Insurer-Controlled Middlemen Are Behind High Drug Costs

Inside America’s broken drug pricing system, and why health insurers are the men behind the curtain

There’s More to Drug Pricing than Meets the Eye

In last month’s investigation, we exposed the devastating impact of the FDA’s decision to end access to compounded GLP-1 alternatives, forcing millions of Americans to confront the shocking reality of $1,000+ monthly price tags for brand-name weight loss and diabetes medications.

We explained how manufacturers set astronomical list prices, how other countries pay a fraction of what Americans pay, and how insurers rarely cover these drugs for obesity despite their proven effectiveness.

But there’s another critical piece to this affordability puzzle: the hidden middlemen.

The Hidden Layer

While pharmaceutical manufacturers like Novo Nordisk and Eli Lilly certainly bear responsibility for setting high list prices for drugs like Ozempic, Wegovy, Mounjaro, and Zepbound, a complex and opaque network of intermediaries – particularly Pharmacy Benefit Managers (PBMs) – wields extraordinary influence over what patients ultimately pay and whether they can access these medications at all.

Drugmakers argue that U.S. prices are high because of the unique American system of rebates and middlemen. In a 2024 Senate hearing, Novo Nordisk’s CEO testified that “we pay 75 cents of every dollar of medicine we sell back into this complex system in rebates, discounts, and fees.” ¹ In other words, only 25% of the gross revenue from Ozempic/Wegovy might actually be kept by Novo Nordisk; the rest is absorbed by intermediaries in the supply chain.

That “complex system” includes PBMs negotiating rebates, insurers and Third-Party Administrators (TPAs) administering plans, and brokers steering employer insurance plan decisions. Each intermediary takes a slice.

When competition is limited (as with brand-name GLP-1s under patent) and cheaper workarounds like compounding are eliminated, the leverage of these middle players grows. With no low-cost alternative available, all transactions must flow through the standard distribution and insurance channels – where middlemen can impose their mark-ups, fees, or negotiated spreads.

The result is a U.S. market where list prices soar, even if net prices after rebates are somewhat lower – and patients without strong insurance coverage can be left with unaffordable bills.

Pharmacy Benefit Managers (PBMs): Rebate-Fueled Price Inflation

Pharmacy benefit managers (PBMs) are often singled out in discussions of high drug costs – and for good reason. PBMs manage prescription drug benefits for insurers and employers, deciding which drugs are covered (formularies) and negotiating rebates and discounts with drug manufacturers.

Health plans (i.e. employers and insurers) often choose PBM services based on criteria like rebate guarantees, formulary breadth, and administrative cost, which pressures PBMs to maximize rebates. PBMs also compete to secure exclusive arrangements with large buyers by offering bigger savings, which often means bigger rebates.

In theory, PBMs are meant to leverage volume to lower net costs for health plans. In practice, their business model can create perverse incentives that inflate list prices.

Rebate Structures and Formulary Control

PBMs typically negotiate hefty rebates from manufacturers of expensive brand-name drugs in exchange for favorable placement on the formulary, a list of medications that a specific health insurance plan or PBM covers.

These rebates are paid by the manufacturer to the PBM after the sale and are often a percentage of the drug’s list price. This means a PBM’s revenue from a drug can increase if the manufacturer raises the list price, since a higher price yields a larger rebate (even though the net price to the insurer and insured patients may remain unchanged).

According to an FTC investigation, the “Big Three” PBMs (CVS Caremark, Express Scripts, and OptumRx) – which together manage about 80% of U.S. prescriptions ² – have created a “perverse drug rebate system” that prioritizes high rebates over low list prices ³.

Case Study: Insulin

The FTC’s 2024 complaint against PBMs alleges they “rigged” the system so that drugs with higher list prices (and thus higher rebates) are favored, while lower-list-price alternatives are excluded, ultimately artificially inflating drug costs ⁴.

In the case of insulin, even when lower-priced versions came to market, PBMs kept them off formularies in favor of higher-priced, rebated products. This strategy allowed PBMs and their affiliated rebate intermediaries to “line their pockets while patients are forced to pay higher out-of-pocket costs,” according to the FTC ⁵.

