Appendix F: Pharmacy benefit managers and the pharmacy payment system

This appendix supports the section "The pharmacy counter" in the plan, and the cutover rules in the transition section. It explains why abolishing the pharmacy benefit managers has to be sequenced, and how.

What a pharmacy benefit manager does

When you hand a prescription across a pharmacy counter, three things happen in less than a second before the pharmacist can fill it. Something confirms that you have coverage and what it covers. Something checks the drug against every other drug you are taking, for interactions, duplicate therapy, and dose. And something tells the pharmacy what it will be paid and what you owe. The company on the other end of that transaction is a pharmacy benefit manager, a PBM.

PBMs began in the 1960s and 70s as claims processors: insurers outsourced the paperwork of drug coverage to specialist firms that could adjudicate a claim electronically. Over the following decades they took on three more roles. They design the formulary, the list of which drugs a plan covers and on what terms. They negotiate with manufacturers for rebates, payments a manufacturer makes to a PBM in exchange for a favorable position on the formulary. And they run networks of pharmacies, setting the price each pharmacy is reimbursed.

The business model that grew out of this is the reason PBMs are loathed across the political spectrum. A PBM is paid by the plan, negotiates with the manufacturer, and pays the pharmacy, and it profits in the gaps between them. It keeps a share of the rebates it negotiates, so it has an interest in drugs with high list prices and large rebates over drugs that are simply cheap. It charges a plan one price for a drug and pays the pharmacy a lower one, and keeps the spread. And because the three largest PBMs each own a mail-order and specialty pharmacy, they steer prescriptions to themselves. The Federal Trade Commission's investigation of the industry, whose interim report in 2024 found that the largest PBMs had inflated the cost of drugs including cancer medicines by hundreds of millions of dollars through their affiliated pharmacies, is one of the few things Congress and the administration of both parties have agreed on in recent years.

Three companies, most prescriptions

Three PBMs handle something like 80 percent of American prescriptions: CVS Caremark, Express Scripts, and OptumRx. All three are owned by insurers. CVS Health owns Caremark and Aetna. Cigna owns Express Scripts. UnitedHealth Group owns OptumRx. The consolidation is the product of a decade of mergers, and it means that a patient's insurer, their PBM, their mail-order pharmacy, and often their doctor now belong to the same company. Appendix G maps those conglomerates.

Why the plan abolishes them

A single public payer buying every drug at one public price leaves a PBM nothing to do. There is no formulary to negotiate, because the national benefits schedule decides what is covered. There are no rebates, because there is one price. There is no spread, because the payer pays the pharmacy directly. The plan's drug savings are measured against what payers actually pay after rebates, not against list prices, precisely because list prices are the fiction PBMs exist to exploit. What remains of the PBM's function is the transaction itself, and that is the part that has to be handled with care.

The plumbing at the counter

The sub-second transaction at the pharmacy counter runs on a national electronic standard, and the messages travel through a small number of intermediaries called switches, which route each claim from the pharmacy to the right PBM's adjudication system and back. The largest switch in the country, Change Healthcare, has been owned by UnitedHealth Group since 2022. The adjudication systems themselves, the software that decides coverage and price, are owned and run by the three big PBMs and their affiliates. Two decades of pharmacy claims history, the record of what every American has been prescribed, sits in their databases. The people who know how to run it work for them.

None of that can be switched off on a Tuesday. In February 2024, a ransomware attack took Change Healthcare offline and, for weeks, pharmacies across the country could not verify coverage or bill for prescriptions; patients paid cash, went without, or relied on pharmacists who filled prescriptions on trust. That was one switch, for a few weeks. A public payer that replaced the whole system on cutover day with software that had never run at national scale would be risking the same thing for everyone at once.

The precedent: Medicare Part D, January 2006

The country has done this once before and got it wrong. Medicare's prescription drug benefit, Part D, went live on 1 January 2006. Roughly six million people who were eligible for both Medicare and Medicaid, the poorest and sickest beneficiaries, were moved on that day from state Medicaid drug coverage to new private Part D plans. The enrollment data had not been fully transferred. Pharmacies could not confirm which plan a patient was in, or found the patient enrolled in a plan that did not cover their drug, or were told the copay was hundreds of dollars for someone whose income was a few hundred dollars a month. Patients left without medication. Within the first weeks, more than 20 governors declared emergencies and authorized state funds to pay for prescriptions as a stopgap, and the federal government eventually reimbursed them.

The failure was not the benefit. It was the cutover, and specifically the decision to make coverage verification a precondition of dispensing on the first day of a new system. The plan's rules are written directly against it.

How the plan makes the transition

Run the transaction system as a regulated utility, then bring it fully public. The public price takes effect immediately, through the system that already exists. The government contracts for the operation of the existing adjudication and switching infrastructure at a regulated rate while the transition runs. The statute sets the date on which the system transfers into public hands and names the agency that maintains the national medication record afterward. The plan applies the same rule to the pharmacy switch that it applies to every other piece of infrastructure it replaces: you may replace the system, or cut the people who ran it, but never in the same year (see Appendix K).

Fill everything for the first 180 days. To cover any early gaps in enrollment data, any prescription presented at any pharmacy in the first 180 days after cutover is dispensed as a 30-day supply and paid, with eligibility reconciled afterward and the government covering any claims that turn out to be ineligible. The clinical safety checks, for interactions and dosing, continue throughout. Only the coverage question is deferred. Medicare already runs a version of this for new enrollees, and it costs almost nothing, because it delays the eligibility check rather than waiving the payment. This is the rule that would have prevented January 2006, and the plan makes it permanently available as the offline fallback whenever the system is down.

Move the people and the records with the system. The staff who operate the switch work for the companies being wound down, and the claims history sits in their databases. The statute requires the transfer of that data to the public system and offers continuity of employment to the operators, under the Health Workers Transition Guarantee, because neither the software nor the institutional knowledge can be replaced on a deadline.

Then the PBMs close. Once the transaction system is public, the formulary is the national benefits schedule, and the price is the public price, the pharmacy benefit manager has no remaining function, and the entity is wound down like the insurance business it belongs to.