The Hidden Middlemen Driving Up Your Drug Costs — And How Baltic Nations Eliminated Them
Every time an American fills a prescription, a largely invisible transaction takes place behind the pharmacy counter — one that has little to do with the pharmacist, the physician, or even the drug manufacturer. It involves a third party known as a pharmacy benefit manager, or PBM, whose role in determining drug prices, formulary coverage, and reimbursement rates has made it one of the most consequential — and least understood — forces in US healthcare.
For patients in Lithuania, Estonia, and Latvia, this particular problem is largely a non-issue. Not because their healthcare systems are perfect, but because their regulatory architecture was deliberately designed to prevent the opacity that allows PBMs to thrive. The contrast is instructive, and increasingly, it is one that American health economists are beginning to examine more closely.
What Exactly Is a Pharmacy Benefit Manager?
PBMs serve as intermediaries between insurance companies, drug manufacturers, and retail pharmacies. On paper, their function sounds reasonable: they negotiate drug prices on behalf of insurers, manage formularies, and process claims. In practice, however, the mechanisms through which they profit have become deeply controversial.
The three largest PBMs in the United States — CVS Caremark, Express Scripts, and OptumRx — collectively manage prescription benefits for the vast majority of insured Americans. Together, they control an estimated 80 percent of the PBM market. Critics, including members of Congress from both parties, have argued that these companies use their market power to extract rebates from manufacturers, favor high-list-price drugs that generate larger rebates over lower-cost alternatives, and retain a portion of those rebates rather than passing savings to patients or plan sponsors.
A 2022 Federal Trade Commission report flagged serious concerns about PBM consolidation and its effects on drug affordability. Yet meaningful federal regulation has remained elusive, in part because the financial arrangements PBMs rely upon are extraordinarily complex and deliberately difficult to audit.
How Eastern Europe Built Transparency Into the System
The Baltic states took a different approach — one rooted in the principle that pharmaceutical pricing must be legible to regulators and, to the extent possible, to the public.
In Lithuania, the State Health Insurance Fund (known by its Lithuanian acronym PSDF) operates as the primary payer for reimbursable medications. Drug prices are negotiated directly between the fund and manufacturers under a framework that requires public disclosure of reference pricing. The prices Lithuania pays are benchmarked against a basket of European Union member states, meaning that no single manufacturer can quietly charge a premium that diverges dramatically from what neighboring markets pay.
Estonia employs a similar mechanism through its Health Insurance Fund, which maintains a publicly accessible reimbursement database. Estonian regulations require that the margin between a drug's wholesale acquisition cost and its retail price remain within defined statutory limits. Intermediaries exist, but their compensation is capped and their role is transparent by law.
Latvia has gone further in recent years, implementing mandatory electronic reporting requirements that allow regulators to trace the full pricing chain from manufacturer to patient. This kind of end-to-end visibility is precisely what PBM critics in the United States have demanded — and precisely what the current American system does not provide.
The Rebate Problem and the Baltic Alternative
One of the most contentious aspects of PBM operations in the United States is the rebate system. Drug manufacturers pay rebates to PBMs in exchange for favorable formulary placement — essentially paying for the privilege of having their drug recommended over a competitor's. The problem is that these rebates are often tied to a drug's list price rather than its net cost, creating a perverse incentive to keep list prices artificially high.
In the Baltic model, this incentive structure is largely neutralized. Because reference pricing anchors reimbursement to actual transaction prices in comparable markets, manufacturers have less to gain from inflating list prices. And because intermediary margins are regulated, there is no financial reward for favoring one drug over another based on hidden rebate arrangements.
The result is a system where the price a patient pays at the pharmacy counter is far more closely aligned with what the drug actually costs to produce and distribute — a relationship that has become almost unrecognizable in the American context.
Why American Policymakers Have Been Slow to Act
The Baltic transparency model is not unknown to health policy researchers. Academic literature comparing European pharmaceutical regulation to US practices has grown substantially over the past decade. What has been slower to develop is political will.
Several factors explain the lag. PBMs are significant lobbying forces in Washington, spending tens of millions of dollars annually to shape federal and state legislation. The complexity of their financial arrangements also makes it difficult for non-specialists — including many legislators — to fully grasp the mechanisms being criticized. And the US healthcare system's fragmented, multi-payer structure makes it genuinely harder to implement the kind of centralized pricing transparency that a single national health insurer can mandate.
There are also structural differences worth acknowledging. The Baltic states operate smaller populations with relatively homogeneous insurance coverage, making coordinated pricing regulation administratively simpler. Scaling such a model to a country of 330 million people with thousands of distinct insurance plans presents real challenges that should not be dismissed.
What a Transparency-Inspired Reform Might Look Like in the US
None of this means the Baltic example is irrelevant to American reform efforts. Several proposals currently circulating in Congress draw, at least implicitly, on principles that Eastern European regulators have already operationalized.
Mandatory rebate pass-through requirements — which would force PBMs to forward negotiated rebates directly to patients at the point of sale rather than retaining them — mirror the Estonian approach of capping intermediary compensation. Proposals to require PBMs to disclose net drug costs and formulary decision criteria echo the Lithuanian public reference pricing framework. And the FTC's ongoing investigation into PBM consolidation reflects a growing recognition that market concentration in pharmaceutical intermediation is a problem requiring active regulatory attention.
What the Baltic model adds to this conversation is proof of concept. These are not theoretical reforms. They are functioning systems, operating in countries that are members of the European Union and subject to rigorous health outcome measurement. Their pharmaceutical spending per capita is dramatically lower than that of the United States, and their patient access to essential medications remains broadly comparable.
A Question of Political Imagination
The gap between what is known about transparent drug pricing models and what has been implemented in the United States is not primarily a knowledge gap. It is a political one. The mechanisms through which Eastern European regulators have constrained pharmaceutical intermediaries are well documented. The outcomes are measurable. The policy tools are available.
What remains missing is the collective decision to prioritize patient affordability over the financial interests of the intermediaries who have made the current system so profitable for themselves. For American patients paying hundreds of dollars monthly for medications that cost a fraction of that price in Vilnius or Tallinn, that distinction is not an abstraction. It is a monthly financial reality.
Understanding how other health systems have solved problems that the US continues to treat as unsolvable is, at minimum, a necessary starting point for serious reform. The Baltic experience suggests that transparency is not merely an aspiration — it is an achievable regulatory standard, one that produces measurable benefits for patients and payers alike.
