How PBM vertical integration leads to conflicts of interest.

PBM vertical integration has quietly reshaped how pharmacy benefits are designed, priced and delivered—and not in favor of employers or members. When a single company controls formulary decisions, pharmacy networks, drug distribution and rebate flows, the incentives driving those decisions shift. The result is a system that can appear competitive on the surface while generating significant hidden value for the PBM itself.

Understanding how vertically integrated healthcare works—and why it matters—is essential for any employer evaluating whether their pharmacy benefit is actually working in their interest.

Key highlights:

• PBM vertical integration in healthcare refers to the consolidation of multiple stages of the care or drug supply chain under one corporate entity, creating opportunities for internal profit generation.
• When a PBM controls its own pharmacies, distribution channels and rebate streams, it can steer prescriptions and pricing decisions to maximize internal revenue rather than minimize client spend.
• Employers and members often bear the consequences—leading to higher costs, reduced care access and limited visibility into how decisions are made.
• Rightway operates as a neutral PBM alternative, with no owned pharmacies, specialty pharmacies, or other healthcare entities that could create conflicts of interest.

What is vertical integration in healthcare?

Vertical integration in healthcare occurs when a single organization owns or controls multiple stages of the care delivery or supply chain—from insurance and pharmacy benefit management to pharmacy dispensing and drug distribution. In the context of PBMs, this means one company can influence nearly every touchpoint a prescription drug passes through before reaching a member.

To understand what a pharmacy benefit manager does in the first place, it helps to understand how the drug supply chain works, and how consolidation across that chain changes the incentive structure at every step.

How vertical integration in healthcare works across drug channels.

Vertically integrated pharmacy benefit manager models have ownership across the entire drug supply chain. Here is how control flows through each layer and where conflicts begin to form.

1. Formulary design and drug selection are determined.

The drug formulary is where the process begins. In a vertically integrated model, the PBM designs the formulary, deciding which drugs are covered, at what tier and with what cost-sharing requirements for members.

Because the PBM may have financial relationships with specific manufacturers through rebate agreements, formulary placement decisions are not always made purely on clinical merit or lowest net cost. Drugs that generate higher rebates for the PBM may receive preferred placement, even when lower-cost alternatives exist.

The mechanics of formulary bias follow a predictable pattern:

• Rebate negotiations influence tier placement
• Higher-rebate drugs may displace lower-cost clinical equivalents
• Employers rarely have visibility into how formulary decisions are made

2. The PBM defines pharmacy networks and fulfillment pathways.

Once a drug is on formulary, the PBM determines which pharmacies members can use — and on what terms. In a vertically integrated structure, the PBM typically owns or partners with specialty and mail-order pharmacies, giving it direct influence over where prescriptions are filled.

Network design in these models often creates strong financial incentives to route prescriptions through preferred channels. Members may face higher cost-sharing at independent pharmacies, and employers may not realize that the network structure itself is generating revenue for the PBM.

The financial incentives embedded in network design are rarely disclosed:

• Owned pharmacies are often preferred network destinations
• Independent pharmacies may be excluded or reimbursed at lower rates
• Network tiering can push members toward higher-revenue channels without their awareness

3. Prescriptions are routed through PBM-owned distribution channels.

Specialty medications—often the highest-cost drugs on a plan—are frequently required to be dispensed through a PBM-owned or affiliated specialty pharmacy. With specialty drugs now making up 75% of the total drug pipeline, according to Advisory, the volume flowing through these closed channels will only grow. This creates a compounding problem: the PBM controls coverage, network access and dispensing, capturing margin at each stage, and the dollar amounts at stake are increasing every year.

For employers, this structure can be difficult to identify in contract language. Terms like "specialty pharmacy program" or "preferred dispensing" may obscure the fact that the PBM is fulfilling the prescription through a related entity and retaining a portion of the margin.

