Pharmacy Cost Savings for Employer Plans: Look Beyond the Rebate
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A pharmacy benefit can come with a strong rebate guarantee and still leave an employer asking the same question at renewal: Did we actually save money?
Pharmacy now represents 25% of employers’ total healthcare spending according to Business Group on Health’s 2027 Employer Healthcare Strategy Survey. At the same time, rising drug costs, specialty therapies, and GLP-1s are adding pressure to the benefit.
There’s more to pharmacy spend than the rebate attached to a contract. Drug mix, overall utilization, specialty pharmacy, fees, new drug launches, and the Pharmacy Benefit Manager’s (PBM) financial model all play a role. Looking at each of these areas can reveal where costs are coming from and where there may be room to change them.
What Drives Pharmacy Costs for Employers?
A prescription can have a lower price and still contribute to high pharmacy spend. The reason comes down to everything happening around that price, including which drugs members use, how often they use them, where they fill or receive them, and what fees sit behind the benefit.
Chief Commercial Officer Kristin Begley, PharmD, uses this framework to put those cost drivers into perspective:
- 30%: Unit costs, discounts, dispensing fees, and rebates
- 50%: Drug mix
- 20%: Ancillary fees
This approach highlights why rebate guarantees are only one part of pharmacy cost management. A guarantee tells employers how much they can expect to receive in rebates, but it doesn't account for every factor driving pharmacy spend. Drug mix and ancillary fees also contribute to total costs, which is why employers need to look beyond rebate revenue to understand what they're paying overall.
How Can Employers Reduce Pharmacy Spend?
Employers can reduce pharmacy spend by looking beyond the rebate guarantees and evaluating what they pay across the pharmacy benefit. A rebate may lower the net cost of a drug, but it doesn’t account for every factor that can increase pharmacy spend.
Rebates are easy to understand. They’re visible. They’re tangible. They’ve been positioned as savings for decades, but I will die on this hill that there are no free lunches.
- Kristin Begley, PharmD, Chief Commercial Officer
A pharmacy contract can generate revenue in more ways than a rebate. Those terms can cover:
- Drug pricing
- Manufacturer rebates
- Administrative fees
- Spread pricing
- Dispensing economics
- Other PBM revenue
A simple way to put a rebate guarantee into perspective is a simple 3.25x multiplier. The calculation estimates how much underlying drug spend would be required to generate that rebate. A projected $1 million rebate, for example, would correspond to roughly $3.25 million in underlying ingredient spend.
The benchmark used to establish a drug’s price can change the number attached to it. National Average Drug Acquisition Cost (NADAC), Average Wholesale Price (AWP), and other pricing benchmarks rely on different approaches. For the plan sponsor, the important question is where that number comes from and whether the underlying calculation can be audited.
How do PBMs Help Employers Benchmark Pharmacy Costs?
Employers can benchmark pharmacy costs by comparing net cost, utilization, formulary performance, rebates, and other pharmacy benefit expenses over time. These measures can help employers evaluate how the benefit is performing against the terms of their contract. Key questions to ask include:
- What is our true net cost Per Member Per Month (PMPM), and how has it changed year over year?
- What are the PBM’s prior authorization approval rates by therapeutic class?
- Does the formulary favor lower-cost biosimilars or higher-rebate alternatives?
- How does refill logic prevent waste and stockpiling?
- Are 100% of the manufacturer rebates passed through, and can that be demonstrated at the drug level?
- Can we access our own claims-level data down to the NDC-9 level?
- What ancillary fees apply, including percentage-based charges related to copay coupons?
Reviewing these measures gives employers a way to assess pharmacy costs against actual benefit performance and contract terms.
Why Are Specialty Pharmacy Costs Rising?
Specialty medications account for a growing share of pharmacy spending, even though they represent a relatively small portion of prescriptions. Their high price points and complex utilization patterns can make them a significant driver of overall pharmacy costs.
