Question 1

What is a PBM and what do they do?

Accepted Answer

A Pharmacy Benefit Manager (PBM) is a company that manages prescription drug benefits on behalf of health plan sponsors — employers, insurers, and government programs. PBMs negotiate drug prices with manufacturers, contract with pharmacies, process claims, manage formularies, and administer rebate programs. The three largest PBMs — CVS Caremark, Express Scripts (Cigna), and OptumRx (UnitedHealth) — control roughly 80% of the U.S. market.

Question 2

How do PBMs make money?

Accepted Answer

PBMs make money through multiple revenue streams, many of which are not transparent to employers: (1) Spread pricing — charging the employer more than they pay the pharmacy and keeping the difference; (2) Rebate retention — keeping a portion of manufacturer rebates instead of passing them through to the employer; (3) Dispensing fees — charging employers for each prescription filled; (4) Administrative fees; (5) Preferred pharmacy networks — receiving payments from pharmacies for preferred placement. Traditional PBMs often earn more from these hidden sources than from their stated administrative fees.

Question 3

What is spread pricing?

Accepted Answer

Spread pricing is the practice where a PBM charges the employer (or health plan) more for a drug than it pays the pharmacy, keeping the difference as profit. For example, the PBM pays the pharmacy $10 for a generic drug but charges the employer $18 — the $8 spread is PBM profit. Spread pricing is most common in Medicaid managed care and employer plans using traditional PBMs. It is invisible to employers unless they audit their claims data. Transparent/pass-through PBMs eliminate spread pricing by charging employers exactly what they pay pharmacies.

Question 4

What is rebate pass-through and why does it matter?

Accepted Answer

Drug manufacturers pay PBMs rebates — essentially discounts — in exchange for favorable formulary placement. In a traditional PBM arrangement, the PBM retains a portion of these rebates and passes the rest to the employer. In a pass-through arrangement, 100% of rebates are passed to the employer. The difference can be significant: PBMI data shows employers with pass-through contracts receive 20–40% more in rebates than those with traditional contracts. When evaluating PBM contracts, always require 100% rebate pass-through.

Question 5

What is a transparent or pass-through PBM?

Accepted Answer

A transparent (or pass-through) PBM charges employers exactly what it pays pharmacies for drugs — no spread — and passes 100% of manufacturer rebates to the employer. The PBM earns revenue only from a transparent administrative fee (typically $3–$8 per claim). Examples include Navitus, Capital Rx, SmithRx, and Rightway. Transparent PBMs typically save employers 15–30% on pharmacy costs compared to traditional PBMs, primarily by eliminating spread pricing and rebate retention.

Question 6

How do I audit my PBM?

Accepted Answer

A PBM audit compares what your PBM charged you against what it actually paid pharmacies and manufacturers. Key audit areas: (1) Spread pricing — compare ingredient cost billed to employer vs. paid to pharmacy; (2) Rebate reconciliation — compare rebates billed vs. received; (3) MAC list compliance — verify generic pricing against the Maximum Allowable Cost list; (4) Specialty pharmacy steering — identify what percentage of specialty fills went to PBM-owned pharmacies. Most PBM contracts allow for independent audits — exercise this right annually.

Question 7

What is a formulary and how does it affect costs?

Accepted Answer

A formulary is the list of drugs covered by your health plan, organized into tiers with different cost-sharing levels. Formulary design is one of the most powerful cost-control levers in pharmacy benefits. A well-designed formulary drives generic utilization (target: 85%+ generic dispensing rate), controls specialty drug access through prior authorization and step therapy, and aligns drug coverage with clinical evidence. Your PBM manages your formulary — but you, as the plan sponsor, have the right to customize it.

Question 8

What is specialty pharmacy and why is it so expensive?

Accepted Answer

Specialty drugs are high-cost medications used to treat complex conditions — cancer, autoimmune diseases, rare diseases, and others. They typically require special handling, administration, or monitoring. Specialty drugs represent 1–2% of prescriptions but 50%+ of pharmacy spend for many employers. Costs are high because manufacturers set prices with minimal competition, and PBMs often steer specialty fills to their own specialty pharmacies at higher prices. Managing specialty pharmacy requires prior authorization, step therapy, site-of-care optimization, and specialty carve-out strategies.

Question 9

How often should I re-bid my PBM contract?

Accepted Answer

Most benefits consultants recommend a competitive PBM RFP every 3 years. PBM pricing and market conditions change significantly over that period, and a re-bid gives you leverage to negotiate better terms even if you stay with your current PBM. If you have never run a competitive PBM RFP, do one now — employers who have not re-bid in 5+ years are almost certainly overpaying. Even if you plan to stay with your current PBM, a competitive bid gives you negotiating leverage.

Question 10

What PBM contract terms should I negotiate?

Accepted Answer

Key PBM contract terms to negotiate: (1) 100% rebate pass-through with no retention; (2) Audit rights with access for independent auditors; (3) MAC list transparency and a formal appeal process; (4) Specialty carve-out rights to redirect to lower-cost pharmacies; (5) Data ownership and portability — you own your claims data; (6) Termination for cause with 30-day notice; (7) Performance guarantees with financial penalties for non-performance. Never accept a standard PBM contract without negotiating these terms.

Question 11

What is a MAC list?

Accepted Answer

A Maximum Allowable Cost (MAC) list is the PBM's internal pricing schedule for generic and multi-source brand drugs. The PBM uses the MAC list to set the maximum amount it will reimburse pharmacies for these drugs. MAC lists are often not transparent to employers, and PBMs can manipulate them to increase spread pricing. Negotiating MAC list transparency and a formal appeal process is an important contract term — it allows pharmacies to challenge below-cost reimbursements and gives employers visibility into generic pricing.

Question 12

How much can employers save by reforming their PBM?

Accepted Answer

Employers who complete a competitive PBM RFP and negotiate transparent contract terms typically reduce pharmacy costs by 15–30% PEPY (per employee per year). The savings come from eliminating spread pricing, securing 100% rebate pass-through, and implementing specialty pharmacy controls. For a 200-employee group spending $800,000/year on pharmacy, that represents $120,000–$240,000 in annual savings. PBMI 2024 data supports this range for employers switching from traditional to transparent PBM models.

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