Understanding Vertical Integration in the Health System and Why It Matters for Patients

Vertical integration has impacted the prescription drug market in ways most consumers never see, but almost all feel. 

There has been a significant increase in vertical integration between PBMs and health insurers in recent years. This, along with the fact that the five largest PBMs controlled 93.6% of the Part D market, 79.6% of the commercial insurance market, and 71.5% of the Medicaid managed care PBM market in 2023, means that very few corporate entities have significant control over pricing, drug coverage rules, pharmacy network decisions, and benefit design. 

The companies that decide which medications are covered are often the same ones that control drug pricing negotiations and operate their own pharmacies, which generally results in limited transparency, fewer choices, limited access, higher out-of-pocket costs for patients and higher profits for PBMs. 

A recent USC Schaeffer study analyzing data from insurer-PBM contracts found several important trends around vertical integration: 

• Vertical integration in Medicare Part D increased from about 30% to 80% between 2010 and 2018. 

• The loss of standalone PBMs increased costs: When the last major independent PBM in Part D exited the market, plans saw premiums rise after being forced to switch to PBMs owned by rival insurers. The consolidation did not deliver promised savings: United’s acquisition of Catamaran did not reduce premiums for United’s own enrollees. 

• Independent insurers faced premiums that were 36% higher compared to those that were integrated. 

  
  

Vertical integration also contributes to disparities in network participation that directly affect patient access to care. Research shows how PBM and insurer consolidation shapes which pharmacies get included in Medicare Part D preferred networks and which do not. 

Pharmacies that were preferred by fewer than half of Part D plans were more likely to close compared to pharmacies included more broadly. Independent pharmacies were hit the hardest, despite making up roughly 40% of all U.S. pharmacies in 2023, very few were included as preferred providers in most plans. Large chains and PBM-owned or affiliated pharmacies were far more likely to receive preferred status. As a result, independent pharmacies have been closing at an alarming rate. Nearly one in three have shut down since 2010 and almost 800 ZIP codes are now without a pharmacy, leaving patients with limited access to needed medications. 

The combination of vertical integration and high PBM concentration creates a system where competition is limited at multiple levels.  

Increasing transparency, strengthening oversight, and reducing anti-competitive structures is critical to help restore balance to the prescription drug market. Reforms that focus on patient outcomes and fair competition will provide clarity on pricing, increased access to pharmacies, and lead to a system that better reflects the needs of patients rather than the financial incentives of a few dominant corporations.

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