KFF’s 2025 Employer Benefits Survey found that 87% of covered workers at firms with 10 or more employees were in plans that covered specialty drugs. Among covered workers at firms with 200 or more employees whose plans covered specialty drugs, 63% were in plans with a separate cost-sharing tier for specialty drugs.
Specialty drug costs are shaped by more than just the price of the medication. Formulary decisions influence which therapies are available, while utilization policies, refill practices, and site of care can affect how those medications are used and what the plan pays.
Biosimilars offer a clear example of where those decisions can create an opportunity for savings. As more biosimilars enter the market, formulary placement can impact whether clinically appropriate lower-cost alternatives are available to members. The FDA continues to support biosimilar development and competition in biologic medicines.
Managing Specialty Pharmacy Costs
Biosimilars are only one consideration. Specialty pharmacy management can also involve:
- Formulary design: does the formulary favor clinically appropriate, lower-cost alternatives, or products carrying larger rebates?
- Utilization management: Are prior authorization, step therapy, and quantity limits being applied where they make clinical sense?
- Refill management: Does the program prevent unnecessary early refills, excess supply, and medication waste?
- Site of care: Is a medication being administered in the most appropriate setting when a lower-cost option is clinically appropriate?
- Benefit integration: Can the plan see specialty drug costs across both the pharmacy and medical benefits?
- Generic dispensing rate: What’s the plan’s GDR, and how does it compare over time?
Specialty pharmacy can also cross the line between the pharmacy and medical benefits. A drug may fall under the medical benefit depending on how and where it’s administered, which can make the full cost of therapy harder to see when those benefits are evaluated separately. Price variation can make the distinction even larger, particularly when the same therapy can carry very different costs depending on where it’s administered.
Judi Rx™ 2025 Book of Business: Adjusted Claims & Gross Spend
Bringing medical and pharmacy benefits together can give plan sponsors a more complete view of specialty drug spending and where costs can be managed while creating a more consistent experience for members navigating their care.
How to Evaluate a PBM
Evaluating a PBM starts with looking beyond the headline terms of the contract. The right questions extend to how the benefit is administered, how the PBM is compensated, and what information is available to track performance over time.
The way a PBM gets paid is one place to start. Administrative fees are one source of revenue, but other payments and financial relationships can also affect the economics of the benefit, which is where fiduciary responsibility has a role to play.
Fiduciary responsibility means making decisions in the best interests of the plan and its participants. For a PBM evaluation, that means looking closely at the financial arrangements behind the benefit and whether the organization has enough transparency to make informed decisions about its pharmacy program.
Claims-Level Data and Pharmacy Benefit Transparency
Claims-level data gives teams a way to evaluate the benefit based on what is happening, rather than relying solely on projections or guarantees, which includes tracking total net cost over time, seeing changes in drug mix and utilization, and identifying where costs are moving.
As CFOs take a more active role in healthcare strategy, access to that information becomes even more useful. Claims-level data can help finance leaders ask better questions about what they’re paying for and how the benefit is changing over time.
Visibility also makes pharmacy costs easier to plan for. As utilization changes and new therapies enter the benefit, tracking actual claims and performance over time can help teams distinguish between a temporary shift and a broader change in the underlying trend.
One example came from a Judi Rx client whose pharmacy trend was 4% the previous year, compared with an industry trend of around 11%, even with GLP-1s in the mix.
We validate our net cost now by measuring actual performance, not projected savings related to the rebates.
- Julia Bryan, SHRM-SCP, Benefits and Compensation Manager, Subaru of Indiana Automotive
The distinction is important: actual performance gives a finance team a way to evaluate its own benefit based on what happens, rather than what a model predicted.
Make Sense of Your Pharmacy Spend
There’s more to pharmacy spend than the rebate or guarantee. A transparent view of the benefit can show what’s driving costs and where there’s room to improve.
Lower costs, better member experience. See what’s possible with Judi Rx.
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