The PBM Shell Game: When Cost-Cutting Leads to Record Profits

United Healthcare and Johnson & Johnson both recently delivered their earnings for 2024. After reviewing both, here's a puzzle for the economically inclined: How do pharmacy benefit managers, those self-proclaimed champions of lower drug costs, somehow coincide with pharmaceutical companies booking record profits? If you're scratching your head, you're asking the right question.

This year, UnitedHealth brought in a record $400.3 billion in revenue in 2024 despite numerous setbacks, including a massive cyberattack, heavy congressional and regulatory scrutiny, and the shooting of its CEO.?

Let’s double-click on UnitedHealth Group's Optum, the 800-pound gorilla of the PBM world. They've just reported a tidy 12% revenue increase to $253 billion. At the same time, their pharmaceutical dance partner, Johnson & Johnson, saw sales climb to a record $88.8 billion (where most of that revenue came from their US market). But here's where it gets interesting: UnitedHealthcare's revenue growth to $400.3 billion isn't just from market expansion – it's coming straight from the pockets of health plan providers who are paying more while getting less.

Here’s the standard narrative – PBMs are white knights fighting Big Pharma's pricing dragons – this deserves the same skepticism we reserve for sports betting apps that claim to protect fans from losing money. Optum wants applause for promising to pass along an extra 2% in drug rebates by 2028 – moving from 98% to 100%. Let that sink in: they're bragging about a 2% change years from now while American drug prices remain the highest in the developed world. It's corporate theater at its finest: wave the shiny rebate promise with one hand while the real money – billions in escalating drug prices and health plan fees – flows freely through the other.

The answer lies in what economists call “revealed preferences.” Despite the PBMs' chest-thumping about negotiating power, their formulary decisions – determining which drugs get the green light for insurance coverage – create a peculiar form of market segregation. It's as if they're traffic cops directing cars into toll lanes under the claim that it’ll reduce congestion.

You can see this in Optum's impressive 98% client retention rate and record 750 new clients. This isn't just a testament to stellar PowerPoint presentations. It's evidence of a system where PBMs have become indispensable middlemen in a game that paradoxically supports high drug prices while claiming to fight them. It's evidence of a captured market where providers have few alternatives while facing ever-increasing costs. When your choice is between expensive healthcare or no healthcare, it's hardly a choice at all.

Johnson & Johnson's performance tells the other half of the story. With 26 treatment options (including drugs and technology) generating billion-dollar-plus revenues annually, including newcomer SPRAVATO crossing the ten-figure threshold, J&J hardly seems cowed by PBM pressure. Their adjusted income may have dipped from 29.2% to 24.1%, but that's largely due to one-time items. The underlying profit machine hums along nicely, as their gross profit margin sits at 69%.?

So, I encourage you to watch what's happening rather than what's being said. Drug companies are rushing to raise prices now, citing 'market adjustments' ahead of new regulations. As this happens, the PBMs, who are the self-proclaimed guardians of drug costs, now find themselves mysteriously quiet, perhaps because higher drug prices mean bigger profits for everyone except the patient and plan provider.

UnitedHealth's overall operating margin is a modest-looking 5.2%, but this figure masks the real action. When your revenue base is $400.3 billion, even single-digit margins translate into serious money, $32.3 billion in profits, to be exact. More telling is their operating cost ratio improvement to 13.2% from 14.7% – efficiency gains that somehow never quite translate into savings or improved services for patients or health plan providers. So where do these efficiency gains go? It's a bit like a restaurant celebrating its improved margins by serving smaller portions at higher prices while claiming to solve hunger.

What we're witnessing isn't market failure but market success – just not the kind that benefits the average patient or health plan provider. The system works precisely as designed, with PBMs and pharmaceutical companies engaged in an elaborate dance that creates the appearance of cost containment while preserving the underlying pricing power that keeps American drug prices world-class (and not in a good way).

The solution? That's where things get interesting. Breaking up this cozy arrangement would require more than just transparency requirements or rebate pass-throughs. It would mean fundamentally rethinking a system where every player's incentives are misaligned with the end goal of lower drug prices.

But don't hold your breath waiting for reform. As UnitedHealth's growing value-based care business shows – now serving 4.7 million people and counting – the healthcare industry excels at creating new complexities faster than reformers can unravel old ones. In this game, the house always wins, even when it's playing both sides of the table.