PBMs and Their Role in Pharmacy Benefits

Most of us don't give much thought to the pharmacy industry until we find ourselves in front of a pharmacist, prescription in hand. What many people don’t realize is that there are entities working behind the scenes to determine the type of medication we receive, assess its clinical appropriateness, decide where we can pick it up, and administer the benefit based on our employer's plan to determine our medication costs. While we may be able to name our medical carrier, how many of us can actually identify our pharmacy benefit manager (PBM)? PBMs are not well understood and often go unnoticed despite their critical role in the prescription-filling process.

Let’s face it, the pharmacy industry is extremely complex and involves multiple stakeholders, including PBMs, drug manufacturers, insurance plans, wholesalers, and various pharmacies (e.g. retail, mail-order, specialty, and online). Understanding how these groups interact and the important role PBMs play is crucial in prioritizing what is right for the health and well-being of your teams. So, what are the relationships between these entities? And how can you, as an employer, navigate this complicated pharmacy benefits system to make the best choices for your members and their families?

Understanding the pharmacy ecosystem.

The journey that a medication takes from the manufacturer to the patient involves many parties and agreements. After a drug is produced, drug manufacturers sell it directly to pharmacies or wholesalers, who then negotiate with insurance companies to determine its end cost. The drug is then dispensed by the pharmacy and taken by the patient. While the process appears relatively simple, there is an additional layer of complexity known as a PBM.

PBMs are sometimes called "middlemen", acting as a direct link between the plan sponsor and drug manufacturer or a hidden link between the plan sponsor and insurance company. They negotiate with drug manufacturers to get discounts on prescription medications and work with insurance companies or plan sponsors to design and manage Rx benefit plans. PBMs are also responsible for coordinating with pharmacies to ensure that patients have access to the prescriptions they need.

Employers contract directly with PBMs, or with their insurance carriers that utilize a backend PBM, to manage their pharmacy benefits and provide their members with affordable, comprehensive drug coverage. Here’s how PBMs do it:

Formulary design and management.

• Develop and maintain drug formularies—tiered lists of covered medications—based on clinical efficacy and cost considerations.
• Organize tiers so that lower-cost, clinically appropriate drugs result in lower out-of-pocket costs for members.

Rebate negotiation with manufacturers.

• Secure rebates and discounts in exchange for preferred placement of a manufacturer’s drug on the formulary.
• Leverage purchasing volume to negotiate deeper savings, then allocate a portion of those savings back to plan sponsors.

Pharmacy network management.

• Establish and oversee networks of retail, mail-order, and specialty pharmacies to ensure patient access.
• Contract with pharmacies on dispensing fees and reimbursement rates to control overall program costs.

Claims processing and payment.

• Administer benefit plan designs by processing member copays, calculating reimbursement amounts, and reimbursing pharmacies for dispensed prescriptions.
• Provide real-time data on utilization and costs to plan sponsors, enabling ongoing optimization of the Rx benefit program.

By handling these core functions - formulary design, rebate negotiation, pharmacy network management, and claims processing - PBMs streamline medication delivery while working to lower drug costs for both payers and patients.

How to choose the right PBM partner.

Healthcare costs are projected to increase 6.5% this year, with Rx spending representing 20-30% of total healthcare costs. Traditional PBMs have come under greater scrutiny for how they profit from opaque practices like spread pricing and rebate retention, rather than driving down net drug costs for employers and members. Legacy PBM model practices include rebate retention (keeping a large portion of manufacturer rebates instead of passing savings back to plan sponsors) and spread pricing (billing employers one rate but reimbursing pharmacies at a lower rate and pocketing the difference). As a result, employers often see little year-over-year reduction in Rx spending, while patients may face higher out-of-pocket costs and restricted access to lower-cost drugs.

The current system doesn't provide PBMs with strong incentives to offer favorable deals to employers and pass on pharmacy cost savings. So how do you know if an Rx manager has your company's best interests in mind? When selecting a new PBM, make sure they:

1. Place members at the center of care.

What does a PBM do to put members first? Member utilization management is the process of helping members select medications that are both clinically effective and cost-efficient. Rather than simply approving or denying a prescription, a PBM uses utilization management to:

• Review a member’s treatment plan and recommend lower-cost, high-quality alternatives (for example, a generic in place of a brand-name drug when clinically appropriate)
• Provide clear information about copays and out-of-pocket costs before a medication is dispensed
• Offer one-on-one support—such as a pharmacy benefits navigator—to answer questions and guide members through their options

Traditional PBM incentives, however, often favor higher-priced drugs because they generate larger rebates and fees. When expensive medications are prioritized, employer pharmacy spending climbs and members may struggle with higher copays, leading to reduced adherence and worse health outcomes. A member utilization management program that truly puts patients first aligns PBM rewards with choosing lower-cost, high-quality therapies—helping employers control costs and supporting better health for members.

2. Deliver an aligned, transparent model.

How a PBM middleman makes money can have a significant impact on the quality of care your members receive. Many legacy PBMs own their own pharmacies—specialty, retail, and mail order—and profit when patients fill prescriptions at those in-house options, creating a direct conflict of interest. They also rely on two opaque revenue streams:

•Spread pricing: The PBM charges your plan sponsor one price for a drug but reimburses the dispensing pharmacy at a lower rate—and keeps the difference as profit.
• Rebate retention: The PBM negotiates rebates from drug manufacturers but only returns a portion of those savings to you, pocketing the rest.

These misaligned incentives encourage PBM middlemen to steer members toward higher-cost drugs that yield bigger spreads and rebate checks, driving up overall employer spend and raising member out-of-pocket costs.

3. Prioritize advanced tech with simple delivery.

Legacy PBM technology often relies on outdated systems that are difficult to maintain and upgrade. This results in:

• Slow claims processing: Batch-based workflows can delay claim adjudication by hours or days.
• Manual administrative tasks: Paper-heavy processes increase errors and staffing costs.
• Limited visibility: Members and sponsors lack real-time access to benefit details, formulary changes, or cost data.

By contrast, technology-forward PBMs leverage modern, consumer-facing tools to streamline every step of the pharmacy experience. These advanced tools drive tangible benefits:

• Faster claims reduce administrative overhead and improve cash flow for pharmacies.
• Better member experience boosts satisfaction by giving people transparent, self-service access to their benefits.
• Improved adherence comes from proactive alerts and cost-saving recommendations, which help members stay on therapy.

For employers, choosing a PBM with cutting-edge technology isn’t just about keeping up with consumer expectations - it’s a strategic differentiator that drives higher engagement, stronger health outcomes, and real cost savings.

PBMs: What employers need to know.

Selecting a new Rx manager can be overwhelming when you try to balance economics with effectiveness and legacy with innovation. By taking the time to carefully evaluate and select a PBM model that aligns with your organization's goals and values, you can ensure your members have access to high-quality, cost-effective prescription benefits that support their overall health and well-being.

Are you ready to tip the scales back in your favor and partner with a better PBM? Talk to us.