When a patient visits their primary care physician, they are prescribed medications by their physician, in which they will send over to the patient’s preferred pharmacy. When the pharmacy receives the prescription for the patient, they’ll verify that the drug is on formulary, covered by the patient’s health insurance and submit a claim. The insurance company would review the claim and verify the patient’s coverage to check deductibles, copayments, and coinsurance. The insurance would determine the reimbursement amount based on the patient’s plan which factors in deductible and copayment. The patient may have to pay a portion of the medication cost if the insurance doesn’t cover the whole amount. The pharmacy would also be reimbursed by the insurance company for the medication dispensed based on the cost of the medication and the patient’s payment.1 Pharmacy benefit managers (PBMs) play a part in each of these steps.

PBMs, or pharmacy benefit managers, are third-party administrators that act as liaisons between pharmacies and pharmaceutical manufacturers. PBMs create formularies, negotiate rebates with manufacturers, create pharmacy networks, process claims, review drug utilization, and sometimes may manage mail-order specialty pharmacies. They do not manufacture or distribute medications and are not healthcare professionals. PBMs are contracted by health plans, large employers, unions, and government entities to manage prescription drug benefit programs. Their purpose is to negotiate discounts with drug manufacturers on behalf of health insurance companies, and to reimburse pharmacies which are dispensing the prescriptions.2

Started in the 1960s, PBMs were initially created to help insurers contain drug spending. By the 1970s, PBMs were serving as fiscal intermediaries adjudicating prescription drug claims. Today, PBMs still adjudicate claims but also do so much more. They develop and manage pharmacy networks, determine drug formularies, set co-pays, and set criteria for prior authorizations.3 There are currently 66 PBM companies, and the three largest are CVS Caremark, Express Scripts, and OptumRx, in which control approximately 89% of the market and serve about 270 million Americans.

PBMs work closely with pharmaceutical manufacturers, wholesalers, pharmacies, and health insurance providers, handling negotiations and payments within the supply chain.2

Pharmacy benefit managers look to curate pharmacy benefits plan options to help patients access and afford medications that they need. PBMs negotiate prices of drugs with a large network of retail and mail order pharmacies. Because of the size and leverage that PBMs have, they are able to buy drugs from drug manufacturers at a discount. By doing so, they are able to offer patients, pharmacies, and employers greater access to medications at a competitive price. By negotiating directly with drug manufacturers, PBMs are able to negotiate for discounts from wholesale acquisition cost (WAC) for quantity discounts that they are able to pass to their clients. Patients are then able to get coverage for a drug that they need, at a much lower price and cost to the insurance plan.4

PBMs are responsible for determining the affordability of a drug and forming programs to help patients access medications and use the most effective treatments. PBMs negotiate with pharmaceutical companies to determine the rebates the manufacturer will pay the PBM for certain drugs. Drug rebates are the compensations provided by manufacturers to PBMs.4 PBMs also create and maintain formularies. A drug formulary is a list of brand and generic medications that an insurance plan will cover. With the help of physicians, clinical experts, and pharmacists, the list would include the drugs that are most effective, safe, and affordable. PBMs also determine specific types of drugs that would require prior authorization and step therapy programs for patients on their insurance plans to ensure that they tried the least expensive drug that’s proven effective for the patient’s condition before moving on to a more expensive drug.

PBMs determine how much to bill an insurance plan per prescription and how much they will reimburse the pharmacy dispensing that prescription. Some PBMs own their own retail and mail order pharmacies and they make money when patients are forced to use their mail order services or only purchase from PBM-owned pharmacies. PBMs also reimburse their own pharmacies more than they reimburse non PMB-owned pharmacies. When it comes to the pharmacies, they incur the cost for stocking and dispensing patient’s medications but have no control in the medication’s sale.

It is up to the PBMs to determine a patient’s copay and how much it will reimburse pharmacies for each medication covered under the insurance plan. PBMs pre-determine how much each drug covered under the plan should cost, and this is the amount it reimburses the pharmacies, but the ones they own. It’s an often occurrence that the reimbursement rates are well below the cost of the drugs, meaning that pharmacies often fill a prescription for a loss. Because PBMs are not regulated and are not required to disclose their formulas for determining costs, no one is sure how the cost for covered drugs is determined.

This is the controversy surrounding PBMs as pharmacies lose money, while PBMs profit immensely. Pharmacies continue to contract with PBMs and work with them as pharmacies are dependent on having patients, and most patients depend on having a prescription drug plan that would help pay the cost of expensive medications. Pharmacies are forced to take this as they are motivated to provide care and the PBMs have the patients.3

All in all, pharmacy benefit managers play a crucial role in pharmacy, managing prescription drugs and negotiating with drug manufacturers to control drug spending. PBMs are tasked with determining drug costs for insurers, providing patient access to medications, and determining reimburses for pharmacies. In recent years, there have been many controversies surrounding possible misalignment of their financial incentives, with policymakers considering more transparency in price determination and reforming the rebate system. We can’t deny the complex role that PBMs have within the healthcare system and as the healthcare world transforms and evolves daily, let’s hope that PBMs can also adapt to operate in the best interest of patients and healthcare providers.


Schultz, J. (n.d.). What is Insurance Reimbursement?. What Is Insurance Reimbursement? https://www.hni.com/blog/what-is-insurance-reimbursement#:~:text=Insurance%20reimbursement%20is%20the%20money,a%20medical%20service%20is%20completed.
National Association of Insurance Commissioners. (2022, April 11). Pharmacy Benefit Managers. NAIC. https://content.naic.org/cipr-topics/pharmacy-benefit-managers
Pharmacist Society of the State of New York. (n.d.). PBM Basics. Pharmacist Society of the State of New York. https://www.pssny.org/page/PBMBasics
Truveris. (2022, February 17). What is a Pharmacy Benefit Manager (PBM)?. Truveris. https://truveris.com/what-is-a-pharmacy-benefit-manager-pbm-and-how-does-a-pbm-impact-the-pharmacy-benefits-ecosystem/
The Commonwealth Fund. (2019, April 22). Pharmacy Benefit Managers and Their Role in Drug Spending. The Commonwealth Fund.