When US lawmakers convened a hearing last month to discuss the pricing of prescription drugs, it was the testimony of Martin Shkreli—the brash former Turing Pharmaceuticals CEO who raised the price of AIDS medication by 5,000%—that garnered the headlines. But the hearing also looked at an issue that, while it got far less attention, could make drugs more expensive for far more people: almost everyone in America, in fact.

The impetus was October’s announcement from Walgreens, the US’s second-largest chain of pharmacies, that it was buying Rite Aid, the third. Critics said that would create a drugstore duopoly with CVS, the market leader. They didn’t, however, look as hard at another effect of the deal, which likely will bring about the final collapse of the industry tasked with keeping prescription-drug costs under control.

When a pharmacy owns a PBM, “it’s a sweetheart deal—the two entities no longer have an incentive to negotiate with each other.”

Buried inside Rite Aid is a bundle of pharmacy benefit managers (PBMs). These are companies that handle the distribution of drugs for large employers, insurance companies, and government programs like Medicare. Walgreens says that acquiring Rite Aid’s PBMs would help it compete with arch-rival CVS, which controls a large and extremely profitable PBM called Caremark.

But combining pharmacies and PBMs under one roof creates a conflict of interest. It can restrict patients’ access to certain prescription drugs, and can prevent independent drugstores from competing fairly for new customers.

Worst of all, it could push up drug prices. When a pharmacy owns a PBM, explains Bob Zebroski, a professor at the St. Louis College of Pharmacy, “it’s a sweetheart deal—the two entities no longer have an incentive to negotiate with each other.”

As the Federal Trade Commission (FTC) scrutinizes the Walgreens-Rite Aid deal, some experts believe the agency should consider more than just the potential effect on pharmacy retailing, and evaluate whether PBMs combined with pharmacies are good for patients. Indeed, there’s an opportunity here: The FTC could use the review to revisit its controversial 2007 decision that let CVS acquire Caremark. That was the deal that first undermined the ability of modern PBMs to drive a hard bargain with today’s giant drugstore chains.

A history of acquisition, separation, and reconsolidation

Since they were formed in 1968, PBMs have played an important role in keeping a lid on drug prices. They processed insurers’ drug prescriptions, reimbursed pharmacies for those prescriptions, and maintained the formulary (the list of drugs a particular insurer deems medically safe). Most important, they used their sizable patient networks to independently negotiate lower reimbursement rates with pharmacies, and discounts with drug-makers. Being independent meant that PBMs had an incentive to pass those savings back to their health plan sponsors, and thus, ultimately, to patients.

That’s why, when drug-makers began acquiring PBMs in the 1990s, the FTC acted swiftly to undo the deals. The FTC believed that combining PBMs with pharmaceutical companies created egregious conflicts of interest. It would enable drug-makers to coordinate pricing policies, see their competitors’ sensitive pricing information, and favor their own drugs over those of their competitors.

Timeline of key PBM deals Key Drug firm Pharmacy Pharmacy benefit managers Drug-maker era: Pharmaceutical firms acquire PBMs 1968 The first PBM, Pharmaceutical Card Systems (PCS), is started in Scottsdale, Arizona 1993 Merck purchases Medco for $6 billion 1994 Eli Lilly purchases PCS Health Systems for $4 billion 1994 SmithKline Beecham buys Diversified Pharmaceutical Services (from insurer UnitedHealth) for $2.3 billion Independent era: Pharmaceutical firms sell PBMs as a result of 1990s FTC actions 1998 Eli Lilly sells PCS Health Systems for $1.5 billion 1999 SmithKline Beecham sells Diversified Pharmaceutical Services to Express Scripts for $700 million 2003 Merck spins off Medco Pharmacy era: Mergers between PBMs, and of PBMs with pharmacy chains 2000 Advance Paradigm purchases PCS for $1 billion, and becomes AdvancePCS 2003 Caremark purchases AdvancePCS for $5.6 billion 2007 CVS Purchases Caremark for $26.5 billion 2012 Express Scripts merges with Medco for $29 billion (combination of largest and second-largest PBMs). Also acquires Accredo speciality pharmacy from Medco, and merges it with its CuraScript pharmacy Feb. 2015 Rite Aid purchases EnvisionRx for $2 billion. (EnvisionRx owns a subsidiary PBM, MedTrak, which itself owns the PBMs Connect Health Solutions and Smith Premier Services) March 2015 OptumRx purchases Catamaran for $12.8 billion (combination of third and fourth-largest PBMs) May 2015 CVS purchases Omnicare for $12.7 billion Oct. 2015 Walgreens announces intention to acquire Rite Aid for $17.2 billion

Today, though, it’s pharmacies, rather than drug-makers, that are merging with PBMs—and the deals appear to be creating similar conflicts of interest.

