May 18, 2024

Pharmacy Benefit Management: An Oversight on Healthcare Spending


Pharmacy benefit management or PBM has become an integral part of the healthcare sector in management of prescription drug costs and benefits for both public and private healthcare programs. PBM acts as an intermediary between drug manufacturers, health plans, pharmacies as well as patients in the drug supply chain. In this article, we will discuss the role of PBM in healthcare spending, various services offered by them and the need for improved transparency and oversight on their operations.

What is Pharmacy Benefit Management?

A pharmacy benefit manager or PBM is a third-party administrator of prescription drug programs. The main role of a PBM is to negotiate discounts and rebates from drug manufacturers, develop drug formularies or lists of covered medications, process and pay prescription drug claims from pharmacies, and help design customized prescription drug benefit plans for health plans and employers.

Some key services offered by PBMs include developing a network of retail and mail order pharmacies where plan members can fill their prescriptions at contracted rates. They also perform drug utilization review to promote cost-effective medication use and safety. PBMs rebate a portion of negotiated discounts and fees back to health plans to help lower the drug costs for plans and insurers.

Role in Healthcare Spending

PBMs have played a significant role in lowering drug costs for healthcare programs. It is estimated that drug expenditures in the US would be 30-40% higher without PBM negotiations and rebates. However, there is little transparency on the complex rebate system and the actual savings passed on to consumers.

While PBMs do lower list prices at pharmacies, the size of rebates they negotiate is confidential. There are concerns that rebates may not be fully passed to health plans or consumers. This enables PBMs to cream off profits while maintaining high list prices favorable to their business. Lack of PBM regulation and oversight has meant sky-rocketing drug costs continue to burden payers and consumers.

Need for Improved Transparency

PBMs make money not just from negotiated fees and administrative charges but also from spreading discounts. They often retain a percentage of rebates from manufacturers. Lack of disclosure on PBM contracts and financial arrangements makes it difficult to assess the actual savings and determine whether they are anti-competitive.

Several studies have shown that PBMs can manipulate drug pricing to favor affiliated companies, shifting costs to consumers and plans. For example, placing expensive drugs without generics on preferred formulary tiers and charging higher co-pays for cheaper generic versions.

There are calls for PBM reform to bring transparency on rebates, fees and contracts. Senators have introduced bills to open the “black box” of PBM negotiations and finances. States like Ohio have passed laws requiring documentation of PBM financial deals and ensuring savings are shared. Improved oversight is needed to maximize benefits for consumers and curb rising drug costs.

Formulary Management under Scrutiny

PBMs design custom drug formularies and manage tiered co-payments to influence utilization. While this aims to boost lower-cost generics and preferred brands, formulary design and frequent changes are also revenue drivers for PBMs. Placement of expensive specialty drugs in lower co-pay tiers despite generic/cheaper options raises conflict of interest concerns.

Some argue that formulary management prioritizes PBM profits over patients’ interests. Exclusion of drugs for non-medical reasons like non-coverage of cannabis for neuropathic pain defeats the very purpose. Lack of transparent medical rationale in formulary decisions make oversight challenging.

Independent experts have called for tighter control over formulary management through unbiased committees. Standardized formulary structures and prior notice of changes may help address concerns around PBM influence on drug utilization for financial gain.


While PBMs have contributed immensely in reducing prescription drug spending, the lack of transparency, regulation and standardization in their operations pose a challenge. Improved disclosure laws on rebates, contracts and medical decision-making can optimize value from PBM services. Periodic independent audits or dismantling of PBMs’ roles may maximize savings and pass on true benefits to consumers and payers for affordable healthcare access. With upcoming regulatory reforms, optimizing the PBM model can help control unsustainable drug costs.

1. Source: Coherent Market Insights, Public sources, Desk research
2. We have leveraged AI tools to mine information and compile it