Big Pharma’s Campaign Against Vertical Integration Is Falling Apart

For years, Big Pharma has waged a campaign against vertical integration in healthcare. Drug manufacturers have argued that pharmacy benefit managers (PBMs), insurers, and affiliated pharmacies are responsible for rising healthcare costs, distorted incentives, and declining competition. Their message has been simple: if Americans want lower drug prices, Washington should break up vertically integrated healthcare companies.

That argument shifts attention away from the one group that actually sets drug prices in the first place—pharmaceutical manufacturers.

Now, a new review from the Department of Health and Human Services Office of Inspector General (OIG) is examining that narrative. After examining Medicare Part D drug spending, the federal government found little evidence that vertical integration is driving higher costs for patients. In fact, the findings suggest the opposite.

The OIG examined 60 drugs used by Medicare beneficiaries and compared costs between vertically integrated plan sponsors and non-integrated competitors. If Big Pharma’s talking points were correct, integrated plans should have produced higher drug costs.

That is not what happened.

The report found that net drug costs were virtually identical between vertically integrated sponsors and other plans. Overall differences amounted to less than one percent. For brand-name drugs, integrated plans actually paid less. For generic and multiple-source drugs, the difference also favored integrated sponsors. Across most of the medications reviewed, cost differences were minimal.

This finding alone should force policymakers to rethink years of assumptions.

Drug manufacturers have spent years blaming middlemen for the gap between list prices and net prices. Their argument suggests that rebates and negotiations conducted by PBMs create higher costs for consumers. Yet the government’s own analysis found that integrated and non-integrated plans arrive at nearly identical net costs.

The difference is that integrated plans often secure larger rebates and discounts, allowing them to offer lower premiums to beneficiaries. Medicare Advantage prescription drug plans operated by vertically integrated sponsors charged premiums roughly half the size of competing plans. Stand-alone prescription drug plans also offered substantially lower premiums.

That matters for seniors living on fixed incomes.

Every month, millions of Americans care far more about what comes out of their checking account than about ideological arguments over corporate structure. If integration helps lower premiums while maintaining similar net drug costs, policymakers should think carefully before dismantling it.

The OIG also undermined another common accusation advanced by critics of vertical integration, that integrated companies systematically favor their own pharmacies at the expense of independent and unaffiliated competitors.

Again, the evidence failed to support the accusation.

The report found that vertically integrated sponsors reimbursed their own affiliated pharmacies less than unaffiliated pharmacies for the same drugs. Both groups received reimbursements above acquisition costs, but unaffiliated pharmacies actually enjoyed larger margins on average.

This directly contradicts the narrative that integrated healthcare companies are using their market position to funnel profits to their own pharmacy operations while starving competitors.

That does not mean every concern about healthcare markets has been resolved. The OIG itself noted that additional audits are underway and that more information is needed in certain areas. Reasonable oversight remains appropriate.

But there is a vast difference between targeted oversight and the sweeping proposals currently being pushed in Washington.

Several lawmakers have introduced legislation designed to break apart vertically integrated healthcare organizations, including the Patients Before Monopolies Act and the Break Up Big Medicine Act. Supporters claim these measures would lower costs and improve competition. Yet the latest federal evidence raises a fundamental question: if the alleged harms are not showing up in the government’s own data, what exactly are lawmakers trying to fix?

Too often, healthcare debates become exercises in political theater rather than evidence-based policymaking. Vertical integration has become an easy target because it sounds complicated and suspicious. Meanwhile, pharmaceutical manufacturers continue to raise list prices while encouraging lawmakers to focus their attention elsewhere.

That is the real lesson of the OIG report.

When federal investigators examined one of the most heavily integrated sectors of American healthcare, they did not find runaway drug costs. They did not find consumers being gouged. They did not find affiliated pharmacies receiving preferential treatment at the expense of competitors.

What they found were similar net drug costs, lower premiums, and little evidence supporting the central claims made by opponents of vertical integration.

Before Congress rushes to break apart healthcare organizations that are helping millions of Americans access affordable coverage, lawmakers should pause and follow the data. The facts increasingly suggest that Big Pharma’s favorite villain may have been a convenient scapegoat all along.

Sam Kuebler is a board member for the American Growth and Innovation Forum.