What Is the Role of a Pharmacy Benefits Manager (PBM)?

Pharmacy benefit managers (commonly abbreviated PBMs) facilitate one of the most important, yet continually debated, aspects of Americans’ lives: access to prescription drugs.  

PBMs have been in the press and the target of reform initiatives at the federal and state levels recently, but because they generally operate behind the scenes in the pharmaceutical supply chain, many people are unaware that they exist. Even those who do know what PBMs are and what they do are often perplexed by how they operate and the role they serve within the healthcare ecosystem.

So – let’s dive into what PBMs are and why are they so important.

What is a Pharmacy Benefit Manager (PBM)?

Put simply, a PBM is an administrator that processes prescription drug claims on behalf of “payers” (e.g., employers, municipalities, labor unions, health plans – including commercial, Medicaid, and Medicare through Part D plans – and other entities that provide prescription drug coverage to beneficiaries).

To provide this service, PBMs contract and negotiate with pharmaceutical manufacturers and retail pharmacies to provide the right balance of drug access and cost-effectiveness.

PBMs also handle plan design, eligibility, card printing, formulary (the list of prescription drugs available to members) maintenance and creation, and hundreds of other tasks and processes behind the scenes.

For example, a PBM performs these processes and tasks for an employer so that its employees have access to prescription medication when needed.

What are the Responsibilities of a Pharmacy Benefit Manager?

Most of a PBM’s responsibilities fall under two categories: devising fair pharmacy prescription benefit plans and offering patients unfettered access to a list of suitable medications so that their health is maintained.

To achieve these goals, PBMs work and contract with different entities, including:

• Pharmaceutical companies
• Wholesalers
• Pharmacies
• Health plan providers

PBMs are responsible for handling more than 80% of all pharmacy benefits negotiates and related matters in the United States for a variety of clients; this is why they are integral to the system. PBMs have a substantial influence on drug rebates and reimbursements, too.

What Else do PBMs Do?

In addition to the responsibilities outlined above, PBMs are also responsible for:

Contracting & Controlling Pharmacy Costs/Spending

PBMs contract with everyone – drug manufacturers, mail order and retail pharmacies, and health plans, for example – and they negotiate pricing to provide patients and employers with better access to medication. They also ensure that pharmacies can offer competitive pricing to patients while also keeping prices within a predetermined range.

To achieve this goal, PBMs utilize a series of methods, including setting up clinical programs. For example, keeping an eye on quantity checks and authorizations allows plan administrators to adequately determine medication usage and calculate savings. PBMs may also offer discount programs.

Providing Better Access to Medication

A PBM should ensure that patients have access to medication. They achieve this through:

• Constant communication with the drug manufacturers and wholesalers that are responsible for ensuring medicines are produced and made available (at fair prices), and
• Managing pharmacy network strategies in ways that balance cost and quality for each plan's unique needs.

Formulary Design & Management

A formulary is a set, or a list, of drugs covered within a healthcare plan. This may include both brand and generic drugs. Formularies are created by PBMs, and they seek the help of physicians and pharmacists to ensure the most effective and affordable drugs are on the list. Based on the formulary, physicians can prescribe the drugs included in them to their patients.

Drug manufacturers may also compensate PBMs to ensure their drugs are available to be prescribed to patients.

What about specialty drugs, though? Check out our related content section below to learn what specialty drugs are and why there’s a cost problem associated with them.

Driving Patient Engagement & Tracking Health Outcomes

As PBMs evolve into clinical management roles they become more valuable. PBMs must be agile and offer flexible, personalized plan designs based on clients’ needs. Because PBMs are managing prescription drug claims and overseeing drug utilization, with the right resources and technology, they can handle proactive clinical oversight and create personalized analytics and reports.

Next-generation PBMs can work with employers to strategically balance drug-spending and introduce programs that allow employers to offer better choices to improve outcomes (rather than just push paper and process claims).

Related Content – More on Specialty Drugs & Pharmacy Benefit Design

• Pharmacy Benefits 101: Specialty Drugs
• Replay - Cracking the Code: Unraveling Specialty Drug Costs & PBM Profits
• AH027 - What is Pharmacy Benefit Management? With Jillian Lonson and Jean Beman, Part 1
• AH028 - What is Pharmacy Benefit Management? With Jillian Lonson and Jean Beman, Part 2

Handling Drug Rebates

Drug rebates are a source of contention, as they are decided by the PBMs and pharmaceutical manufacturers for individual drugs, and they are paid directly to PBMs. According to the agreement that PBMs have with their employer, plan sponsors, or other stakeholders, they are required to redirect some (or all) of the rebate back to them.

In many cases, PBMs aren’t contractually obligated to return any of the rebates back to their employers (i.e., the PBM can keep some or all the rebate dollars). At Capital Rx, rebates are passed through to the plan sponsor.

How Do PBMs Work with Pharmaceutical Companies?

As noted above, PBMs have direct relationships with and earn revenue from pharmaceutical companies that manufacture drugs of all kinds. However, this relationship isn’t without its hurdles and bumps, mainly due to the financial constraints and challenges that arise during negotiations between PBMs and drug manufacturers and potential conflicts of interest.

Since PBMs act as a bridge between drug manufacturers and patients, they are tasked with deciding how affordable a certain drug is for patients. While a simpler pricing model can help, PBMs must design and implement programs that balance cost and efficacy to ensure patients have access to the most effective and suitable medications for them.

How do PBMs work with Employers?

Like the relationship with pharmaceutical companies, PBMs contract with their employer clients and are required to design a prescription benefits plan. Once this plan is designed, the employer requires the PBM to administer the prescription benefits and make employees aware of the benefits they can receive.

There are several types of pricing models and drug price indexes, each with its own issues and limitations.

Three common buckets pricing models fall into include:

• Traditional Pricing: A percentage discount from the Average Wholesale Price (AWP) is negotiated with manufacturers and passed to pharmacies (Retail, Mail, Specialty).
• Pass-Through Pricing: Negotiated pricing that includes passing formulary rebates to patients at point-of-sale or to the insurer; rebates can be retained by the PBM based on contractual arrangements with the insurer.
• National Average Drug Acquisition Cost (NADAC) Pricing: Pricing is based on the approximate invoice price retail pharmacies pay for medications in the United States. NADAC pricing aligns drug prices with average actual pharmacy drug costs rather than manufacturer lists, so it’s not subject to the inflationary tendencies of AWP.  

Capital Rx is Bringing New Enterprise Health Technology to the Industry

At Capital Rx, we strive every day to improve prescription drug price visibility and how patients are cared for. We see PBMs as an essential stakeholder in the pharmaceutical supply chain and ourselves as a health technology company first, daring to rebuild our nation’s electronic claims processing infrastructure.

In 2021, we launched Judi®, a cloud-native enterprise health platform that unifies all pharmacy operations – from claims adjudication, data integration, prior authorization, patient communication, client reporting, invoicing, reimbursement, and more – within one ecosystem. Judi’s flexibility creates a level of efficiency never thought possible in healthcare administration. In What Really Makes a Pharmacy Benefit Administration (PBA) Solution Different?, we explain how enabling technology like Judi allows health plans, health systems, and others to set up and run pharmacy benefit programs with support or on their own.

On January 1, 2025, we launched Judi Health™, healthcare’s first unified pharmacy and medical claims processing platform. What will Judi power next?

If you’d like to learn more about our full-service PBM solution or Judi, please contact us today! We’d love to hear from you.

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