Pharmacy Benefit Managers (PBMs): A Guide to Managing Prescription Drug Costs in 2026
Introduction
Prescription drug spending continues to be one of the fastest-growing components of employer healthcare costs. Many small and mid-sized businesses assume rising drug prices are driven only by pharmaceutical manufacturers, but the way prescription benefits are managed can also significantly affect total plan spending.
Understanding Pharmacy Benefit Managers (PBMs) has become essential for employers that want greater cost transparency and better value from their health plans. This guide explains what PBMs do, where costs can increase, how to identify hidden fees, and what employers can do to improve pharmacy benefit performance without reducing employee benefits.
What Are Pharmacy Benefit Managers (PBMs)?
Pharmacy Benefit Managers (PBMs) are third-party organizations that administer prescription drug benefits on behalf of employers, insurance carriers, and health plans. They negotiate prices with drug manufacturers, create formularies (lists of covered medications), process pharmacy claims, and manage pharmacy networks.
PBMs play an important role in controlling prescription costs, but the complexity of their pricing models can sometimes make it difficult for employers to understand the true cost of their pharmacy benefits.
PBM vs. Health Insurance Carrier
| Pharmacy Benefit Manager (PBM) | Health Insurance Carrier |
|---|---|
| Manages prescription drug benefits | Manages overall medical insurance benefits |
| Negotiates drug pricing and rebates | Pays medical claims |
| Creates formularies | Manages provider networks |
| Oversees pharmacy claims | Oversees medical claims |
While PBMs are designed to help control costs, the structure of their contracts and pricing models can sometimes introduce expenses that are not immediately visible to employers.
Is a PBM Review Right for Your Business?
Your organization may benefit from reviewing its PBM arrangement if you:
- Employ between 10 and 500 people.
- Have experienced steady increases in prescription drug spending.
- Notice specialty medication costs growing each year.
- Receive limited pharmacy reporting from your current carrier.
- Cannot clearly identify how manufacturer rebates are shared.
- Are preparing to renew your health plan.
- Want greater transparency into healthcare spending.
If several of these apply to your organization, a structured review of your pharmacy benefit program may reveal meaningful savings opportunities.
How Pharmacy Benefit Managers (PBMs) Can Increase Employer Healthcare Costs
PBMs are designed to negotiate lower drug prices, but certain contract structures can increase employer costs if they lack transparency.
1. Spread Pricing
Spread pricing occurs when a PBM charges the employer more for a prescription than it reimburses the pharmacy while keeping the difference.
Key considerations:
- Employers may pay inflated prices without realizing it
- The spread can vary significantly by medication type
- Without detailed reporting, employers may never see these retained margins
2. Manufacturer Rebates
Drug manufacturers often provide rebates to PBMs in exchange for favorable placement on formularies.
The important question for employers is how much of those rebates are passed back to the health plan. Contracts vary widely, and retained rebates can significantly affect overall pharmacy costs.
3. Administrative and Network Fees
PBM contracts may include:
- Administrative fees
- Network access fees
- Dispensing fees
- Clinical management fees
- Specialty pharmacy markups
Individually these fees may appear small, but together they can materially increase annual pharmacy spending.
4. Specialty Drug Management
Specialty medications account for a growing share of employer pharmacy expenses.
Without effective management, employers may pay substantially more than necessary for specialty drugs because of limited sourcing options or unfavorable contract terms.
5. Limited Contract Transparency
Many employers receive summary reports without access to the underlying claims data.
Without complete visibility, it’s difficult to determine whether negotiated savings are actually reaching the health plan.
Real-World Example
A 120-employee manufacturing company preparing for its annual health plan renewal noticed pharmacy costs had increased by nearly 20% over three years despite relatively stable employee enrollment.
A pharmacy benefits audit identified retained rebates and several administrative fees that had not previously been reviewed during contract renewals. After renegotiating the PBM agreement, the employer improved pricing transparency and gained clearer reporting for future benefit decisions, resulting in approximately $28,000 in annual savings.
Common Mistakes Employers Make When Managing PBMs
Even with the best intentions, employers often make costly errors when managing their pharmacy benefits. Common pitfalls include:
- Assuming lower premiums automatically mean lower pharmacy costs. Medical and pharmacy benefits are often priced separately.