“Caremark as a PBM can give preference to CVS, and tie its products to some degree.”

In addition to CVS owning Caremark and Rite Aid owning the PBM EnvisionRx, several PBMs own smaller pharmacies. The largest PBM, Express Scripts, for instance, owns specialty pharmacy Accredo, fertility drugstore Lynnfield Drug, and home infusion pharmacy AHG of New York.

Regardless of whether the dominant company is the PBM or the pharmacy, the problem is the same. A PBM combined with a drugstore, explains Wharton professor Patricia Danzon, has an incentive to steer plan members to its affiliated pharmacies, rather than contracting with as many drugstores as possible on the basis of location, convenience, and care for its patients. “Caremark as a PBM can give preference to CVS,” she says, “and tie its products to some degree.”

The numbers seem to bear this out. When the Bush-era FTC waved through CVS’s acquisition of Caremark in 2007, only 12% of CVS’s retail prescription revenue came from Caremark. By 2014, however, that share had tripled to 35%. In addition to being allied with the largest retail pharmacy chain, Caremark also is affiliated with CVS’s Omnicare, the nation’s dominant long-term care pharmacy.

The current industry structure has “cast a complete pall over the marketplace.”

Another problem is that when PBMs are combined with drugstores, they lose the incentive to police against pharmaceutical company schemes to steer patients to more expensive drugs. Indeed, they may collude in them. Last year, for instance, the federal government discovered that Express Scripts was accepting kickbacks from Novartis Pharmaceuticals to recommend the iron chelation drug Exjade to Medicaid patients, instead of a less expensive alternative. Express Scripts, and its specialty pharmacy Accredo, simply looked the other way.

Antitrust experts say that it can be hard to tell whether such kickbacks are offered willingly by the producer, or extorted by overly powerful retailers and drugstores. What is increasingly clear, however, is that it’s the patient who pays the price. Beginning in 2012, CVS’s Caremark began to use its formulary to exclude certain drugs, initially listing 30 drugs it refused to handle. Today, that number is up to 124, and Express Scripts and OptumRx have adopted similar practices.

The current industry structure has “cast a complete pall over the marketplace,” Doug Collins, a Republican representative from Georgia, said in an interview.

Asked whether vertical integration leads to conflicts of interest or anti-competitive practices, a CVS spokesperson, Erin Britt, said: “At our PBM, CVS/Caremark, we welcome competition; indeed, our success is predicated on thriving competition in the health care marketplace. With over 30 different PBMs, the PBM industry is highly competitive.”

Pity the small pharmacy

“We complained bitterly to the Feds and FTC about CVS owning Caremark.”

Another problem for patients is that the practice of combining drugstores with PBMs appears to be driving small independent pharmacies out of business. For patients, especially those in small towns, this means less choice as to where they can fill their prescriptions. (“PBMs allow plans to choose to provide efficient mail-service pharmacies to members that supply home-delivered prescriptions with great accuracy and safety and at a substantial savings,” said Britt, the CVS spokesperson.)

Steven Nelson, owner of Okeechobee Discount Drugs in Okeechobee, Florida says that PBMs charge independent pharmacists a variety of special fees that harm their ability to serve their customers. “We complained bitterly to the Feds and FTC about CVS owning Caremark,” Nelson says.

PBMs combined with drugstores also pay independent pharmacists lower reimbursement rates for the drugs they sell, then threaten to expel the pharmacists from their network if they complain. Such threats matter, as the three largest PBMs control 78% of the market, and cover more than 180 million people in the US.

Vertical integration “creates perverse incentives for PBMs to shut out independent pharmacies.”

Nor is it just small pharmacies that have faced threats from PBMs; such strong-arm tactics have also been used against larger drugstore chains. Indeed, Walgreens’ decision to acquire Rite Aid and its cluster of PBMs appears to stem from CVS’s takeover of Caremark in 2010. Walgreens objected to Caremark’s “unpredictable” reimbursement rates and practices “no longer in the best interests” of customers. For long periods of time, Walgreens couldn’t fill prescriptions for patients covered by Caremark.

Last November, members of the House judiciary subcommittee on regulatory reform, commercial, and antitrust law charged Caremark and Express Scripts with failing to rein in fast-rising prescription and employer health-benefit costs. Then in February, the House oversight and government reform committee convened the hearing on prescription drug prices.

While Shkreli stole the show at that hearing, lawmakers did also talk about the problems caused by combining drugstores and PBMs. Buddy Carter, another Georgia Republican, for instance, said that such vertical integration “creates perverse incentives for PBMs to shut out independent pharmacies at the expense of the American public.”

As “competition decreases,” he added, “prices are going to increase. That’s what we’re finding now.” If Walgreens successfully acquires Rite Aid and its PBMs, one of the industry’s last remaining constraints on drug prices will disappear.