Understanding Pharmacy Benefit Managers (PBMs): What Employers Need to Know

Prescription drug costs have become an increasingly important part of employer-sponsored health insurance. As employers look for ways to manage rising healthcare expenses, one area that deserves closer attention is pharmacy benefit management.

Most employees may never think about the company behind their prescription drug benefits. They simply present their insurance card at the pharmacy and pay their copay or coinsurance. Behind the scenes, however, a Pharmacy Benefit Manager (PBM) can play a significant role in determining how prescription drug benefits are administered.

For employers, understanding how PBMs work can make it easier to evaluate pharmacy benefits, identify potential cost drivers, and ask better questions during a health insurance renewal.

Here's what employers should know about PBMs and their role in employee benefits.

What Is a Pharmacy Benefit Manager (PBM)?

A Pharmacy Benefit Manager (PBM) is a company that helps administer prescription drug benefits on behalf of health plans, employers, insurers, and other organizations.

PBMs can perform a variety of functions related to prescription drug coverage, including:

• Managing prescription drug formularies

• Negotiating pricing with pharmacies and drug manufacturers

• Developing pharmacy networks

• Processing prescription claims

• Managing specialty pharmacy programs

• Administering mail-order pharmacy programs

• Negotiating manufacturer rebates and other discounts

The specific services and financial arrangements can vary depending on the PBM and the employer's health plan.

For employers, the important point is that the PBM can have a meaningful influence on how prescription drug benefits operate and how pharmacy spending is managed.

How Do PBMs Work?

PBMs sit between different participants in the prescription drug system.

A typical arrangement can involve:

Employer or Health Plan → PBM → Pharmacy → Employee

The PBM helps manage the prescription benefit according to the terms of the health plan.

For example, when an employee fills a prescription, the PBM may determine whether the medication is covered, what the employee's cost-sharing is, and whether the pharmacy is part of the plan's network.

PBMs can also negotiate with pharmacies and drug manufacturers as part of managing the overall prescription benefit.

Because there are several parties involved, prescription drug pricing can be complicated. The amount an employer pays for a medication isn't necessarily the same as the amount an employee pays at the pharmacy counter.

What Does a PBM Do for an Employer Health Plan?

PBMs can provide several services that help employers administer prescription drug benefits.

Formulary Management

A formulary is a list of prescription medications covered by a health plan.

Medications may be organized into different tiers, with different employee cost-sharing requirements.

For example, a plan may have separate tiers for:

• Generic medications

• Preferred brand-name medications

• Non-preferred medications

• Specialty medications

Formulary design can influence both employee costs and overall plan spending.

Pharmacy Networks

PBMs can establish networks of participating pharmacies.

Employees may have different costs depending on whether they use an in-network pharmacy, preferred pharmacy, or another pharmacy allowed under their plan.

Claims Administration

PBMs can process prescription claims and apply the plan's coverage and cost-sharing rules when employees fill prescriptions.

Specialty Pharmacy

PBMs may also manage specialty medications, which can represent a significant portion of prescription drug spending for some employer health plans.

Why Are PBMs Important to Employer Health Insurance Costs?

Prescription drug spending is one component of overall healthcare costs, and PBM arrangements can influence how that spending is managed.

Several factors can affect pharmacy costs, including:

• Drug utilization

• Formulary design

• Brand vs. generic use

• Specialty medications

• Pharmacy networks

• Employee cost-sharing

• Manufacturer rebates and discounts

• Contract terms

This is why employers should look beyond the headline premium when evaluating their employee benefits.

A health plan with seemingly competitive premiums may still have pharmacy-related cost considerations that deserve closer review.

What Are PBM Rebates?

One area that can be confusing for employers is prescription drug rebates.

Drug manufacturers may provide rebates or other price concessions to PBMs or health plans based on certain agreements and utilization arrangements.

The treatment of these rebates can vary depending on the contractual arrangement.

For employers, the important question isn't simply whether rebates exist. It's understanding how rebates and other financial arrangements are handled under their specific PBM contract.

Employers should ask whether rebates are passed through, retained, or otherwise reflected in the pricing structure of their pharmacy benefits.

Transparency in the contract can help employers better understand what they're actually paying for.

How Specialty Medications Affect Employer Costs

Specialty medications can be particularly important when evaluating pharmacy benefits.

These medications are often used to treat complex or chronic conditions and can carry significantly higher costs than traditional generic or brand-name prescriptions.

A relatively small number of prescriptions can therefore have a substantial impact on an employer's overall pharmacy spending.

Employers should work with their benefits advisor to understand:

• Specialty drug utilization

• High-cost medications

• Specialty pharmacy arrangements

• Prior authorization requirements

• Cost-sharing

• Available clinical management programs

What About GLP-1 Medications?

GLP-1 medications have become another major consideration for employers reviewing prescription drug benefits.

Depending on the medication and plan design, GLP-1 drugs may be covered for certain medical conditions, while coverage for weight management may be handled differently.

Employers need to understand how their pharmacy benefit treats these medications and how utilization could affect overall plan costs.

For a deeper discussion, see our article on GLP-1 Medications: What Employers Need to Know.

What Should Employers Review in Their Pharmacy Benefits?

Employers don't necessarily need to become pharmacy experts. However, they should understand the major components of their PBM arrangement.

During a benefits review or renewal, consider asking:

• What is our current prescription drug spending?

• Which medications are driving the greatest costs?

• How much of our spending comes from specialty medications?

• How is our formulary structured?

• How are rebates and discounts handled?

• What pharmacy network is being used?

• Are there opportunities to improve generic utilization?

• How are high-cost medications managed?

• What services and fees are included in the PBM arrangement?

• Are there alternative pharmacy benefit strategies worth considering?

These questions can help employers identify potential opportunities without simply shifting costs to employees.

How PBMs Fit Into Your Overall Benefits Strategy

Pharmacy benefits shouldn't be evaluated separately from the rest of your health plan.

Prescription drug spending can affect overall healthcare costs, claims experience, and future renewal pricing.

That's especially important for employers reviewing self-funded or level-funded health plans, where understanding claims and pharmacy spending can be an important part of managing financial risk.

For more information, see our guides on Self-Funded vs. Fully Insured Health Plans and Level-Funded Health Plans.

How DK Benefits Can Help

Understanding prescription drug costs can be difficult when employers are dealing with complicated contracts, formularies, networks, and pricing arrangements.

DK Benefits helps employers evaluate their employee benefits strategy and identify opportunities to better manage healthcare costs.

Whether you're reviewing your current pharmacy benefits, preparing for a health insurance renewal, or considering alternative funding strategies, our team can help you understand the options and ask the right questions.

Take a Closer Look at Your Pharmacy Benefits

A Pharmacy Benefit Manager (PBM) can play an important role in how prescription drug benefits are administered and how pharmacy spending is managed.

For employers, understanding the basics of PBM contracts, formularies, pharmacy networks, specialty medications, and rebate arrangements can lead to better benefits decisions.

You don't necessarily need to change your PBM to reduce costs. Sometimes, the first step is simply understanding your current arrangement and determining whether it still provides the right value for your business and employees.

As prescription drug costs continue to be an important part of healthcare spending, employers should make pharmacy benefits an intentional part of their overall benefits strategy—not something that's only reviewed when renewal time arrives.