CHARLESTON — Market intervention, through regulation of prices and payment, routinely fails to achieve neutrality.
Recent rules (2024) enacted by the West Virginia Legislature — intended to protect pharmacies and patients — show this firsthand.
In federally run, complex markets with many participants, the roles of intermediaries and middlemen emerge to reduce transaction costs, synthesize information, and coordinate dispersed activity. They provide a service to both buyers and sellers of goods and services, generally by lowering prices and expanding the markets in which these participants operate.
Dobrinsky
For the prescription drug market, Pharmacy Benefit Managers (PBMs) were designed to fill this role.
Troyan
They act as liaisons among drug manufacturers, insurers, and pharmacies to smooth transactions across the market ecosystem, so that each party can focus its efforts on what it is best positioned to do. While PBMs focus on negotiating rebates from manufacturers, managing which drugs are covered at what cost, and processing claims, drug manufacturers can focus on bringing their products to market, and pharmacies can focus on dispensing drugs to patients.
Without PBMs, pharmacies, drug manufacturers and other parties in that market space would need to divert resources toward administrative tasks. Such burdens would not fall equally on firms of different sizes. As such, large pharmacy chains and drug manufacturers, with legal teams and compliance departments, can shoulder the administrative burdens. Small, local chains cannot.
To generate the revenue that keeps them afloat, PBMs traditionally rely on a few methods. The most straightforward approach is to collect transparent administrative fees. In their negotiations around manufacturer rebates, they can share portions of those savings with insurance plan sponsors. They have also used “spread pricing,” or charging the insurance company more than they reimburse the pharmacy and collecting the difference as part of their compensation. Each of these methods, regardless of their transparency or straightforwardness, allows PBMs to be compensated for the services they provide.
As regulations enter PBM operations, they introduce frictions into an already heavily regulated market, undermining the intermediary role, increasing costs for pharmacies and patients, and decreasing competition in the PBM sector. In West Virginia, those regulations imposed minimum reimbursement levels on pharmacies and transparency requirements on PBMs participating in the PEIA program.
No matter how sincerely policymakers intended to ensure pharmacies were adequately reimbursed and patients could better understand the pricing of the drugs they were being prescribed, these regulations led to predictable outcomes. PBMs were less able to collect the compensation to maintain their operations. The administrative burdens of the transparency requirements had a disparate impact on PBMs, depending on company size.
In accordance with provisions written into the bill, a comprehensive business intelligence study and analysis of PBM services was completed at the end of 2024. One key finding indicated that generic drug reimbursement per day dropped by 52.5%. Such a drastic change forced changes in PBM operations. These could take the form of PBMs scaling back participation, narrowing their networks, or leaving plans completely to maintain economic viability. Thinner markets with less competition, higher costs, and diminished service quality hurt patients—especially those in rural and underserved communities.
Looking ahead, policymakers should focus on structuring a health care environment that incentivizes price signals, consumer choice, and competition. In doing so, they’ll facilitate PBMs' role in reducing transaction costs across a complex market and promote access, efficiency, and affordability for patients.
Dobrinsky is the chief of staff at the Cardinal Institute for West Virginia Policy, and Troyan is the institute’s director of policy and research.
