Pharmacy Benefit Management: An Overview


Pharmacy benefit management, commonly referred to as PBMs, have become an integral part of the U.S. healthcare system. As prescription drug costs continue to rise at an alarming rate, PBMs play a crucial role in managing these costs and creating efficiencies for payers and consumers alike. However, their operations are not always well understood. This article aims to provide an overview of what PBMs are, how they operate, their impact on drug pricing and some of the ongoing debates around their activities.

Introduction to Pharmacy Benefit Management

Pharmacy benefit managers emerged in the 1960s primarily as third-party administrators that managed prescription drug benefits on behalf of health insurers, employers and government programs. Their core business involves negotiating discounts and rebates from drug manufacturers, developing formularies which determine which drugs are covered, processing and paying prescription drug claims from retail pharmacies, and providing other services such as auditing pharmacies for improper billing.

Today, the top three PBMs in the United States – CVS Health, Express Scripts and OptumRx – control over 70% of the prescription drug benefit management market. Combined with smaller competitors, PBMs play an intermediary role between drug makers, pharmacies, insurers and consumers who rely on prescription drug coverage. It is estimated that over 266 million Americans receive their prescription drug benefits through a PBM.

Formulary Development and Drug Pricing

One of the most important functions performed by PBMs is developing formularies or lists of covered drugs for their clients. These formularies are designed based on clinical considerations as well as price negotiations with drug manufacturers. PBMs leverage their large membership to negotiate rebates and discounts from drug companies in exchange for favourable placement of their products on the formulary.

These rebates usually range from 15-30% off the list price of brand name drugs but the exact details are kept confidential due to non-disclosure agreements between PBMs and drug makers. While proponents argue that rebates lower drug costs for payers and consumers, critics say they drive up list prices set by manufacturers and lack transparency. There have been multiple lawsuits as well as calls for increased regulation around PBM drug pricing and rebate practices.

Pharmacy Networks and Reimbursement Rates

To process and pay prescription claims, PBMs contract with retail pharmacies to create their pharmacy networks which are then used by their health plan clients. The pharmacies within a PBM’s network agree to accept reimbursement rates that are often lower than their customary charges. This allows PBMs to negotiate discounts and drive volumes to preferred pharmacies which accept lower rates.

However, these reimbursement rates have increasingly come under scrutiny from independent community pharmacies who argue that the low and non-transparent rates set by PBMs are unsustainable. Multiple pharmacies have closed down in recent years citing financial losses from PBM contracts. At the same time, PBM owned pharmacies like CVS Health’s CVS Pharmacy benefit from preferential treatment and steering of patients within their own networks.

Utilization Management Tools

Beyond pricing negotiations, PBMs employ a variety of utilization management strategies to control prescription drug costs and improve patient outcomes. This includes tools such as prior authorization requirements which require approval for certain high-cost drugs, quantity limits which cap supplies for select medications and generics promotion through incentive programs.

PBM owned specialty pharmacies which handle complex medications like injectables and cancer drugs have also grown rapidly. Critics argue that these serve anticompetitive purposes by locking patients into using PBM owned pharmacies. Additionally, PBM clinics employing doctors and nurse practitioners have emerged in some markets raising potential conflicts of interest concerns.

Lack of Transparency and Regulatory Action

One of the major criticisms against PBMs is the lack of transparency around their operations. The complex contracting terms between PBMs, drug makers and pharmacies are treated as confidential business information by the PBM industry. This has led to questions around the true value and flow of prescription drug rebates, audit strategies targeting pharmacies and anti-competitive behaviour in some markets.

Several states have passed or introduced legislation mandating more disclosure of PBM contracting and financial arrangements. The U.S. Department of Health and Human Services also released a proposed rule last year aimed at increasing transparency in drug pricing. At the same time, consolidation in the PBM industry has also spurred antitrust concerns with the top three companies managing over two-thirds of prescription volume nationally. More regulatory scrutiny of this opaque, but powerful sector is likely in the coming years.


In summary, PBMs have emerged as major intermediaries that manage prescription drug benefits for millions of Americans. While they help lower drug costs through negotiations and utilization controls, a lack of transparency into their business practices and aggressive cost-cutting measures have drawn much criticism. As prescription drug costs and healthcare spending continue rising, further regulation aimed at shedding light on PBM activities could balance their interests with those of consumers, pharmacies and the healthcare system as a whole.

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