“Where There Is Mystery, There Is Margin.” Will Medicare Eliminate Mystery From Retail Pharmacy?

Dave Berkus is a business consultant credited with the phrase “Where there is mystery, there is margin.”¹ As a computer consultant in the 1980s, he observed the go-to-market evolution of hardware and software and realized that what had started out as mysterious to his customers and company was becoming less mysterious and a la carte. In other words, once purchasers began to understand hardware and software, and it became more like a commodity, margins contracted dramatically.

Replacing 30% to 40% margins would have been impossible were it not for bundling and reintroducing mystery to computing professional services (as opposed to merely software and hardware). As the cost of hardware and software fell dramatically due to more efficient manufacturing and more mature software development, professional services and network administration became a means to reintroduce differentiation to the commodities, thereby reintroducing mystery (and thus margin).

Evolution of Pharmacy Benefits Management Margins

Similarly, the evolution of drug manufacturing, first by local pharmacies and then by large pharmaceutical companies, has rendered most medications commodities. In fact, a great deal of regulation is put into place to ensure a lack of differentiation among approved drug products. So how did pharmacy benefit managers (PBMs) come to be, and why has the introduction of mystery been such a critical strategy to their profitability over time?

Administrator

In the 1980s, PBMs helped administer a pharmacy benefit to insured individuals as the variety and demand for prescriptions grew substantially. Rather than filing paper claims, a standards-based claims system that operated in a timely manner was implemented at scale to reduce prescription administration costs, leaving a margin for PBMs.

Drug Cost Police

As the administration of pharmacy benefits became less novel, clients sought to reduce administrative costs, and a new focus on controlling drug prices and utilization became a valuable priority for clients. During the 1990s and the early 21st century, numerous blockbuster brand-to-generic switches occurred. PBMs were at the forefront of evolving prior authorization, step therapy, and tiering strategies, creating new margin opportunities for PBMs.

Along the way, pharmaceutical manufacturers, desperate to avoid the government-imposed price controls used in most other countries, struck a deal in the US to create the Medicaid Drug Rebate Program. This way, manufacturers could list a price that would be the most that any entity or individual might pay, and then provide greater rebates for entities (through rebates) and individuals (through discount cards) for those less willing or less able to pay. This created a system in which everyone can access the medications, but wildly different net pricing is applied. This also generated an enormous amount of mystery, leaving new margin opportunities for PBMs.

Spread Harvesting

Health plans, employers, and other purchasers demanded larger portions of rebates from PBMs and, in some instances, contractual guarantees of rebate levels. This led to PBMs taking advantage of the mystery created from opacity in the delta between the net price paid on behalf of the sponsor–health plan–purchaser and the amount charged to those clients, creating new margin opportunities.

Evolution of Medicare Part D Cost Containment

January 1, 2006, is a day that any community pharmacist would remember had they been practicing when Medicare Part D was implemented. Nearly one-third of all prescriptions are filled by Medicare recipients, the largest provider of pharmacy benefits on the planet.

When the Medicare Modernization Act of 2003 was passed, Medicare’s pharmacy benefit was born and immediately privatized. Legislators promoted the marketplace as a means to contain prescription drug costs and simultaneously allow for enrollee choice. Rebates enshrined margin mystery from the get-go.

After some time, CMS grew skeptical that the private market was providing enough data to ensure they were receiving all rebates and concessions, so a regulation was passed to require full pass-through. Balking at the reduction in margins caused by full transparency, the industry passed the burden of direct and indirect remuneration margin reduction to pharmacies.

After blowback from pharmacies, legislators, patients, and caretakers, policy makers finally said, “We’ve had enough.” A Democratic administration championed direct government negotiation of prices for Medicare (maximum fair price), and the subsequent Republican administration is now following through with it. There will be no mystery from the purchasers’ perspective (CMS).

10 Drugs, 1 Payer Type, Outsized Effects

Yes, the list contains only 10 drugs, and it only applies to Medicare, representing less than 5% of prescription fills for the vast majority of pharmacies. However, it represents between 20% to 40% of the total cost of goods sold across all prescription fees, regardless of payer type, for most pharmacies. And with each subsequent year’s addition of 10 more drugs, the proportion of the cost of goods sold (COGS) will go up. It won’t be long until the majority of COGS has a fully and publicly known cost to the purchaser, marking the first time in US history that this will be the case.

As the number of price-transparent drugs grows horizontally within Medicare, employers, consumers, and even Medicaid programs (with the largest rebate amounts by law) will take notice and start to compare pricing and transparency with their own costs. This vertical movement across payer types, including the reemergence of the “cash pay” payer (patient-consumer), may spread like wildfire.

Previously, manufacturer pushback would have been a reliable lobbying and public relations effort; however, Eli Lilly and Company and Novo Nordisk have recently indicated that rebates must be eliminated. They realized that the size of a rebate was starting to outgrow the size of revenue retained from the sale of a unit (gross to net falling to < 50% for many of their products), and they will begin to sell directly to employers.²

Transparency Will Move Upstream to the Supply Chain

As manufacturer prices (the starting point) and purchaser costs (the end point) become ever more transparent, the supply chain will start to sweat. Up and down the supply chain (including the last mile pharmacy) still operates largely in opacity, with Byzantine purchasing agreements for pharmacies and offshore buying groups, as well as off-invoice rebating and many other mystery makers. Manufacturers are already well down the road of manufacturer-to-patient direct programs to eliminate the supply chain altogether, where allowed.

When Buy-Sell Mystery Dissolves, We’re Left With Services That Help Patients Navigate Their Health

Community pharmacies have been screaming for PBM transparency for decades, and transparency will ultimately come to their shores as well. What remains in the provision of these commodities will be the service opportunities that come with dispensing. Community pharmacies will either be dispensing machines designed to be loss-lead business models in large retailers of nondrug products or ground-down dispensing machines that can safely operate with a per-fill margin of $4 or less, with no room whatsoever to take care of the patient when in need.

The die is now cast. We’ve been saying it since 1990 or earlier: Pharmacy must evolve to a services-based model in which the mystery is how to best optimize a drug regimen given an individual’s condition, needs, and health goals. That is a mystery worth paying for.

About the Author

Troy Trygstad, PharmD, PhD, MBA, is executive director of CPESN USA, a clinically integrated network of more than 3500 participating pharmacies. He received his doctor of pharmacy and master of business administration degrees from Drake University and a doctorate in pharmaceutical outcomes and policy from the University of North Carolina. He has recently served on the board of directors for the Pharmacy Quality Alliance and the American Pharmacists Association Foundation. He also proudly practiced in community pharmacies across North Carolina for 17 years.

REFERENCES

1. Berkus D. “Where there’s mystery, there’s margin.” Berkus. July 24, 2025. Accessed December 16, 2025. https://berkus.com/where-theres-mystery-theres-margin-2/

2. Tozzi J, Muller M. Novo, Lilly plan to sell weight-loss drugs direct to employers. Modern Healthcare. November 21, 2025. Accessed December 17, 2025. https://www.modernhealthcare.com/insurance/mh-novo-nordisk-eli-lilly-waltz-health/