Here are three structural ways this channel capture works:

• Specialty drug routing is a primary source of vertical revenue
• Closed distribution channels limit member choice and employer negotiation leverage
• The same entity may adjudicate the claim and fill the prescription

4. Patient access and care delivery are managed within the network.

Provider and care delivery ownership extends vertical integration beyond pharmacy. Some PBMs and parent healthcare organizations also own physician groups, clinics, urgent care centers and telemedicine platforms—giving them influence over where members receive primary care and how they move through the healthcare system.

For employers, these relationships are often not immediately visible. Care referrals, virtual care programs, or “integrated care models” may appear independent, while routing members into affiliated provider networks that generate additional revenue for the parent organization.

The consequences of provider ownership compound the conflicts:

• Referrals may direct members toward owned providers or services
• The same organization may influence both treatment decisions and pharmacy utilization
• Integrated provider ownership expands control across both medical and pharmacy spend

How PBM ownership of pharmacies creates conflicts of interest.

Vertical integration does not just centralize operations; it changes the incentives driving decisions that ultimately impact employer pharmacy spend and member cost and access. Here is where specific conflicts of interest emerge.

Incentives steer prescriptions to owned pharmacies.

When a PBM owns the pharmacy filling a prescription, it benefits financially from every claim processed through that channel. This creates a direct incentive to route volume toward owned entities, regardless of whether that serves the employer or member. According to the Federal Trade Commission (FTC), pharmacies affiliated with the Big 3 PBMs received 68% of the dispensing revenue generated by specialty drugs in 2023, up from 54% in 2016.

This conflict sits at the center of employer drug benefits management, and it is rarely disclosed in the sales process. Network design, specialty carve-outs and mail-order mandates all function as routing mechanisms. The result is that the PBM's fulfillment revenue grows in direct proportion to the employer's drug spend, which misaligns the interests of both parties.

The routing mechanisms are built into the contract—not disclosed in the sales process:

• Mandatory mail-order provisions benefit PBM-owned pharmacies
• Specialty carve-outs may require dispensing through a related entity
• Member experience and cost are secondary to channel economics
• Employers cannot verify whether routing decisions reflect clinical or financial logic

Rebate and pricing structures favor higher-cost drugs.

Rebates are negotiated between manufacturers and PBMs. In a vertically integrated model, the PBM may retain a portion—or the majority—of these rebates rather than passing them through to the employer. This creates an incentive to favor drugs with strong rebate economics over drugs with the lowest net cost.

The downstream effect is increased drug prices at the employer level. A drug with a 40% list price rebate but low net cost pass-through may generate more PBM revenue than a lower-cost alternative with no rebate. Employers pay more; the PBM retains more. The member may also pay more in cost-sharing tied to the list price.

The economics of rebate retention play out the same way every time:

• Rebate retention creates incentives to prefer higher-list-price drugs
• Formulary positioning is influenced by which drugs generate the most PBM revenue
• Cost-sharing for members is often based on list price, not net cost
• Employers rarely see claim-level data showing the true economics

Transparency reduces across pricing and decision-making.

In a vertically integrated PBM structure, the same entity making formulary decisions, processing claims and filling prescriptions also controls the data. This creates an environment where employers have limited visibility into how drug pricing models work in practice—and limited ability to audit whether contract terms are being honored.

Standard summary reporting tells employers what they spent, not why. Without claim-level access, employers cannot determine whether formulary decisions, network routing, or pricing structures are working in their favor or against them. Transparency alone does not fix misalignment. But without it, employers cannot even ask the right questions.

The data problem is structural, not accidental:

• Summary reporting replaces claim-level visibility in most vertically integrated contracts
• Audit rights are frequently narrow or subject to PBM approval
• Employers cannot independently verify spread pricing or rebate calculations
• Conflicts of interest are hardest to identify when the conflicted party controls the data

Internal profit flows across vertically integrated entities.

Healthcare industry verticals generate revenue at multiple points in the supply chain: rebate retention, spread pricing, specialty dispensing margins and distribution markups. Because these flows happen between related entities, they are not always visible in the summary data employers receive.

