Employers have grumbled about rising prescription drug prices for years. They gripe about specialty-drug spending. They gripe about rebate dollars they can’t fully explain. They gripe about non-transparent contracts, formulary design, spread pricing, and employees who arrive at the pharmacy counter bewildered by why their prescription now costs $200. Then they cut another three-year deal with a pharmacy benefit manager. It might be time to ask a different, more radical question: What if employers cut ties with traditional PBMs? The more you dissect how the system operates, the less ridiculous that notion seems.
We Built an Enormous Middleman Industry
PBMs were originally created with a relatively simple mission. They processed prescription claims and helped health plans negotiate discounts. PBMs do much more now. They decide which drugs are on formularies. They negotiate rebates with drug manufacturers. They create pharmacy networks and decide how much pharmacies will be reimbursed. And they influence what patients end up paying. Add in the incredible consolidation in the industry.
The Federal Trade Commission estimates the three largest PBMs process about 80% of the 6.6 billion prescriptions filled in the United States each year. The six largest control more than 90% of the market. PBMs wield immense power over a system most Americans couldn’t recognize if it bit them. But there’s one more twist.
Many PBMs are vertically integrated with massive healthcare companies that may own insurers, specialty pharmacies, mail pharmacies and other related businesses. You guessed it. The FTC has concerns about this setup because it creates an inherent incentive for PBMs to do business with their sister companies. According to the FTC, pharmacies that are affiliated with the top three PBMs control about 70% of the market for specialty drugs. Employer… should we really be trusting PBMs to have our interests in mind?
Employers May Not Know What They’re Buying
One statistic that really jumped out at me: In federal rulemaking, there was a citation to a 2024 survey of employers with 500 or more workers that offer health benefits. Of those employers, 37% could not identify how much of their PBM-negotiated rebate they actually received.
Imagine the CFO of a corporation negotiating a multimillion-dollar procurement contract and saying, “Uh, I’m not exactly sure how much of the supplier discount we’re getting.” Would anyone else in corporate America allow that? But when it comes to prescription benefits, we’ve let the complexity get so out of control that not knowing is considered normal. Contracts are often hundreds of pages. They contain clauses on rebate guarantees, administrative fees, specialty pharmacy arrangements, formulary incentives, network pricing provisions, and definitions of “pass- through” that can make even seasoned benefits executives seek outside help. Insane complexity is baked into the model.
What Would a World Without Traditional PBMs Look Like?
Farewell to PBMs doesn’t mean goodbye to pharmacy benefit administration. Claim processing still needs to occur. Eligibility still needs to be managed. Formularies, clinical programs and pharmacy networks still need to be administered. Pricing still needs to be negotiated.
The difference is that employers would unbundle those services rather than outsourcing the entire pharmacy benefit to a single, vertically integrated company. Imagine an employer building its pharmacy benefit more like a supply chain. Select a transparent claims administrator to handle adjudication. Contract with pharmacies, or pharmacy networks where it makes sense. Apply cost-plus pricing to commodity generic drugs. Negotiate transparent pricing for specialty drugs. Implement clinically appropriate, independent clinical formulary management. Apply reference pricing where clinically appropriate.
Demand transparency for every dollar spent through the system. Basically, employers would go from saying: “Manage my pharmacy benefit for me.” to “Here are the services I need. Tell me exactly what each one costs.” That’s a radically different approach to purchasing.
Direct Contracting Isn’t Just a Theory
At least some facts support the notion that alternatives should be considered. One published case study examined an employer that contracted directly with a pharmacy on an invoice-cost-plus-professional-fee basis. Analysts reviewed 412 employee prescriptions filled over a six-month period. The study estimated that, under the direct contract, the employer would have paid $5,664 less and employees would have paid $1,918 less in copays. The pharmacy would have made a profit. Yeah, it’s just one study. Don’t go extrapolating that to the entire employer marketplace in the U.S., please. That’s my point. Employers should be trying things. Why renew the status quo every year when that arrangement has been in place for decades, and potentially profitable alternatives exist through technology and creative pharmacy models?
The Rebate Question Can’t Be Ignored
Strange as it may sound, one of the unique features of the American pharma marketplace is our fetishization of rebates.
Employers hear obscene rebate numbers thrown around during PBM negotiations all the time. $2,000 per prescription. $4,000. $8,000. Often significantly higher amounts for pricey specialty medications. Those numbers sound amazing. But employers need to stop asking: “How big is my rebate?” and start asking: “What is my total net cost?”
