What Is a PBM?

A pharmacy benefit manager, or PBM, is a third-party administrator that manages prescription drug programs on behalf of health insurers, self-insured employers, Medicare Part D plans, and other payers. PBMs negotiate with drug manufacturers and pharmacies, process claims, manage formularies, and operate mail-order and specialty pharmacy services.

The three largest PBMs — CVS Caremark, Express Scripts (Cigna), and OptumRx (UnitedHealth Group) — collectively process approximately 80% of all prescriptions in the United States. This concentration gives them enormous negotiating leverage but also raises questions about conflicts of interest, particularly as each is now vertically integrated with an insurer, a pharmacy chain, or both.

Core Functions

PBMs perform several interconnected functions that together determine what drugs are covered, where they can be filled, and what patients and plan sponsors pay.

Formulary management is the process of deciding which drugs are included on a plan's list of covered medications. PBMs employ pharmacy and therapeutics committees that evaluate clinical evidence, cost-effectiveness, and manufacturer rebate offers to determine tier placement. A drug placed on a preferred tier will have a lower copay for the patient, driving utilization toward that product.

Network management involves contracting with retail pharmacies, mail-order pharmacies, and specialty pharmacies to create the dispensing network available to plan members. Reimbursement rates negotiated with pharmacies directly affect plan costs and pharmacy profitability.

Claims adjudication is the real-time processing that occurs when a patient presents a prescription at a pharmacy. The PBM's system verifies eligibility, checks formulary status, applies copay rules, and transmits the reimbursement amount to the pharmacy, typically within seconds.

Rebate negotiation involves securing price concessions from drug manufacturers in exchange for favorable formulary positioning. These rebates can represent billions of dollars annually and are a central point of controversy regarding how much is passed through to plan sponsors versus retained by the PBM.

Why PBMs Exist

Pharmacy benefits became complex enough to require dedicated administration as the number of available drugs grew, pricing structures multiplied, and utilization management tools like prior authorization became standard. Individual employers and insurers lacked the claim volume and technical infrastructure to negotiate effectively with thousands of pharmacies and hundreds of manufacturers.

PBMs emerged to aggregate purchasing power across many clients, spreading the cost of technology, clinical programs, and negotiation capacity. In theory, this aggregation benefits plan sponsors through lower drug costs. In practice, the opacity of PBM economics means employers often cannot verify whether they are capturing the full value of that aggregated leverage.

The PBM Value Proposition

PBMs argue they reduce drug costs for plan sponsors through several mechanisms: negotiating lower pharmacy reimbursement rates, securing manufacturer rebates, promoting generic utilization, managing high-cost specialty drugs, and operating lower-cost mail-order pharmacies. Industry-funded studies have estimated PBM-generated savings at several hundred billion dollars annually across the healthcare system.

Critics counter that PBM savings estimates are difficult to verify independently, that spread pricing and rebate retention create misaligned incentives, and that vertical integration has reduced competitive pressure. The lack of standardized transparency requirements means employers must rely on contractual audit rights and consultant analysis to assess PBM performance.