Pharmacy Benefit Managers: What You Need to Know

But what exactly is a PBM? This guide breaks down everything you need to know – from their role in the drug supply chain to how they affect patients, insurers, and the broader healthcare market.

What Is a Pharmacy Benefit Manager?

A Pharmacy Benefit Manager (PBM) is a third-party administrator that manages prescription drug benefits on behalf of health insurers, Medicare drug plans, large employers, and other payers. PBMs play a crucial role in the U.S. healthcare system by acting as intermediaries between insurers, pharmacies, and drug manufacturers.

They are responsible for negotiating drug prices, managing formularies, processing pharmacy claims, and implementing cost-containment strategies. While PBMs aim to reduce costs and improve access to medications, their role has become controversial due to concerns about transparency and their impact on drug pricing.

How Do Pharmacy Benefit Managers Operate?

PBMs sit at the center of the pharmaceutical supply chain and coordinate several moving parts:

• Negotiating with Drug Manufacturers: PBMs negotiate discounts and rebates from pharmaceutical companies in exchange for preferred placement on formularies.
• Managing Formularies: These are the lists of drugs covered by an insurance plan. PBMs determine which drugs make the list, often based on cost-effectiveness and manufacturer rebates.
• Creating Pharmacy Networks: PBMs contract with pharmacies to form networks where members can fill prescriptions, often at lower out-of-pocket costs.
• Processing Claims: They manage the administrative tasks of processing and reimbursing drug claims between payers and pharmacies.
• Utilization Management: PBMs implement strategies like prior authorization, step therapy, and quantity limits to promote safe and cost-effective drug use.

While they do all these, they generate income through a combination of the following mechanisms:

• Spread Pricing: Charging payers more for a drug than what they reimburse the pharmacy, keeping the difference as profit.
• Rebate Retention: Collecting rebates from drug manufacturers for formulary placement and choosing to retain part or all of those rebates instead of passing them on to insurers or patients.
• Administrative Fees: Charging plan sponsors fees for services such as claims processing and formulary management.
• Mail-Order Pharmacies: Operating their own mail-order or specialty pharmacies, often encouraging or requiring members to use them.

This opaque business model has raised concerns about misaligned incentives and hidden profits.

Who Uses PBM Services?

Many organizations rely on Pharmacy Benefit Managers (PBMs) to manage prescription drug benefits efficiently and control costs while ensuring patients receive the right medications.

Insurance Companies

Both public and private insurance companies partner with PBMs to administer drug benefits for their members. PBMs help reduce prescription drug costs by negotiating lower prices with pharmaceutical manufacturers and leveraging their purchasing power.

These managers often implement formulary controls, which determine which medications are covered and how much members pay at the pharmacy. This ability to shape access and pricing is a key reason insurers depend on PBMs.

Large Employers

Large employers contract with PBMs to keep prescription drug spending under control. PBMs help design formularies, secure volume-based discounts from drug manufacturers, and manage claims, ultimately lowering costs and avoiding pharmacy billing issues​ for both employers and employees.

According to industry surveys, approximately 90% of large employers report satisfaction with PBM services, particularly in terms of cost savings and access to essential medications.

Government Agencies

Federal and state programs like Medicaid and Medicare Advantage also work with PBMs to manage drug benefits. PBMs support these agencies by negotiating prices and rebates, developing covered drug lists, and overseeing claims processing.

For example, PBMs secure more favorable pricing for medications used in Medicaid by negotiating directly with drug manufacturers. They also ensure that pharmacies comply with coverage rules and billing guidelines, helping government programs offer broad access to medicines while keeping expenditures in check.

Benefits of Using PBMs

PBMs offer several advantages to healthcare stakeholders.

Cost Containment

By leveraging their scale, PBMs negotiate lower drug prices and manufacturer rebates, which can reduce insurance premiums and out-of-pocket costs.

Formulary Management

Helps ensure that patients receive clinically appropriate and cost-effective medications.

Pharmacy Network Optimization

Encourages use of in-network or mail-order pharmacies to reduce dispensing costs.

Administrative Efficiency

PBMs handle the complexities of drug claims and online pharmacy payment processing, freeing up resources for payers and providers.

Concerns and Criticisms

Despite the mentioned benefits above, PBMs have faced mounting criticism for several reasons.

• Lack of Transparency: Many stakeholders are unaware of how much PBMs retain in rebates and spread pricing, making it difficult to track true drug costs.
• Rebate-Driven Formularies: Critics argue that formulary decisions are sometimes based more on rebates than patient outcomes, potentially limiting access to newer or more effective drugs.
• Pharmacy Reimbursement Practices: Independent pharmacies often claim PBMs reimburse them below cost while favoring their own mail-order services.
• Patient Access Issues: Utilization management tactics such as prior authorizations can delay or deny access to needed medications.
• Concentration of Market Power: With just a few companies dominating the market, critics worry about anti-competitive behavior and limited choices for consumers.

How PBMs Impact Patients

PBMs play a major role in determining the final price patients pay for medications.

Lower Prices

Bulk negotiation and tiered formularies can drive prices down.

Higher Out-of-Pocket Costs

When rebates aren’t passed on to consumers or when PBMs favor expensive drugs due to higher rebates, patients may face inflated costs.

