As pharmacy spending continues to rise and market pressures intensify, plan sponsors face a pivotal question: Is your PBM working for you or against you?
Pharmacy benefit managers (PBMs) have an outsized influence on drug pricing, plan design, and member access to medications. But the PBM space is a complex environment marked by consolidation, rising specialty costs, increasing regulation, and growing employer demand for transparency.
This article offers a look at today’s PBM landscape and a guide to choosing the right PBM partner for your organization’s unique needs.
The Modern PBM System
The PBM role was created to help reduce drug costs and streamline pharmacy services between health plans, drug manufacturers, and pharmacies. Their core services include:
- Negotiating drug prices and rebates
- Managing formularies (list of covered drugs)
- Administering pharmacy claims and network management
- Operating mail order and specialty pharmacies
- Implementing utilization management programs
As PBMs continue to expand their role and growing influence, they’ve become central players impacting drug pricing, plan design, and member access to medications in the US healthcare system.
But with power comes scrutiny. Today, the PBM model is questioned by employers, regulators, and even health plan members. Here are the main reasons.
Industry consolidation and vertical integration
Over the past decade, three major PBMs — CVS Caremark, Express Scripts, and OptumRx — have dominated the market, collectively controlling more than 80% of the market and are vertically integrated with health insurers and retail pharmacy chains. This consolidation raises important questions about market competition, pricing transparency, and conflicts of interest, such as:
- Steering members to owned pharmacies
- Maximizing rebate revenue instead of minimizing net costs
- Reducing formulary flexibility
Lack of transparency
Employers often don’t know the true cost of a drug, how rebates are calculated, or how much a PBM earns from each transaction. This lack of transparency limits trust and undermines cost-control efforts.
Specialty drug explosion
Specialty medications now represent more than 50% of total pharmacy spend for many plans, despite being used by fewer than 2% of members. Managing this spend — through biosimilar preference, utilization management, and pharmacy channel optimization — is now a top priority.
Legislative and regulatory crackdowns
State and federal lawmakers are intensifying scrutiny on PBMs, with a focus on:
- Rebate transparency
- Spread pricing bans where PBMs are prohibited from charging plans more than what they reimburse the pharmacy for a prescription drug which they keep as profit
- Audit and fiduciary requirements
- Drug affordability and patient access
Overall, these changes may reshape PBM contracting and employer exposure over the next few years.
The Rise of Transparent and Alternative PBMs
In response to employer frustration with opaque pricing and spread pricing models, a new wave of “transparent” PBMs have emerged. These players, including CapitalRx, Rightway, Navitus, SmithRx, and EmsanaRx, differentiate themselves by offering:
- Pass-through pricing (no spread)
- Full rebate transparency
- Flat administrative fees
- Channel agnosticism
- Tech-driven reporting
- High-touch member support
These PBMs are gaining traction among mid-size and self-funded employers seeking more accountability and alignment as they typically offer pass-through pricing, rebate transparency, and contractual clarity around formulary decisions and revenue streams. While they may lack the scale of legacy providers, many offer modern tech stacks, member engagement tools, and white glove customer service.
A Comparison of PBM Models
| Category | Traditional PBMs | Transparent PBMs |
| Pricing model | PBMs charge health plans more than they reimburse dispensing pharmacies, keeping the difference, known as the spread, as profit. | PBMs pass on all discounts, rebates and fees directly to plan sponsors. |
| Revenue streams | Opaque revenue from spread, rebates, owned pharmacy profits, clinical programs, fees | Flat admin fee as sole source of revenue |
| Advantages | Cost predictability through a well-negotiated PBM contract that contains terms and guarantee language Potential cost savings with competitively negotiated discounts | Visibility of all costs, including discounts and rebates Fewer conflicts of interest with revenue from admin fee only Customization ability in plan design and formulary |
| Considerations | Opacity with minimal visibility into actual costs, rebates, discounts, and PBM revenue streams Conflicts of interest to incentivize higher-cost drugs or formulary options for larger rebates | Fixed administrative costs may be higher than PBM markups Cost management expense is higher since the PBM isn’t incentivized to aggressively manage the drug and pharmacy reimbursement prices Additional middleman with rebate aggregator contract that may keep portion of rebates as a fee |
| Clinical management strategies | Rebate-driven formulary options with limited utilization management choices | Lowest net cost with generic and biosimilar preferences, plus embedded and flexible utilization management strategies |
| Pharmacy network | Favor internal pharmacy dispensing ownership for mail- order, specialty, and retail | Open network with channel agnosticism, but confirm no pharmacy dispensing ownership |
| Reporting and data | Standard (minimal customization) — may have limited access or ownership | Flexibility with real-time dashboards and data transparency |
How to Select the Right PBM Partner
Choosing the right PBM isn’t about the lowest bid, it’s about alignment with your goals, values, and budget. Here’s a step-by-step process for making the right choice.