A $10,000 rebate on a $30,000 medication isn’t always a good deal if a clinically equivalent alternative could have been acquired at a lower net cost. Studies on reference pricing highlight the issue. One study looking at nearly 3.3 million drug claims showed that reference pricing led to increased prescribing of lower-cost drugs, lower employer net cost, and lower employee cost sharing. The goal shouldn’t be maximum rebate value. It should be the lowest net cost of appropriate therapy. Those are two different questions.
Then There’s Specialty Pharmacy
It’s no surprise, then, that this is the area where employers should really be paying attention. Specialty drugs are some of the fastest-growing and highest-cost drivers of employer pharmacy spending. Vertically integrated PBMs have built significant businesses around them. The FTC’s second interim report on PBMs specifically studied specialty generic drugs and described them as “a large profit center for vertically integrated PBMs.” If your company is writing checks for millions, or tens of millions of dollars worth of specialty drug spending, you should be asking why the company that manages your pharmacy benefit should also potentially profit from dispensing those drugs. Perhaps the arrangement creates efficiencies. Or perhaps not. But you should demand the data to find out which is the case.
Employees Could Benefit Too
A lot of ink has been spilled these days on the debate around PBMs. Much of it focuses on employer expenses. However, employees experience the PBM system differently. At the pharmacy counter. Suddenly, a prescription isn’t covered. Now a medication they’ve taken for years needs prior authorization. Their preferred pharmacy is no longer on the list. The copay doubled. The medication their doctor prescribed isn’t on the formulary. Or they find out they can pay less out of pocket by just paying cash rather than using their insurance. It doesn’t make sense to employees. And honestly, it shouldn’t have to. A reimagined pharmacy benefit could begin with one radically simple concept: The lowest legitimate net price should win. Not the drug with the biggest rebate. Not the pharmacy on the benefit managers’ APL. Not the channel that provides the largest margin.
Getting Rid of PBMs Wouldn’t Be Easy
PBMs grew so large because they provide real administrative services. Large employers can process hundreds of thousands, if not millions, of prescriptions per year. Networks need to be built. Claims need to be adjudicated. Utilization needs to be managed. Drug prices need to be negotiated. All of this takes infrastructure. Plus, PBMs provide aggregated purchasing power.
An employer with 5,000 employees isn’t going to walk into a drug manufacturer’s office and negotiate down chemotherapy drug prices like a group representing 50 million covered lives can. Therefore, completely eliminating PBMs might not make sense for all employers. A more realistic outcome might be doing away with the traditional PBM economic model. Employers can still outsource pharmacy benefit administration. However, all of the fees would be transparent.
The administrator is paid a set fee. Drug acquisition costs are passed through. Rebates are fully passed through. Pharmacy reimbursements are audit-friendly. Specialty drug margins are known. Formulary decisions are clinically driven. And employers own their claims data. Basically: Make the PBM a service provider again, not a hidden business partner in every prescription transaction.
Employers Have More Power Than They Think
Big employers like to act like healthcare costs are acts of God. They’re not. Employers are buyers. Together, they’re powerful buyers. They can ask for different contracts. They can ask for transparent pricing. They can carve out specialty pharmacy. They can negotiate directly with pharmacies. They can implement reference pricing. They can use transparent or pass-through admins. They can audit claims. And most importantly, they can stop letting vendors intimidate them into thinking that prescription drug pricing is “too complicated” to figure out. If you’re footing the bill, you have a right to know what’s on the bill.
Maybe the Better Question Isn’t Whether We Need PBMs
The question isn’t whether PBMs have a future. It’s whether we need them in their current form.
The pharmacy benefit of the future may not need to be completely middleman-free. But it does need to be free of economic relationships that employers can’t see, can’t measure, and can’t adequately audit. Employers should understand the acquisition economics behind the drugs they’re paying for. They should know where rebate dollars are flowing. They should know how much their administrator is being paid. They should understand why one medication was chosen over another. And they should know if sending a patient to an affiliated specialty pharmacy will actually save money.
If a PBM can provide that level of transparency and prove it’s producing the lowest total net cost, employers should definitely keep them. But if they can’t? Well, maybe ripping them apart isn’t such a crazy idea. Maybe it’s just good procurement 101.
