The Middleman Your Health Plan Doesn’t Explain
You review the premiums. You negotiate with your broker. You pick the plan. Then a year later, renewal numbers went the wrong direction again, and no one can give you a clear explanation for why.
Prescription drug costs are often the biggest driver. At the center of those costs is a player most employers have never been asked to think about: a pharmacy benefit manager, or PBM.
Learn what PBMs are and how they get paid. It’ll change what you demand from your next renewal.
What Is a PBM?
A pharmacy benefit manager is a third-party company that sits between your health insurance plan and the pharmacies where your employees fill their prescriptions. On paper, their job is to streamline the process: negotiate drug prices with manufacturers, build and manage the formulary (the list of covered drugs and their cost tiers), and process prescription claims.
In practice, PBMs sit at the center of a massive money flow with a revenue structure employers almost never see. A handful of companies dominate the market and process the vast majority of prescriptions filled in the United States.
Every time one of your employees picks up a prescription, there’s a real chance a PBM is taking a cut somewhere in that transaction. Your plan absorbs it, usually without knowing where it went. That’s the dynamic that shapes every pharmacy benefit cost conversation that follows.
How PBMs Make Money
PBMs don’t charge a flat management fee the way you’d pay a payroll processor or HR software vendor. Their revenue comes from several mechanisms that are harder to spot on a standard benefits statement, and each one adds a layer of cost your plan can’t easily trace.
- Spread pricing is the most direct. A PBM negotiates a rate with a pharmacy, then charges your plan a higher rate for the same drug. The difference is their margin. You don’t see it broken out as a line item. You see the total claim, not what’s built into it.
- Manufacturer rebates work like this: drug companies pay PBMs to secure preferred placement on the formulary. Preferred placement pushes certain drugs onto lower-cost tiers, where employees are more likely to use them. PBMs collect those payments but aren’t required to pass them through to your plan. Some do. Many keep a portion and call it a service fee.
Think of it like grocery store shelf placement. Brands pay for prime real estate in the cereal aisle. Those payments don’t make it back to the consumer, and neither do PBM rebates. - DIR fees (Direct and Indirect Remuneration) are charges assessed back to pharmacies after claims are already processed. They affect what your plan ultimately pays in ways that don’t always show up in real-time reporting. For employers trying to track their true pharmacy spend, DIR fees are one of the hardest costs to pin down.
The Formulary Isn’t a Neutral List
Most employers treat the formulary (the official list of covered drugs) as a clinically driven document: which drugs work best, what’s safest, what delivers the most value. The reality is more complicated.
PBMs have financial relationships with drug manufacturers, and those relationships influence which drugs land where on the formulary. A drug that generates a larger rebate to the PBM may end up on a more accessible tier than a competitor drug with a similar or better clinical profile. You might not be getting the most cost-effective option available. You’re getting the option that bought its way onto the best list.
That doesn’t mean every formulary decision is financially compromised. It means the list isn’t purely clinical, and you shouldn’t treat it as if it is. Treat the formulary as what it is: a document shaped by both clinical criteria and business relationships.
Why Mid-Market Employers Take the Biggest Hit
Large corporations have the resources to push back on PBMs. They carve out pharmacy benefits, run audits, and hire consultants who specialize in these negotiations. They know the levers, and they use them.
Mid-market employers, roughly in the 50- to 500-employee range, usually don’t. They’re large enough to be generating real pharmacy spend. They’re small enough that everybody pretty much assumes they won’t ask hard questions. Too often, they just sign the renewal, absorb the rate increase, and repeat the cycle next year.
That’s the gap a good benefits advisor for mid-market employers can actively work to close. You don’t need the infrastructure of a large corporation to demand transparency from your PBM arrangement. You need a broker who knows what to ask and isn’t afraid to ask it on your behalf.
Your current broker should be raising PBMs, spread pricing, and rebate pass-through in plan reviews without you prompting it. A strategic partner shouldn’t only surface these issues when asked. One who isn’t bringing them up is giving you a signal worth paying attention to.
What Health Plan Fee Disclosure Rules Mean for You
The Consolidated Appropriations Act of 2021 changed the rules on benefits transparency in a meaningful way. Among its provisions, the law established health plan fee disclosure rules requiring brokers and consultants working with employer-sponsored health plans to disclose their compensation to plan sponsors. That includes indirect payments that may flow from PBMs or affiliated entities.
You’re entitled to understand the full picture of how every service provider connected to your plan is being compensated, directly and indirectly. Broker commissions are part of that picture. So are payments from PBMs, pharmaceutical manufacturers, and anyone else in the supply chain with a financial stake in how your plan is structured.
Put the request in writing before your next renewal. Document the response, or the absence of one. Both are useful. Employers who ask this question often find that it changes the dynamic with their broker immediately.
What to Demand From Your Broker
A transparent benefits brokerage brings these conversations up without being asked. Brokers who don’t are delivering the same passive service the industry has run on for decades.
Here are the questions worth putting on the table now:
- Does our plan receive any portion of manufacturer rebates, and how much is passed through to us?
- Is spread pricing used in our PBM arrangement, and can we see a summary of the spread retained last plan year?
- What was our total DIR fee exposure? When in the claims cycle are DIR adjustments assessed?
- Can we access our own pharmacy claims data to understand our actual drug spend by category?
You don’t have to understand every answer on the first read. What matters first is whether your broker can answer at all. The ones who can are working at a different standard.
Stop Letting PBM Opacity Drive Your Costs
PBMs will continue to be part of how prescription benefits get administered. What can change is how much visibility you have into what’s happening inside your plan and what that costs you. The regulatory environment is pushing toward more disclosure. Employers who start asking better questions now will be ahead of the next rate increase instead of reacting to it.
At The Benefit Doctor, we work with mid-market employers who are done guessing at their benefits costs and ready to understand them. That means getting into the actual data, pushing for real disclosure, and building a plan that works in your favor. Ready to stop accepting the black box? Let’s talk.