Step 1: Understand your organization’s needs
Before you start evaluating vendors, take a step back and assess your own organization’s priorities. A PBM that works well for one employer may not suit another. Ask yourself:
- What’s your current pharmacy spend? And what was the trend over the last two to three years?
- Is cost reduction your top priority?
- Are there challenges with specialty drug costs or member access or service?
- Do you value transparency and control more than turnkey administration?
- Do you want more insight into your pharmacy claims?
- How important is a high-touch member experience?
Clearly defining your goals — whether it’s cost containment, better reporting, enhanced member support, or improved clinical outcomes — will shape how you evaluate PBMs.
Step 2: Key evaluation criteria for PBMs
Not all PBMs operate the same way. Here are five key areas to evaluate:
Pricing transparency and contract terms
- Pass-through vs. spread pricing
- Rebate sharing and definitions
- Audit rights and reporting access
Formulary management and clinical programs
- Flexibility to customize plan design and formulary options
- Utilization management strategies, such as prior authorization, step therapy
- Biosimilar strategies and trend management
Technology and data analytics reporting
- Member-facing tools, such as apps and portals
- Employer dashboards and real-time data
- Claims integration and interoperability
Service model and member support
- Call center performance, such as response time, resolution rate, satisfaction
- Member services availability, navigation, and multilingual support
- Pharmacy network breadth and mail-order or home delivery options
Compliance and risk
- URAC or other accreditations
- HIPAA and ERISA compliance
- Transparency laws and fiduciary readiness
Step 3: Ask the right questions in the RFP
Include questions such as:
- How do you define and share rebates?
- Can you show savings under both spread and pass-through models?
- What percent of your revenue comes from sources other than plan sponsors?
- How do you handle specialty drugs and biosimilar adoption?
- What clinical programs do you offer to drive adherence and outcomes?
Common Pitfalls to Avoid
Even seasoned benefits teams make missteps when selecting a PBM, such as:
- Chasing the lowest bid without understanding the underlying terms or cost drivers
- Overlooking value contract language that allows the PBM to reclassify drugs and obscure true costs
- Ignoring member experience metrics, such as ease of prior authorization, customer service quality, and medication adherence
- Failing to benchmark proposals against peer employers or third-party pricing indexes.
A consultant with pharmacy benefit expertise can help you navigate the nuances between PBM partners and the pharmacy complexities.
Additional Tips for Employers
Whether you’re considering switching PBMs or renegotiating an existing contract, here are additional steps to take:
- Review your contract language to ensure terms like “rebates,” “generic,” and “specialty” are clearly defined.
- Benchmark your pricing against national averages and pees.
- Conduct a claims audit to identify waste, misclassification, or non-compliance.
- Evaluate both traditional and transparent PBM models to understand trade-offs.
Prioritize member experience — a low-cost PBM is no help if it frustrates your workforce or reduces access.
Final Decision and Transition Tips
Ultimately, the best PBM partner balances financial performance with transparency, service, and innovation. When making your final choice:
- Weigh quantitative (pricing, rebates, discounts) and qualitative (service quality, trust, cultural alignment) factors.
- Involve HR, legal, finance, and employee representatives in the review.
- Consider using a pharmacy consultant for RFP support and contract review.
- Look for a long-term strategic PBM partner.
If changing PBMs:
- Develop a clear implementation timeline (start about four to six months before go-live) and assign a dedicated transition team.
- Communicate clearly with members about changes in formulary, pharmacy access, or cost.
- Build a transition plan with milestones and risk mitigation, including oversight for the first 90 days to ensure contract compliance, claims accuracy, and positive member experience.
A well-executed implementation can set the tone for the entire PBM relationship.
A PBM Should Be a Partner — Not Just a Vendor
Employers have more choices, better tools, and greater leverage to demand accountability from PBMs. But this requires informed decision-making, careful contracting, and a clear alignment of values between the plan sponsor and the PBM. Whether you choose a traditional or transparent model, what matters most is aligning with a PBM that supports your mission, your members, and your long-term goals.
By staying educated and engaged, employers can not only contain costs but also enhance the quality and equity of pharmacy care for their members.
How Sequoia Can Help
To support companies and their members, Sequoia’s pharmacy advisory team implements a comprehensive pharmacy benefit management strategy. To learn more, connect with a Sequoia advisor.
Related stories:
- Managing Pharmacy Fiduciary Responsibility
- How Biosimilars Can Significantly Reduce Pharmacy Costs for Employers