- Focusing only on medical claims while overlooking prescription spending. Drug costs can represent a significant portion of total healthcare spend.
- Not reviewing rebate pass-through provisions before renewing contracts. Rebate retention can substantially impact net pharmacy costs.
- Accepting limited reporting instead of requesting detailed pharmacy claims data. Data transparency is essential for informed decision-making.
- Waiting until costs become significant before conducting a PBM audit. Proactive reviews are generally more effective than reactive responses.
How Employers Can Evaluate Their PBM Contract
A pharmacy benefits audit can help employers better understand how prescription benefit dollars are being spent.
Key areas to review include:
- Rebate pass-through percentages
- Spread pricing practices
- Specialty drug pricing
- Administrative fee disclosures
- Pricing guarantees
- Formulary management
- Pharmacy network performance
- Audit rights written into the contract
Employers should also compare current PBM performance against their organization’s healthcare goals rather than evaluating contracts based solely on premium costs.
How Better Benefits Helps
Better Benefits is an independent 501(c)(3) nonprofit advisory organization that helps employers evaluate healthcare benefits from a fiduciary perspective rather than a sales perspective. Our advisors work alongside employers to improve transparency, identify unnecessary healthcare spending, and strengthen long-term benefits strategies without being tied to insurance carriers or PBMs.
Organizations often work with us to evaluate funding options, identify cost drivers, and improve benefits performance over time. Employers can explore our resources on Health Insurance Resources and employee benefits optimization in the Free Benefits Resource Library to better understand available options.
If you’re preparing for a renewal or reviewing pharmacy spending, schedule a free benefits consultation to better understand where opportunities for improvement may exist.
Key Takeaways
- PBMs manage prescription drug benefits but contract structure greatly influences employer costs.
- Spread pricing and retained rebates can increase pharmacy spending when contracts lack transparency.
- Pharmacy benefits audits help employers identify hidden costs and contract inefficiencies.
- Specialty medications require ongoing monitoring because they represent a growing share of pharmacy expenses.
- Independent nonprofit advisors can help employers evaluate PBM performance objectively.
- Better reporting leads to better long-term healthcare decisions.
- Proactive contract review is more effective than reacting to unexpected cost increases.
Frequently Asked Questions
Q: What is a Pharmacy Benefit Manager (PBM)?
A: A Pharmacy Benefit Manager (PBM) is a third-party organization that manages prescription drug benefits for employers and health plans. PBMs negotiate drug prices, create formularies, process pharmacy claims, and manage pharmacy networks to administer prescription benefits.
Q: How do PBMs affect employer healthcare costs?
A: PBMs influence employer healthcare costs through drug pricing negotiations, manufacturer rebates, dispensing fees, formulary management, and pharmacy network contracts. While PBMs aim to control costs, limited transparency can sometimes result in higher overall pharmacy spending.
Q: Are PBMs increasing prescription drug costs for employers?
A: In some cases, yes. PBM contracts that include spread pricing, retained manufacturer rebates, or complex fee structures may increase employer pharmacy costs. Conducting a pharmacy benefits audit can help determine whether a PBM arrangement is delivering appropriate value.
Q: What is spread pricing in PBMs?
A: Spread pricing occurs when a PBM charges an employer more for a prescription drug than it reimburses the pharmacy, keeping the difference. This practice has become a major area of concern for employers seeking greater pharmacy cost transparency.
Q: How do PBM rebates work?
A: Drug manufacturers often pay rebates to PBMs in exchange for favorable placement on formularies. Employers should understand how rebate-sharing works because retained rebates may affect the true cost of prescription benefits.
Q: What hidden fees should employers watch for in PBM contracts?
A: Hidden costs may include administrative fees, rebate retention, spread pricing, dispensing fees, network access fees, and specialty pharmacy markups. Reviewing these charges carefully can help employers better understand total pharmacy benefit costs.
Q: How can employers audit their PBM contracts?
A: Employers should review claims data, rebate arrangements, pricing guarantees, formulary performance, audit rights, and fee disclosures. A comprehensive pharmacy benefits audit can identify contract inefficiencies and uncover opportunities to reduce pharmacy spending while maintaining employee benefits.
This guide was published on June 15, 2026. For more information about Pharmacy Benefit Managers and managing prescription drug costs, contact Better Benefits USA.
