What Are Pharmacy Benefit Managers?

Written by:

Jason Kolkey

Reviewed by:

Amy Tran

5 min read

Key Takeaways

Pharmacy benefit managers (PBMs) administer prescription drug plans, negotiating between insurance carriers, pharmaceutical companies, and pharmacies.
PBMs may affect your health insurance plan’s network of pharmacies, what drugs your doctor prescribes for certain conditions, and the costs you pay.
Federal laws protect access to specific types of drugs and limit costs for people on Medicare Part D prescription drug plans.

Pharmacy benefit management companies (PBMs) administer prescription drug plans, including Medicare Part D plans. PBMs negotiate between insurance carriers, pharmaceutical companies, and pharmacies, affecting what prescriptions your plan covers and how much you pay for them.

You may have heard about PBMs because of investigations conducted by the U.S. Congress and the press to learn whether these companies influence higher drug prices. We will help you understand the role that PBMs play in health insurance and why it matters for people on Medicare.

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What Pharmacy Benefit Managers Do

Major insurance carriers are often affiliated with certain pharmacy benefit management companies (PBMs), where either the insurer owns a PBM or both organizations are owned by the same corporation. In other cases, a PBM provides services directly to an employer or a smaller insurance carrier.

PBMs commonly receive administrative fees from these insurance carriers in exchange for performing several key functions like:

Designing formularies
Negotiating drug prices
Managing plan utilization
Forming pharmacy networks
Providing mail order services

Designing formularies

A formulary is the list of medications an insurance plan covers. It is organized into tiers that determine how much you pay out of pocket to fill a prescription. Generally, these range from a first tier of generic drugs with the lowest copay up to a high-cost specialty tier.

Deciding what drugs to include in a formulary and each medication’s tier assignment is a complicated process that accounts for medical needs, costs, and safety. A PBM evaluates drugs and develops formularies for insurance carriers.

Negotiating drug prices

PBMs negotiate with pharmaceutical manufacturers, wholesale drug distributors, and pharmacies to lower the costs that insurance carriers pay to cover medications.

In some cases, the PBM may keep a portion of the rebates they receive, although executives say most savings are passed back to members. PBMs may also practice “spread pricing,” where the PBM organization charges insurers more for certain drugs than they pay pharmacies.

Managing plan utilization

Utilization management aims to control the cost of covered healthcare by preventing unnecessary or inappropriate treatment. According to insurance carriers and PBMs, these measures are necessary to avoid waste and minimize patient risks, providing services as efficiently and cost-effectively as possible.

For example, PBMs sometimes require healthcare providers to seek prior authorization before insurance will cover a prescription. Doctors may also need to prescribe preferred drugs before switching to any alternatives, a process called step therapy.

Forming pharmacy networks

PBMs create networks of pharmacies for insurance plans, negotiating lower prices for covered drugs bought at those locations.

These networks often include major national chains, local businesses, and specialty pharmacies. To get the most out of their coverage, beneficiaries must visit in-network pharmacies.

Providing mail order services

PBMs offer mail-order pharmacy services, which allow patients to get their drugs without traveling to a brick-and-mortar location. These services allow patients to order a three-month supply of many covered prescriptions from an in-network online pharmacy.

Pharmacy Benefit Managers and Medicare

Original Medicare (Medicare Part A and Part B), the public insurance program for U.S. adults who are over 65 or have certain disabilities, does not cover most prescription drugs. If you’re on Original Medicare, you can select a Medicare Part D prescription drug plan from a private insurance carrier.

Alternatively, after enrolling in Parts A and B, you can switch to a Medicare Advantage (Part C) plan from a private insurance carrier. These plans usually include Part D prescription drug coverage and other benefits that Original Medicare doesn’t offfer.

Whether you have a stand-alone Part D plan or a Medicare Advantage plan, your coverage is likely affected by the work of pharmacy benefit managers. PBMs help determine what prescriptions your plan covers, which pharmacies are in your network, and how much you pay for certain drugs.

However, federal policies ensure you have access to widely used drugs and place limits on the costs you pay. The protected classes of medications that every plan must cover include:

Cancer drugs
HIV/AIDS drugs
Anticonvulsants
Antidepressants
Antipsychotics
Immunosuppressants for organ transplants

Under the provisions of the 2022 Inflation Reduction Act, you’ll pay no more than $2,000 a year in out-of-pocket costs for covered drugs in 2025. This cap will be adjusted annually. If you use insulin to control diabetes, you will pay $35 or less for a one-month supply. If you have trouble affording Medicare Part D coverage, you may be eligible for Extra Help, also called the Low Income Subsidy.

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PBMs and You

Pharmacy benefit managers can play a big role in your healthcare, even if you don’t realize it. PBMs work with Medicare Part D plans and Medicare Advantage plans to determine what pharmacies are in your network, which drugs your doctor prescribes, and how you can place orders from a mail-order pharmacy.

For Medicare consumers, it’s important to understand the details of the Part D prescription drug plans available in your area. A licensed insurance agent can help you navigate your options and make the best choices for your needs and your budget.