June 20, 2024

What is a PBM? We know they play a significant role in pharmacy benefits, but let’s examine what these organizations are, how they work and what plan sponsors need to know about this critical player in the pharmacy benefits space.

The Fundamentals

PBM stands for Pharmacy Benefit Manager. They are companies that enable processing of pharmacy claims for covered products and services to covered members of a plan.

PBMs are often at the center of conversations (and controversy) in the United States about the cost of medications. Over the years, PBMs have grown in their responsibilities, and this has led to misaligned incentives in the medication supply chain. Despite this, they are a necessary partner for most plan sponsors to ensure access, monitoring, and control of their pharmacy benefits.

While every PBM is different, they typically offer the same core responsibilities. Here are five examples of a role a PBM may take in supporting a plan sponsor’s benefits.

Pharmacy Network Management

PBMs contract with pharmacies in the retail, mail order and specialty sectors. PBMs negotiate to ensure competitive pricing and access to medications based on geographical needs. At times, PBMs can also develop different levels of pharmacy networks offering savings to plan sponsors and members when narrowing access to certain pharmacies.

Some PBMs may own pharmacies in one, or all the previously mentioned sectors. This can create additional complexity, cost and misaligned incentives in this space.

Prescription Processing

PBMs allow prescription claims for insured members to process at pharmacies that are in their network. These claims are processed using computer software to tell the pharmacy how much the patient owes and how much the plan sponsor will be responsible for. This process considers the plan design, the patient’s current accumulators, additional fees and any assistance or additional programs.

Manufacturer Contracting

When talking about PBMs, we must mention rebates. PBMs negotiate discount prices and rebates on medications. Manufacturers pay rebates, but PBMs decide how much of these rebates to pass along to plan sponsors.

While PBMs own the role of negotiating with manufacturers, in most cases, they delegate this function further by using rebate aggregators.

Formulary Design and Utilization Management

In an ideal situation, a plan sponsor can customize all aspects of their plan. This includes the drug formulary. However, plan sponsors often rely on PBMs to provide the base formulary and utilization management including step therapy and prior authorizations. PBMs often have physicians and pharmacists on their staff to design these tools.

In addition, PBMs also administer these tools by employing staff to complete the step therapy and prior authorization reviews. While these programs should focus on clinical efficacy and cost effectiveness, this is another place where misaligned incentives can come into play. Sometimes, decisions are made based on income or benefit to the PBM over the member or plan sponsor.

Additional Programs

While not a requirement of a PBM, they often design additional programing for plan sponsors to opt into. These additional programs typically come at an additional cost but may yield additional savings. Examples include:

  • opioid management programs
  • co-pay assistance programs
  • disease state specific monitoring and optimization programs

It is understandable that PBMs should make a profit from these programs. However, plan sponsors should ensure the profit is reasonable given the savings provided. It is also vital that plan sponsors evaluate these programs to align with their philosophy. Ensure they are providing the promised benefit and cost savings.


While finding a PBM partner that matches a plan sponsor philosophy is important, it is vital to ensure that plan sponsors find partners in their pharmacy benefit consultants. But not just any pharmacy benefits consultant will do — choose partners who not only have the best interest of their client in mind, but also have the experience and knowledge to hold PBMs accountable and provide customized solutions that enhance plan sponsor and member experience.

The team of clinical pharmacists and industry experts at Innovative Rx Strategies know how to navigate misaligned incentives to get the best value possible. We optimize contracts with the PBM to ensure maximum return for health care spend. To see how Innovative can help you, contact us today.

Reach out to our team