Complexity

Patients often struggle to understand why one drug is covered over another or why some pharmacies cost more, creating frustration and confusion.

Pharmacy Benefit Managers and Drug Pricing

PBMs play a central role in how drugs are priced and which medications are accessible to patients. By negotiating with drug manufacturers, PBMs secure rebates and discounts in exchange for favorable placement on formularies.

These rebate arrangements often come in two forms: pass-through models, where savings are shared with the plan sponsor, and at-risk models, which are tied to drug performance or usage. While these strategies can reduce payer costs, the benefits are not always passed on to the patient.

Although rebates can reduce the net cost for insurers or employers, PBMs may retain a portion rather than passing all savings to the consumer. Because patients often pay based on the drug’s list price, not the discounted price after rebates, they may see little financial relief at the pharmacy counter.

Top PBMs in the Industry

As of 2025, the PBM market is dominated by a few large players:

• CVS Caremark (part of CVS Health, which also owns Aetna and CVS retail pharmacies)
• Express Scripts (owned by Cigna)
• OptumRx (a division of UnitedHealth Group)

Together, these three PBMs control over 75% of the U.S. prescription drug market, giving them considerable negotiating power with both drug manufacturers and pharmacies.

Other notable PBMs include Prime Therapeutics, MedImpact, and Navitus Health Solutions, though they serve smaller market segments.

PBMs in International and Online Business

PBMs are most prominent in the U.S., where they manage drug benefits for millions of patients. Companies like CVS Caremark, Express Scripts, and OptumRx process the majority of pharmacy claims in the country, helping insurers and employers manage costs.

Internationally, PBM-style models are gaining traction in both public and private health systems. European countries have begun experimenting with PBM-like services to manage national formularies and reduce pharmaceutical spending. In countries like Canada and Australia, private insurers use similar systems to negotiate pricing and manage coverage.

Globally, the goal is the same: make medications more affordable and accessible while maintaining safety and quality standards.

PBMs also build broad pharmacy networks, giving patients the choice to pick up prescriptions at a local pharmacy or opt for home delivery. These services improve convenience and help reduce costs for employers and individuals alike.

Choosing a Pharmacy Benefit Manager

If you’re wondering how do i know if an online pharmacy is legitimate, here are key considerations:

• Contract Transparency: Review contract terms carefully, especially those related to drug pricing, rebate retention, and administrative fees. Ensure there’s clarity around practices like spread pricing and rebate sharing.
• Formulary Coverage: Evaluate the PBM’s formulary to ensure it includes essential medications and supports affordable access for members.
• Pharmacy Network Size: A larger network offers patients more choice and improves access to medications, often leading to better pricing through competition.
• Third-Party Audits: Conduct regular audits by an independent party to confirm compliance with contract terms and regulatory standards. This can uncover hidden fees or missed savings opportunities.
• RFP and Review Cycles: Experts recommend issuing requests for proposals (RFPs) every three to five years and regularly reviewing PBM performance. This ensures that your PBM continues to meet your organization’s goals.

Ultimately, the right PBM will offer a balance of affordability, transparency, network access, and customer support to deliver effective pharmacy benefits while managing costs. 

The Future of Pharmacy Benefit Management

Regulatory scrutiny of PBMs has intensified in recent years.

• State and Federal Legislation: Several states have passed laws requiring greater transparency in PBM contracts, spread pricing, and rebate practices.
• Federal Inquiries and Oversight: The Federal Trade Commission (FTC) and the Senate have launched investigations into PBM business practices.
• Transparency and Reform Proposals: Ideas include requiring PBMs to disclose rebate arrangements, banning spread pricing, and mandating that savings be passed on to consumers.

As policymakers and healthcare stakeholders push for more transparency and accountability, PBMs will likely face significant changes in how they operate. Some reforms may benefit patients directly by reducing costs or improving access to medications.

Frequently Asked Questions (FAQs)

What is a pharmacy benefit manager?

A PBM is a company that helps manage prescription drug plans for insurers, employers, and governments by negotiating prices and handling logistics.

Why are PBMs important?

PBMs play a major role in drug pricing, availability, and plan design, which affects both cost and access for patients.

How do PBMs make money?

PBMs earn revenue through rebates from drug manufacturers, administrative fees, and sometimes by charging more to insurers than they reimburse pharmacies.

Are PBMs used outside the United States?

Yes, while PBMs are most prominent in the U.S., similar models are emerging in global and online healthcare systems.

Can a business choose its own PBM?

Yes, businesses and insurers can select PBMs based on price transparency, services offered, and network agreements.

References

Center for American Progress. (2024, March 13). 5 things to know about pharmacy benefit managers. https://www.americanprogress.org/article/5-things-to-know-about-pharmacy-benefit-managers/

Good Day Pharmacy. (n.d.). Understanding pharmacy benefit managers (PBMs) and their impact on independent pharmacies. https://www.gooddaypharmacy.com/post/understanding-pharmacy-benefit-managers-pbms-and-their-impact-on-independent-pharmacies

Socal, M. P., Bai, G., & Anderson, G. F. (2023). The pharmacy benefit manager market concentration and its potential impact on drug prices. JAMA Health Forum, 4(11), e233995. https://jamanetwork.com/journals/jama-health-forum/fullarticle/2811344