Pricing Power and Rebate Walls

Because PBMs control formulary access for millions of patients, manufacturers feel compelled to offer large rebates to secure or maintain favorable placement. A high-demand drug like a GLP-1 agonist effectively faces a “pay-to-play” system.

If Novo Nordisk or Eli Lilly didn’t offer substantial rebates, a PBM could exclude their drug or put it on a higher copay tier in favor of a competitor that offers a bigger rebate. This has led to what some call “rebate walls,” ⁶ where dominant products (with high list prices and rebates) block cheaper would-be rivals from getting traction.

The result is inflated list prices across the board. So long as PBMs are evaluated by plan sponsors on how much rebate dollars they secure, they have a motivation to prefer high-price/high-rebate drugs to lower-cost drugs that don’t throw off as much rebate, even if the lower-cost drug might save the health plan money overall.

So… Who Owns the PBMs?

The largest PBMs have merged with insurance companies and pharmacy chains (surprise!), creating massive healthcare conglomerates:

CVS Caremark is part of CVS Health, which owns Aetna insurance and CVS pharmacies
Express Scripts is owned by Cigna
OptumRx is part of UnitedHealth Group

This integration creates additional profit opportunities. PBMs steer patients to higher-revenue drugs while blocking competitor pharmacies from offering discounts ⁷.

Application to GLP-1 Drugs

For GLP-1 medications, manufacturers have openly asserted that a similar perverse dynamic is at play. Lars Fruergaard Jørgensen, CEO of Novo Nordisk, testified during a U.S. Senate hearing that the high U.S. list price for Ozempic/Wegovy was driven by PBM negotiations, not production costs ⁸.

Jørgensen noted that simply lowering the list price would likely backfire because PBMs “often limit access to drugs with lower list prices because they receive less financial benefit from them.” ⁹ This rebate-driven distortion is a key reason U.S. prices are far above those in Europe, where such rebate middlemen play a smaller role.

The PBM industry argues that manufacturers alone set the prices and that PBMs actually return most savings to patients or payers. In the recent Senate hearing, major PBMs stated they would welcome lower list prices for GLP-1 drugs, and a list price cut wouldn’t harm formulary placement so long as the net cost for their insurance clients remains unchanged ¹⁰.

In reality, PBMs wield enormous pricing power over GLP-1 drugs by controlling access and playing manufacturers off one another. While PBMs are motivated to secure the lowest net cost for their clients, the opaque rebate system makes it hard to tell if a truly lowest net cost is achieved and allows PBMs to take a fat cut along the way.

As long as PBM revenue comes from a slice of the drug price, their actions will tend to favor higher prices.

Third-Party Administrators (TPAs): Hidden Costs in Plan Administration

When an employer self-funds its health benefits – paying claims with its own dollars rather than buying insurance – it typically hires a third-party administrator (TPA) to run the health plan. TPAs handle claims processing, provider networks, utilization management, and often the pharmacy benefit – either directly or via a PBM partner.

The expectation is that a TPA will act in the employer’s and members’ best interest to manage costs. However, many TPAs are actually divisions of major insurance companies (surprise!). For example, Anthem’s affiliate administers many employer plans, even if the plan is self-funded ¹¹.

TPAs therefore have their own insurance-aligned incentives and conflicts of interest that can drive up spending, unbeknownst to employers.

Influence on Coverage and Utilization

TPAs help employers design their benefit plans – including whether or not to cover certain medications like weight-loss drugs, and under what conditions. Their advice might be colored by cost considerations (GLP-1 coverage can significantly increase claims cost) but also by competitive pressures (employers want to attract talent with good benefits).

TPAs might impose prior authorization or clinical criteria to control utilization. Importantly, if a TPA is aligned with a PBM, it may follow the PBM’s formulary and coverage rules, which, as discussed, might favor certain high-cost drugs. For instance, if a compounded semaglutide was available and cheaper, a TPA might still exclude it as “not FDA-approved” (and indeed many did, even before FDA’s crackdown, albeit for liability concerns).