This internal profit structure means the PBM can appear to offer competitive administrative fees while generating significant revenue through other channels. Employers evaluating PBM cost on the basis of admin fees alone are looking at a fraction of what the PBM actually earns. The total economic picture is far broader — and far less favorable to the plan sponsor.

Downsides of vertical integration in healthcare.

Vertically integrated PBM models create structural problems that go beyond misaligned incentives. The cost of traditional PBMs shows up in ways that affect both plan sponsors and the members they cover.

Plan sponsors pay more than they should.

When a PBM generates revenue through retained rebates, spread pricing and specialty dispensing margins, employers absorb those hidden costs. Admin fees look competitive on paper. But the total economic picture includes every dollar flowing through channels the employer cannot see or audit. Employers that evaluate PBM cost on admin fees alone are comparing a fraction of the real number.

The charges that don't appear on an invoice are often the largest ones:

• Retained rebates inflate net drug spend without appearing on any invoice
• Spread pricing on generics and specialty drugs adds a hidden margin on every claim
• Specialty routing through owned pharmacies captures dispensing revenue that the employer is effectively funding
• Total pharmacy spend consistently runs higher in vertically integrated models than in transparent, neutral alternatives

Member out-of-pocket costs rise alongside plan spend.

Cost-sharing for members is typically calculated off list price — not net cost. In a vertically integrated model where formulary design favors higher-rebate drugs over lower-cost alternatives, members pay more at the pharmacy counter as a direct result. Higher-tier placement and step therapy requirements add friction and cost that members experience personally.

The financial consequences for members are direct and often invisible to employers:

• Cost-sharing tied to list price means members don't benefit when net costs are lower
• Formulary designs that favor rebate economics over clinical value push members toward more expensive options
• Step therapy and prior authorization processes can delay access and increase out-of-pocket burden

Member choice and access are limited by network design.

Vertically integrated PBMs design networks that concentrate volume through owned or affiliated pharmacies. Independent and community pharmacies, where many members already have established relationships, are frequently excluded from preferred tiers or reimbursed at rates that make participation unsustainable. The result is a narrower network shaped by the PBM's financial interests, not member needs.

Network restrictions have real consequences for members—especially those in underserved areas:

• Independent pharmacies are often excluded from preferred networks or penalized with lower reimbursement
• Members in rural or underserved areas may lose access to their closest or only pharmacy option, reducing the quality of care
• Mail-order mandates and specialty carve-outs remove member choice in favor of PBM-owned fulfillment channels
• The hidden costs of a restricted network show up in member dissatisfaction and reduced benefit utilization

Neutral vs vertically integrated PBM models: Key differences.

The structural difference between a vertically integrated PBM and a neutral PBM model determines whether the employer's interests are represented at every decision point — or only when they happen to align with the PBM's revenue objectives.

Avoid vertical integration of PBMs with Rightway.

When there are no owned pharmacies to route volume through, no rebates to retain and no spread to capture, the PBM's only path to revenue is delivering outcomes for the client. That is the mission that the Rightway PBM model is built on—designed to remove, not just disclose, the mechanisms that create conflicts of interest in traditional PBM structures.

Here is how the Rightway PBM model works:

• No owned pharmacies and no supply chain ownership means zero financial incentive to route prescriptions anywhere other than what serves the member.
• Every dollar of manufacturer rebates passes through to the client and is retained as PBM revenue.
• Zero spread pricing on every claim, across all drug categories, with no hidden markup between what employers pay and what pharmacies receive.
• One flat administrative fee is the only source of Rightway revenue, eliminating the conflict between PBM profitability and plan sponsor savings.
• Claim-level visibility and quarterly audit-ready reporting give employers full transparency into what was paid, to whom and why, so contract terms can be verified at any time.

Avoid PBM vertical integration. Book a demo today and see how Rightway reduces costs, improves access and delivers a more transparent pharmacy benefit experience.