PBM (Pharmacy Benefit Manager)

A PBM is the middleman that administers the prescription drug portion of a health plan. PBMs build formularies, negotiate rebates with drug manufacturers, contract with retail pharmacies on reimbursement rates, run mail-order and specialty pharmacies, and process the actual pharmacy claims. Caremark, Express Scripts, and OptumRx together handle roughly 80 percent of US prescription claims.

The economics are complicated. PBMs earn money from spread pricing (charging the plan more than they pay the pharmacy), rebates retained from manufacturers, dispensing fees at their own mail-order and specialty pharmacies, and administrative fees to the plan. Traditional PBMs are largely owned by or affiliated with the major carriers and retail pharmacy chains — CVS Health owns Caremark and the CVS retail chain; UnitedHealth owns OptumRx and a large specialty pharmacy footprint. A newer generation of "pass-through" or "transparent" PBMs — Navitus, RxBenefits, Capital Rx, SmithRx — charge a flat admin fee and return all rebates and discounts to the plan sponsor. Self-funded employers are increasingly moving to these models to eliminate spread pricing.

The takeaway: if you're a self-funded employer and you haven't audited your PBM contract in the last two years, do it. The difference between a traditional and a transparent PBM can be 15 to 30 percent of pharmacy spend.