Opaque Fees and Secret Overpayments

A less visible issue is how some TPAs extract value through the pricing of claims and services. Because TPAs directly negotiate with providers and PBMs with limited oversight from employers, they might have opportunities to financially benefit from this information asymmetry.

For example, there have been cases where an insurer acting as a TPA negotiated discounts with hospitals or pharmacies but did not fully pass those savings to the employer’s plan. In one lawsuit, a union health fund accused Anthem (now Elevance Health) of unlawfully applying only part of a hospital discount and retaining the difference, effectively overcharging the self-funded plan ¹².

Such hidden overpayments can go undetected when TPAs refuse to share detailed claims data. Historically, “gag clauses” in contracts prevented employers from seeing price details. Congress banned these gag clauses in 2021, but compliance remains spotty ¹³.

The Georgetown University Health Policy Institute has noted multiple court cases in recent years that uncovered questionable TPA conduct, such as hiding data or failing to act in the plan’s interest ¹⁴. These practices contribute to excessive health care spending for employers: if a TPA can get away with a slightly higher payment here or there, the employer may never know – but everyone’s premiums and costs inch upward.

TPAs might not grab headlines like PBMs do, but they play a significant role in plan costs. Their influence is more about how costs are managed or hidden rather than drug pricing per se. When it comes to expensive drugs like GLP-1s, there’s even more room for middlemen like TPAs to inflate fees and increase their take – at our collective expense.

Insurance Brokers and Consultants: Incentivizing High-Cost Plans

Employers sponsoring health insurance, whether fully-insured or self-funded, often rely on benefits brokers or consultants to advise them. These brokers help design benefit packages and recommend insurers or administrators. They are supposed to find the best value for the employer and employees.

However, the traditional compensation structure for brokers can pose a serious conflict of interest: most brokers are paid commissions and bonuses by the health insurance industry (surprise!). As a result, brokers may have a financial incentive to favor plans that are more lucrative for them – which predictably correlates more expensive plans that increase overall insurance coverage costs.

How Brokers Get Paid

Typically, when an employer buys a health insurance policy (for smaller companies) or contracts for services (for larger plans), the broker receives a commission from the insurer or vendor. This commission is often calculated as a percentage (e.g. 3–6%) of the total premium or contract value ¹⁵. The higher the premium or cost, the higher the broker’s commission.

On top of base commissions, insurers and PBMs commonly offer brokers additional incentives: for example, bonuses for bringing in large groups or keeping clients with the same insurer and even lavish perks like paid trips or exclusive events for top-performing brokers.

A 2019 investigative report by ProPublica revealed brokers were being wooed with “six-figure bonuses to swanky island getaways,” a practice critics called a “classic conflict-of-interest” that can put industry profits above clients ¹⁶. Until recently, much of this went undisclosed to employers.

Brokers’ built-in biases towards more expensive plans aren’t limited to insurance plans – this bias can extend to pharmacy benefits as well. As ProPublica reported, “each service provider may provide payments to brokers unknown to the employer” ¹⁷ – including PBMs paying a fee for every prescription filled or TPAs paying brokers for each employee added to their plan.

Impact on GLP-1 Coverage Decisions

When it comes to high-cost drugs like GLP-1 agonists, brokers influence the overall plan design and the choice of insurer/PBM. If an employer is debating whether to cover weight-loss medications, a broker’s guidance matters.

Ideally, the broker would present the cost impact and pros/cons objectively. But if, say, the broker’s compensation from the health plan will increase as claims (and premiums) increase, the broker might be less motivated to help the employer contain those costs.

However, brokers know that an unhappy workforce or an uncompetitive benefits package could cost them the client. GLP-1 drugs give brokers a chance to kill two birds with one stone.

Brokers might actually encourage adding a popular benefit like coverage for Wegovy for obesity because it makes the overall plan more attractive. And if the employer’s costs – and thus the broker’s commission – just so happen to increase as a consequence? All the merrier.

