Pharmacy Benefit Managers (PBMs) serve as the critical intermediaries between employers, health plans, drug manufacturers, and pharmacies. Their primary role in employer healthcare costs is to manage prescription drug benefits, negotiate pricing, and control overall pharmacy spending. Their influence cuts both ways: PBMs can reduce costs through rebates and formularies, but their pricing models and lack of transparency can also inflate expenses for employers and their employees.
How PBMs Influence Employer Costs
PBMs directly impact employer healthcare costs through several key functions. They negotiate with drug manufacturers for rebates and discounts, create formularies (lists of covered drugs), and manage pharmacy networks. These activities are designed to lower drug prices, but the savings are not always passed through transparently to employers.
1. Rebate Negotiation and Pass-Through
PBMs use their large member pools to negotiate rebates from drug manufacturers in exchange for preferred placement on formularies. These rebates can be substantial and can lower the net cost employers pay. In the commercial market, PBMs pass roughly 91 percent of rebates through to plan sponsors, according to one estimate, and the contract structure determines who keeps the rest:
- Direct pass-through models: Employers receive the full rebate amount, reducing their claims costs.
- Spread pricing models: PBMs charge employers a higher price than they reimburse pharmacies, keeping the difference as profit. This lack of transparency can inflate employer costs.
2. Formulary Design and Drug Tiers
PBMs design formularies to steer utilization toward lower-cost or higher-rebate drugs. This can lower out-of-pocket costs for employees and reduce overall employer spending. Common strategies include:
- Prior authorization for high-cost specialty drugs.
- Step therapy, requiring employees to try cheaper alternatives first.
- Exclusion lists that block certain expensive drugs unless medically necessary.
While these tools control costs, they can also create administrative burdens and limit access for employees with specific medical needs.
3. Pharmacy Network Management
PBMs contract with retail, mail-order, and specialty pharmacies to negotiate reimbursement rates. Employers benefit from lower per-script costs through preferred networks, but PBM-owned pharmacies (like mail-order or specialty) can create conflicts of interest. For instance, a PBM may steer employees to its own mail-order pharmacy, where markups are higher, ultimately costing the employer more than a transparent, independent pharmacy network.
The Transparency Problem
A central issue in PBM's role is the lack of pricing transparency. Employers often sign contracts that obscure how much they truly pay for a drug versus the PBM's cost. Key hidden costs include:
- Administrative fees (e.g., per-claim or per-member fees) not tied to drug savings.
- Claim adjudication fees for processing each prescription.
- Spread pricing where the PBM profits undetectably.
This opacity makes it difficult for employers to benchmark PBM performance or compare bids. The scale of the problem has drawn sustained federal and state attention. In September 2024, the FTC sued the three largest PBMs, Caremark Rx, Express Scripts, and OptumRx, alleging their rebating practices artificially inflated insulin list prices. In January 2025, the agency reported that those PBMs' affiliated pharmacies generated more than $7.3 billion in dispensing revenue above their estimated acquisition cost on specialty generics, and collected about $1.4 billion in spread pricing income between 2017 and 2021 on the drugs it reviewed. The FTC reached a settlement with Express Scripts in February 2026 requiring business practice changes that the agency estimates will reduce patients' out-of-pocket costs for drugs like insulin by up to $7 billion over ten years. All 50 states have enacted at least one PBM law, according to the National Academy for State Health Policy, and the federal Pharmacy Benefit Manager Transparency Act has been reintroduced repeatedly, most recently in 2026, without becoming law.
Impact on Employee Out-of-Pocket Costs
PBMs also affect how much employees pay at the pharmacy counter. Higher copays or coinsurance can shift costs to workers, especially if PBMs place specialty drugs on high tiers. However, when PBMs secure lower net prices, employers can pass these savings to employees through reduced premiums or copays. The challenge is that PBM incentives sometimes prioritize manufacturer rebates over employee affordability, leading to higher cost-sharing for certain drugs. The FTC's 2024 insulin case described this dynamic, alleging that PBMs favored high-list-price, high-rebate insulins over lower-list-price alternatives.
Actionable Strategies for Employers
To better manage PBM-related costs, employers should take proactive steps:
- Demand full transparency in contracts (rebate pass-through, administrative fees, and ingredient cost reimbursement).
- Audit PBM performance regularly, using independent consultants to benchmark drug pricing and rebate effectiveness.
- Consider alternative models such as transparent PBMs (e.g., rebate pass-through plus fixed admin fee) or direct contracting with drug manufacturers for high-cost drugs.
- Incorporate PBM contracts into larger benefits strategy, aligning with wellness programs and employee education on generic or biosimilar use.
How Transparent PBM Models Work
A transparent PBM earns revenue only from a disclosed fee, not from the gap between what it bills the plan and what it pays the pharmacy. In a pass-through model, the employer pays the PBM the drug's negotiated price, such as average wholesale price minus a negotiated discount, plus a flat administrative fee. The fee can be set per claim, per member per month, or as a flat rate. All manufacturer rebates pass through to the employer in full, and spread pricing is prohibited across all drug categories, including specialty drugs.
The contract terms matter more than the label. Employers should require three things in writing: 100 percent rebate pass-through with no carve-outs, a prohibition on spread pricing, and claim-level reporting that shows acquisition cost, dispensing fee, and any manufacturer payments on each prescription. Audit rights let an independent consultant verify that reporting. If those terms are not in the signed contract, the transparency claim is worth little.
The Bottom Line
PBMs play a powerful role in employer healthcare costs. They can be strategic allies in cost containment or opaque middlemen adding unnecessary expense, and the difference usually comes down to the contract. Employers that negotiate for full transparency, hold PBMs accountable for measurable savings, and refuse to trade away employee access and affordability turn the PBM relationship into a working tool for managing prescription drug spending.