What to Know About Pharmacy Benefit Managers

Pharmacy benefit managers, often referred to as the “middlemen” in the negotiations that determine prescription drug costs, have come under increased scrutiny for their largely opaque business practices and allegedly deceptive contracts with plan sponsors.

Speakers at last week’s PLANSPONSOR Roadmap: Health Plan Fiduciaries livestream discussed how plan sponsors can create an optimal process for overseeing pharmacy benefit spend, as well as better understand what drives prescription drug costs. Several speakers cited the lack of transparency the plan sponsors have into agreements PBMs have with other companies in the pharmacy benefit supply chain.

Mary Powell, a director at law firm Trucker Huss, explained that plan sponsors contract with PBMs to administer their drug health plans, to create a formulary (a list of prescription drugs covered) and to manage claims and appeals. The PBM receives compensation for these services. Separately, the PBM also enters contracts with pharmacies that dispense the drugs.

The pharmacies negotiate drug prices with the wholesaler, and the wholesaler buys the drugs from the manufacturer. PBMs sit in the middle of this transaction, and Powell argued that they hold significant power.

For example, PBMs may require a plan sponsor to pay them $1,000 when a certain drug is distributed. At the same time, PBMs may tell a pharmacy in a separate contract that the PBM will pay the pharmacy $200 when they dispense the drug. This would signify an $800 spread in compensation that the PBM earns from the transaction, which Powell said she considers “outrageous.”

“It might not be the place where the PBMs make the most money, but it is the place where the participants are fired up in these lawsuits,” Powell pointed out.

Dae Lee, a shareholder in Buchanan Ingersoll & Rooney PC, said PBMs currently make hundreds of millions, if not billions, of dollars from plan sponsors through spread pricing.

PBMs may also have a contract with the drug manufacturer that pays the PBM for providing data about the kinds of drugs participants are taking, as well as for rebates. A rebate is essentially a delayed discount, whereby the drug manufacturer pays the PBM a dollar amount to put a certain drug higher on a plan’s formulary.

Powell said that while plan sponsors’ contracts with their PBM may state that they will receive all the rebates back, Powell said that does not happen. She said there are rebate aggregators who take a piece of the compensation, as well as the drug manufacturers.

“Interestingly there’s all kinds of little guys taking a piece of your rebate before you ever get it, and the PBM will retain much more than you think,” Powell said. “Look at the PBM in the middle of the ecosystem and how they have contracts with other folks. We have very little visibility into how they’re operating, and that can create a lot of shenanigans.”

When asked where she thinks the administration of President Donald Trump stands on this issue, Powell said it will likely keep pushing on this issue of transparency, but she said it is “not ready to break up the pharmaceutical industry” and tell PBMs they cannot be vertically integrated.

“What they’re doubling down on is this concept of getting transparent information to the employers, and the employers [will need to] battle this out,” Powell said. “That’s what this most recent executive order is [trying to do], and I think that is bipartisan. I don’t think there’s a lot of pushback on transparency rules.”

Trump signed an executive order last week that included measures to improve transparency of PBM fees and compensation.

The Federal Trade Commission has also released two interim reports exposing the “opaque” practices of PBMs, arguing that the three largest PBMs now manage nearly 80% of all prescriptions filled in the U.S. The FTC filed an administrative lawsuit against the big three PBMs in September 2024. 

Ryan Rice, principal and practice lead at the Prism Health Group, said during the livestream it is important that PBMs are aligned with plan sponsors and their fiduciary responsibilities.

“When [plan sponsors] are out there thinking about … meeting [their] objectives under ERISA, it’s really important that you are defining terms very precisely around what a rebate is, and the term ‘other revenue’ can mean lots of other little things,” Rice said. “PBMs, carriers and others have done a really good job of deliberately making the system complex.”

Nathan Mathews, a vice president and senior pharmacy benefits consultant at Milliman, said if PBMs want to maximize their revenue, they are going to put drugs on their formulary that are highly rebatable. He said other PBMs may take a different approach of going for the lowest-cost drugs.

Matthews said plan sponsors need to decide if they want to chase rebates or align themselves with a different model that focuses on the lowest-cost drugs.

He added that it is extremely important that plan sponsors know to request and obtain the proper data from their PBM and that plan sponsors need to be aware of certain contract language that may restrict them from obtaining certain data. For example, Mathews said he often sees restrictions—so-called “gag clauses”—preventing plan sponsors from sharing data with business associates or third-party consultants who can help them interpret the data.

Lee said he expects more lawsuits to be filed against health plan fiduciaries, as plaintiffs’ firms that had success with lawsuits against 401(k) plans are now moving into prescription drug benefits litigation. 

“Employers and plan sponsors [could be] exposed [to litigation] because they don’t have the data, they don’t do the audit, they don’t take control of the RFP process, [and] they’re not monitoring the PBM’s performance,” Lee said. “They’re relying upon the brokers’ annual audit, which is a beauty contest, and they’re getting ripped off.”

Matthews said it is important that companies establish a health care committee, especially as compensation committees and individual decisionmakers are named in lawsuits.

“I would tell [plan sponsors] to do a rinse and repeat of your structure for your retirement [committee] and run that exact same process for health care pharma,” Matthews said.

A full recording of the webinar can be viewed here.