Changes and Transparency

Recognizing these conflicts, policymakers have taken steps to shine a light on broker compensation. A new federal law (enacted as part of the Consolidated Appropriations Act, 2021) now requires brokers and consultants to disclose to employers any direct or indirect compensation they receive from insurance carriers, PBMs, or other vendors ¹⁸.

Still, the legacy of the commission system means many brokers are essentially encouraged to keep healthcare spending and premiums high. Brokers are not necessarily behind the sky-high price of GLP-1 drugs. But they are unlikely to strongly advocate for aggressive cost-reducing measures if such efforts reduce their own earnings.

The Economics Behind Inflated Prices

Stepping back, we see two major patterns that explain why the U.S. struggles with high drug prices versus other industrialized nations:

Many healthcare intermediaries are compensated in ways that scale with the price of the product or service.
Many healthcare intermediaries are either directly controlled or financially incentivized by healthcare insurance companies.

This latter observation is really worth unpacking. Not only are these healthcare middlemen heavily consolidated within their service area (for instance, the three biggest PBMs control nearly 80% of the market ¹⁹), but these middlemen are also vertically integrated with insurers and pharmacies – resulting in healthcare oligopolies.

To demonstrate the immense power that vertical integration affords, let’s study the world’s second largest healthcare company, CVS Health:

CVS Health owns CVS Caremark (a PBM), CVS Pharmacy (retail and specialty pharmacies), Aetna (a health insurer), Wellpartner (a TPA for 340B services) ²⁰, and Oak Street Health (a Medicare-focused primary care provider)
CVS Caremark steers prescriptions directly into its own CVS Pharmacy networks, effectively sidelining independent pharmacies and other competitors.
CVS Caremark can mandate or incentivize Aetna’s vast insurance customer base to use CVS Pharmacies, limiting competition and allowing them to keep profits in-house.
CVS Health has been accused of forcing 340B entities to use its TPA Wellpartner, “effectively forcing covered entities to either forgo substantial savings from the 340B program… or forgo utilization of another TPA that might offer better pricing, quality, or service.” ²¹
CVS-owned Oak Street Health has been accused of providing health insurance brokers illegal kickbacks in exchange for steering Medicare Advantage enrollees towards Oak Street ²².

This interconnected ecosystem – insurers, PBMs, pharmacies, TPAs, and brokers – creates a powerful cycle of cost inflation, limiting true market competition and keeping American drug prices significantly higher compared to those in other industrialized nations.

Therefore, the nation’s GLP-1 affordability crisis is as much about perversely incentivized middlemen as it is about any one pharmaceutical manufacturer. Unless or until lawmakers, employers, and other stakeholders demand deeper transparency and realignment of incentives, these new weight-loss and diabetes treatments will remain out of reach for too many Americans.

It’s easy to see why each middleman behaves as it does – everyone is just following the money. But after mapping out the pipeline, from manufacturer to insurer to PBM to TPA to broker, it’s painfully clear that the voices that matter the most – those of patients and plan sponsors – aren’t getting much say in how that money flows.

Perhaps the real question, then, is how much longer can this elaborate chain of insurance-controlled profiteers hold out against an increasingly desperate public that is losing GLP-1 coverage and on the financial brink?

Insurer-Controlled Middlemen Are Behind High Drug Costs

There’s More to Drug Pricing than Meets the Eye

The Hidden Layer

Pharmacy Benefit Managers (PBMs): Rebate-Fueled Price Inflation

Rebate Structures and Formulary Control

Case Study: Insulin

Pricing Power and Rebate Walls

So… Who Owns the PBMs?

Application to GLP-1 Drugs

Third-Party Administrators (TPAs): Hidden Costs in Plan Administration

Influence on Coverage and Utilization

Opaque Fees and Secret Overpayments

Insurance Brokers and Consultants: Incentivizing High-Cost Plans

How Brokers Get Paid

Impact on GLP-1 Coverage Decisions

Changes and Transparency

The Economics Behind Inflated Prices

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