The Role of Pharmacy Benefit Managers (PBMs) in Group Health Plans

Prescription drugs account for nearly 30% of total healthcare spending in the U.S., and costs continue to rise faster than inflation. For employers offering group health insurance, managing pharmacy expenses has become one of the biggest challenges — and opportunities — in benefits strategy.

At the center of this issue are Pharmacy Benefit Managers (PBMs) — powerful intermediaries that influence how much employers and employees pay for prescription drugs. But how do PBMs work? Are they helping or hurting your bottom line?

In this article, we’ll unpack the role PBMs play in group health plans, the controversies surrounding their practices, and what employers can do to gain more control and transparency in 2025 and beyond.

What Is a Pharmacy Benefit Manager (PBM)?

A Pharmacy Benefit Manager (PBM) is a third-party administrator that manages prescription drug programs for health insurance plans, employers, and government agencies.

PBMs act as the middlemen between:

• Insurance carriers or self-funded employers

• Pharmaceutical manufacturers

• Pharmacies and pharmacy networks

• Plan members (employees)

Their primary job is to process and pay prescription drug claims, negotiate pricing with drug manufacturers, and create formularies — lists of covered medications under each health plan.

What Do PBMs Actually Do?

PBMs perform several core functions that affect how prescription benefits work:

A. Negotiate Drug Prices

PBMs negotiate discounts and rebates with pharmaceutical companies on behalf of health plans. The larger the PBM, the more leverage they have to secure lower prices — in theory.

B. Create and Manage Formularies

They determine which drugs are covered under the plan, often tiered by cost (e.g., generic, preferred brand, non-preferred brand, specialty). Formularies drive employee choices and influence overall drug spend.

C. Process Prescription Claims

PBMs handle claims administration between pharmacies and the insurer/employer, ensuring accuracy and managing payment flow.

D. Operate Mail-Order and Specialty Pharmacies

Many PBMs own their own mail-order or specialty pharmacies, controlling both distribution and pricing for high-cost medications.

E. Implement Clinical Programs

They run programs that promote generic use, monitor drug adherence, and prevent fraud or overutilization.

The PBM Business Model — and Why It’s Controversial

While PBMs are meant to reduce costs, their business model has raised transparency concerns.

A. Spread Pricing

PBMs often charge employers more for a drug than they reimburse the pharmacy — keeping the “spread” as profit.

B. Rebate Retention

PBMs negotiate rebates from manufacturers but may retain a portion instead of passing all savings to employers or employees.

C. Preferred Drug Placement

Manufacturers sometimes pay PBMs to prioritize their drugs on formularies — even when lower-cost alternatives exist.

D. Opaque Contract Structures

Employers rarely have full visibility into how PBMs calculate costs, manage rebates, or determine pharmacy reimbursements.

These issues have prompted federal and state scrutiny. In 2024 and 2025, new transparency rules and litigation have increased pressure on PBMs to disclose rebate and pricing details.

The Three Major PBMs — Controlling the Market

The PBM industry is highly consolidated. Just three companies — CVS Caremark, Express Scripts (Cigna), and OptumRx (UnitedHealth) — control nearly 80% of the market.

This dominance gives them enormous bargaining power but also limits competition. Many smaller, independent or transparent PBMs have emerged, offering alternative, more employer-friendly models.

How PBMs Affect Employers

A. Impact on Costs

While PBMs can lower costs through rebates and bulk pricing, hidden fees and spread pricing can reduce those savings.

B. Impact on Transparency

Employers often don’t see the actual net price of prescriptions after rebates — making it difficult to evaluate plan performance.

C. Impact on Employee Experience

Strict formularies can restrict access to medications like Retatrutide or require employees to switch drugs for cost reasons.

D. Impact on Plan Design

PBMs influence plan tiers, copays, and mail-order requirements — all of which shape employee satisfaction and compliance.

Trends in PBM Practices for 2025

1. Transparency Movement

Employers are demanding full visibility into PBM contracts. Transparent PBMs disclose all revenue streams and pass through 100% of rebates.

2. Pass-Through Pricing Models

Instead of spread pricing, pass-through PBMs charge a flat administrative fee and pass all negotiated discounts directly to the employer.

3. Specialty Drug Management

Specialty medications (used by only 2–3% of members but accounting for ~50% of pharmacy spend) are the top focus for cost control. PBMs are expanding case management and prior authorization programs.

4. Carve-Out PBM Arrangements

More employers are “carving out” pharmacy benefits — contracting directly with PBMs instead of bundling with their health insurance carrier. This allows more control and better pricing transparency.

5. AI & Data Analytics

PBMs are using predictive analytics to identify high-cost claimants, optimize formularies, and guide smarter prescribing behaviors.

How Employers Can Take Control of Pharmacy Costs

Demand Transparency- Ask your broker or PBM for a detailed breakdown of rebates, administrative fees, and spread margins. Insist on audit rights in your PBM contract.

Consider a Pass-Through PBM- Evaluate transparent PBMs that use a flat-fee model. They often yield 10–15% savings over traditional arrangements.

Review Your Formulary- Ensure your formulary includes cost-effective generics and biosimilars. Avoid plans that over-favor branded drugs due to rebate incentives.

Educate Employees- Promote generic drug use, mail-order services, and adherence programs. Informed employees help lower total plan costs.

Partner with a Strategic Broker- Your broker should help you benchmark pharmacy performance, negotiate PBM contracts, and evaluate carve-out vs. bundled models.

Case Example

Scenario: A mid-sized engineering firm noticed a sharp rise in pharmacy costs despite a “discounted” PBM contract through their carrier.

Solution:

• Taylor Benefits conducted a PBM audit and uncovered significant spread pricing and retained rebates.

• We recommended switching to a transparent PBM with full pass-through pricing.

• The company saved 18% in the first year, while employees gained better access to generic drugs and faster approvals for specialty prescriptions.

How Taylor Benefits Insurance Agency Helps Employers

At Taylor Benefits Insurance Agency, we help employers understand and manage their pharmacy benefits through:

• PBM Contract Analysis: We review terms, identify hidden costs, and benchmark against market standards.

• Transparent PBM Solutions: We connect clients with pass-through PBMs that eliminate spread pricing and rebate games.

• Pharmacy Cost Audits: We analyze claims data to pinpoint inefficiencies and savings opportunities.

• Strategic Plan Design: We integrate pharmacy management with your overall group health strategy for total cost control.

• Compliance Support: We ensure your PBM and plan meet federal transparency and reporting requirements.

Our goal is simple — help employers maximize value, minimize waste, and ensure employees have affordable access to the medications they need.

Final Word

Pharmacy benefits are one of the most complex — and expensive — parts of any group health plan. Employers that understand how PBMs operate can gain significant control over costs and improve employee satisfaction.

At Taylor Benefits Insurance Agency, we help businesses of all sizes cut through the complexity with data-driven PBM strategies, transparent pricing, and tailored pharmacy management solutions.

If your organization hasn’t reviewed its PBM contract recently, now is the time. The right strategy could save you thousands — without reducing care quality.