, bipartisan frustration with PBM opacity has reached a boiling point. Several congressional committees are advancing bills that would require full rebate disclosure and restrict exclusionary contracts. The FTC lawsuit adds a decisive legal front to this political campaign, signaling that regulators no longer view PBM practices as opaque but tolerable they now see them as potentially illegal. The alignment of litigation, political momentum, and public outrage makes this the most consequential test of the PBM business model in decades.

Understanding the PBM Model

Pharmacy benefit managers were created to make prescription drug coverage more efficient. In theory, they negotiate lower prices on behalf of insurers and employers, manage pharmacy networks, and handle the logistics of claims and utilization review. In practice, PBMs have become powerful intermediaries that shape the flow of billions of dollars in the drug supply chain with influence that now extends far beyond the role of “administrators.”

A PBM’s most visible function is formulary management deciding which drugs are covered and at what tier. Drug manufacturers compete fiercely for these positions, offering rebates and discounts in exchange for favorable placement. PBMs claim these negotiations reduce costs for health plans, but critics argue the system has evolved into a pay-to-play marketplace, where higher list prices generate larger rebates and thus more revenue for the intermediaries.

Another key revenue stream is spread pricing, where PBMs charge insurers or employers more for a drug than they reimburse the pharmacy, pocketing the difference. Some contracts now favor “pass-through” pricing to reduce this margin, but the practice remains widespread in commercial and Medicaid-managed care markets.

Insulin illustrates this dysfunction vividly. Over the past two decades, the average list price of insulin tripled, even as manufacturing costs and clinical formulations remained largely unchanged. PBMs argue that rebates offset the list price, but the rebates themselves often exceed 70% of a drug’s nominal cost and patients without comprehensive coverage or with high deductibles pay based on the inflated list price, not the discounted one.

The FTC’s Case and Core Allegations

According to the complaint, the PBMs demanded excessive rebates and administrative fees from insulin manufacturers in exchange for “preferred formulary placement.” Drugs that failed to meet those rebate thresholds were often excluded from coverage, even when they were clinically comparable or cheaper. By conditioning market access on rebate size rather than price or value, PBMs allegedly forced manufacturers to keep list prices high simply to fund the escalating rebates.

The lawsuit also claims that PBMs and insulin producers coordinated to stifle biosimilar competition. Newer biosimilar insulins designed to mirror brand-name products at lower prices often struggled to gain formulary access, not because they were ineffective, but because their smaller rebate margins made them less profitable for intermediaries.

FTC Chair Lina M. Khan called the practice “a systematic distortion of competition that keeps lifesaving medicines artificially expensive.” The FTC is invoking its Section 5 authority under the FTC Act, which allows the agency to pursue civil penalties for “unfair methods of competition.”

Ripple Effects on Pricing and Formularies

The FTC’s lawsuit is not just a legal test it’s already reshaping how insurers and employers think about drug pricing, formularies, and PBM relationships. As open enrollment for 2025 unfolds, health plans are reassessing contract structures and rebate models, uncertain how the litigation might end but aware that public and regulatory pressure has shifted the ground beneath them.

For insurers, the case highlights the growing risks of relying on rebate-heavy pricing models. Many plan sponsors are now demanding “pass-through” contracts, in which PBMs must disclose and return 100% of manufacturer rebates to the payer rather than retaining a portion.

Formulary design is another area of immediate impact. If courts side with the FTC, PBMs may face restrictions on conditioning placement on rebate value, which could open the door for biosimilar insulins and lower-cost competitors. Even without a verdict, PBMs are quietly reevaluating formulary strategies to reduce exposure, loosening exclusivity rules that once favored high-rebate brands.

Political and Market Repercussions

The FTC’s lawsuit arrives amid a rare moment of bipartisan consensus on drug pricing reform. Lawmakers from both parties have introduced bills targeting PBM transparency, rebate pass-through requirements, and spread pricing bans in Medicaid and commercial plans.

At the state level, momentum is equally strong. Twenty-three states now require PBMs to disclose rebate flows or register as fiduciaries of health plans. States like Ohio, Arkansas, and New York have taken their own PBMs to court, alleging deceptive pricing practices.

The financial markets have also reacted sharply. Following the FTC announcement, shares of CVS Health, Cigna, and UnitedHealth Group dropped by 4–6% in a single trading day, reflecting investor anxiety over possible rebate restrictions.

Conclusion

The FTC’s case against the nation’s three dominant PBMs may prove to be a watershed in American drug pricing policy. For decades, these intermediaries operated behind layers of confidentiality agreements and rebate formulas too complex for most payers or regulators to untangle. Now, that opacity is being confronted in court, with insulin serving as the perfect symbol of how rebate-driven economics can distort access to essential medicine.

Whatever the legal outcome, the lawsuit has already changed behavior. Insurers are rethinking PBM contracts, employers are demanding transparency, and policymakers are signaling that unchecked rebate manipulation will no longer be tolerated. Even modest reforms such as fairer formulary access for biosimilars or clearer rebate reporting could translate into real savings for patients at the pharmacy counter.

Ultimately, the FTC’s challenge is about more than insulin or PBMs it’s about reclaiming visibility in a system where hidden incentives have quietly dictated the price of care. Whether the courts or Congress lead the next phase, the message is unmistakable: the days of opaque drug pricing are numbered.

References

1. Federal Trade Commission. (2024, September 20). [Press release]. U.S. Government. https://www.ftc.gov/news-events/news/press-releases/2024/09/ftc-sues-prescription-drug-middlemen-artificially-inflating-insulin-drug-prices
2. Reuters. (2024, September 20). https://www.reuters.com/business/healthcare-pharmaceuticals/us-ftc-sues-drug-gatekeepers-over-high-insulin-prices-2024-09-20/