Ownership of the prescription drug supply chain by a single large company can lower insurance premiums for consumers but leads to higher out-of-pocket costs for many, according to a May 2026 audit report. 

The audit conducted by the Office of Inspector General for the Department of Health and Human Services studied the impact of “vertical integration” on prescription drug costs for the Medicare Part D program. 

Vertical integration occurs when a parent company owns multiple parts of the supply chain, such as an insurance company, a pharmacy benefit manager, and pharmacies.

Such arrangements have been widely criticized as opaque and monopolistic. 

“Vertically integrated [pharmacy benefit managers] may have the ability and incentive to prefer their own affiliated businesses, which in turn can disadvantage unaffiliated pharmacies and increase prescription drug costs,” the Federal Trade Commission reported in 2024.

Yet the inspector general’s audit found that vertical integration resulted in similar costs for insurance compared with non-integrated markets, and that it produces lower premiums for enrollees.

“The [Office of Inspector General] study demonstrates that the criticisms of vertical integration and pharmacy benefit managers are unsupported by real-world data. Vertically integrated pharmacy benefit managers have saved Medicare beneficiaries money in the form of lower premiums,” Jeremy Nighohossian, an economist at Competitive Enterprise Institute, told The Epoch Times.

Yet as the report itself points out, much remains unknown about the overall industry impact because of the limited sample used in the audit, and the financial relationships between vertically integrated companies are not visible to the public. 

Complicated Pricing

Drug pricing for insurers and pharmacies is based on complicated reimbursement schemes but tends to produce the same result in integrated and non-integrated markets, the report found.

Medicare Part D plans—offered by private insurance companies contracted with the Centers for Medicare and Medicaid Services—cover prescription drug benefits for enrollees.

In 2023, six organizations accounted for about 82 percent of the $276 billion in Part D spending, according to the Office of Inspector General.

The net cost of drugs varied by less than 1 percent for insurers who were vertically integrated compared with those who were not, according to the report.

However, the pricing schemes were different in each case. 

The large integrated companies paid pharmacies more upfront but took money back later through manufacturer rebates and pharmacy fees.

Non-integrated pharmacies paid less for drugs but took back less money later.

Independent pharmacists have long complained that these complicated reimbursement and take-back policies make it difficult to do business.

Vertically integrated companies paid their own pharmacies about 4 percent less at the point of sale than they paid independent pharmacies, the report said.

Yet because the companies do not report exactly how much they take back from each pharmacy, the actual final payment to insurer-owned pharmacies remains unknown.

“Without knowing the full measure of the ‘clawbacks’ and the rebates, it is hard to know exactly” how reliable the report’s findings are, C. Michael White, a professor of clinical pharmacology at the University of Connecticut, told The Epoch Times.

Trade-Off for Consumers

For people enrolled in these plans, there was a trade-off. 

While their monthly premiums were often lower, their actual out-of-pocket costs for drugs are much higher.

Medicare beneficiaries relying on the Part D program alone—without other insurance or financial support—paid nearly 40 percent more in out-of-pocket costs in vertically integrated plans compared with other plans, the audit found.

In vertically integrated plans, 52 of 60 drugs selected had higher out-of-pocket costs for enrollees who did not have other financial assistance.

Beneficiaries who did have financial support other than the Part D program paid 5 percent more for the 60 drugs when enrolled in a plan provided by a vertically integrated insurer.

Unknowns

The full impact of vertical integration is unclear due to a lack of pharmacy payment data in vertically integrated companies that own pharmacies, according to the report.

Also, the audit examined just 60 of the approximately 4,000 drugs usually covered by Medicare Part D.

Even so, some experts believe the results may indicate that vertical integration has similar effects in the commercial insurance market.

“The integrated entities offer enticements that make people tend toward them on the front end, but there are rules and regulations in the plans at various levels that maintain the profitability,” White said.

New laws will increase price transparency over the next few years. 

Starting in 2024, insurance companies must apply any discounts or fees they get from pharmacies directly to the price at the checkout counter, which can lower the out-of-pocket payment. 

As of 2025, Medicare Part D enrollees’ out-of-pocket drug costs are capped at $2,000 annually. 

Beginning in 2028, Pharmacy Benefit Managers will be required to pass all rebates and discounts to insurers, which could further lower costs.