Pharmacy Benefit Manager (PBM)

Key facts

Clients

Insurers, employers, Medicare Part D plans and Medicaid managed care plans

Market concentration

The three largest PBMs handled nearly 80 percent of U.S. prescriptions in 2023

Regulation

State licensing and PBM laws, plus federal program and plan rules

Federal review

FTC study launched in 2022, with interim staff reports from 2024

What is a pharmacy benefit manager?

PBMs sit between drug manufacturers, pharmacies and the organizations that pay for prescriptions. A plan sponsor, such as an employer or a Medicare Part D plan, hires a PBM to run its drug benefit, and the PBM in practice decides which drugs are covered, which pharmacies patients can use and what pharmacies are paid.

The largest PBMs are vertically integrated with health insurers, own mail order and specialty pharmacies, and have created affiliated entities that negotiate manufacturer rebates. That integration is central to current policy scrutiny.

What PBMs do

Core PBM functions include:

• Claims processing: adjudicating pharmacy claims in real time at the point of sale, applying coverage rules and cost sharing.
• Pharmacy networks: contracting with retail, mail order and specialty pharmacies and setting reimbursement, often using AWP discounts and Maximum Allowable Cost (MAC) lists for generics.
• Formulary management: using pharmacy and therapeutics committees to place drugs on formulary tiers or exclude them.
• Rebate negotiation: obtaining manufacturer rebates in exchange for formulary position and passing some or all of them to the plan sponsor under contract terms.
• Utilization management: applying prior authorization, step therapy and quantity limits.

Why PBMs matter

PBM revenue can come from administrative fees, retained rebates and manufacturer fees, spread pricing (charging a plan more than the pharmacy is paid), and margins at PBM-owned pharmacies. Contract terms, not a standard model, decide which of these apply.

For manufacturers, PBM formulary decisions determine access for a large share of commercially insured and Medicare patients, so rebate strategy and formulary position are core market access work. For pharmacies, PBM reimbursement terms decide whether dispensing a drug is profitable. For employers, rebate pass-through and spread pricing are central to evaluating drug spend.

The rules are changing. States have enacted PBM licensing, transparency and reimbursement laws, and in 2024 the Federal Trade Commission filed an administrative complaint against the three largest PBMs over insulin rebating practices. Check current federal and state requirements before relying on any specific rule.