What a Pharmacy Benefit Manager Does

A pharmacy benefit manager (PBM) is a company that sits between your insurance plan and the pharmacy where you fill prescriptions. Your insurance company hires the PBM to negotiate drug prices, decide which medications your plan covers, and process the claims when you pay at the counter. You do not choose your PBM—your employer or insurance plan does—but the PBM's decisions directly affect what you pay and which drugs are available to you.

The three largest PBMs in the United States are CVS Caremark, Express Scripts (owned by Cigna), and Optum (owned by UnitedHealth). Together they handle prescriptions for roughly 150 million Americans. Because they control such a large share of the market, their decisions about which drugs to cover and at what price shape what medications doctors can realistically prescribe and what patients can afford.

Key Takeaways

  • PBMs negotiate prices with drug manufacturers and pharmacies, then decide which drugs your insurance covers and at what cost to you.
  • A drug's position on your plan's formulary—a list that ranks drugs by tier—determines how much you pay out of pocket.
  • PBMs earn money from rebates manufacturers pay when their drugs are preferred, which can create conflicts between lower costs for you and higher profits for the PBM.
  • You can ask your doctor or pharmacist to request a formulary exception if a drug you need is not covered or is in a high-cost tier.
  • Comparing prices across pharmacies and using manufacturer coupons or patient assistance programs can sometimes lower your cost below what your insurance charges.

How PBMs Decide Which Drugs You Can Get

Every insurance plan has a formulary—a list of covered medications organized into tiers. Tier 1 drugs (usually generics) cost you the least. Tier 2 drugs (preferred brand-name medications) cost more. Tier 3 or higher drugs cost the most, and some drugs are not covered at all. The PBM builds this formulary by negotiating with drug manufacturers: a manufacturer pays the PBM a rebate (a discount off the list price), and in return the PBM puts that drug in a lower tier where more patients will use it.

This system is meant to lower overall costs, but it creates a problem. The rebates the PBM keeps are often largest for expensive brand-name drugs, not for cheaper alternatives. So a PBM can make more money by covering an expensive drug in Tier 2 than by covering a cheaper drug in Tier 3—even though the cheaper option would cost you less. Your doctor may not know which tier a drug is in when they prescribe it, and you may not find out until you reach the pharmacy counter.

What You Pay at the Pharmacy Counter

Your out-of-pocket cost depends on your plan's cost-sharing structure, which the PBM administers. You might pay a flat copay ($15 for a generic, $50 for a brand-name drug), or you might pay coinsurance (a percentage of the drug's price, like 20 percent). Some plans have a deductible you must meet before cost-sharing kicks in. Once you hit your plan's out-of-pocket maximum in a calendar year, your insurance covers 100 percent of covered drugs for the rest of that year.

The price you see at the register is not the drug's actual cost. The pharmacy and your insurance company have negotiated a contracted price, which is lower than the list price. The PBM processes this claim and tells the pharmacy how much you owe based on your plan's tier and cost-sharing rules. If you pay cash instead of using insurance, you might pay more or less than your copay—it depends on the pharmacy's cash price and whether the drug has a manufacturer coupon.

Rebates and the Hidden Cost Structure

When a drug manufacturer pays a rebate to a PBM, that rebate is supposed to lower the cost of drugs for everyone. But the rebate system is opaque. You do not see the rebate amount, and your doctor does not know it. The manufacturer sets a high list price, the PBM negotiates a rebate, and the PBM passes some (but not all) of the savings to your insurance plan. The PBM keeps a portion of the rebate as profit.

This creates a conflict of interest. A PBM earns more money when it covers expensive drugs with large rebates than when it covers cheaper drugs with smaller rebates. Studies have found that some PBMs prefer to cover more expensive brand-name drugs over cheaper generics or older drugs, even when the cheaper option works just as well. Your insurance company and your employer (if they sponsor your plan) have limited visibility into these rebate deals, so they cannot always tell whether the PBM is truly negotiating in their interest.

How to Find Out What Your Plan Covers

Before you fill a prescription, ask your pharmacist or doctor to check your plan's formulary. Most insurance companies post their formularies online, and you can search by drug name. The formulary will tell you the tier, any prior authorization requirements (approval from your insurance company before the pharmacy can fill it), and any quantity limits (the maximum amount you can get per month). If your doctor prescribes a drug that is not on the formulary or is in a high tier, you have options.

You can ask your doctor to prescribe a different drug that is in a lower tier. You can request a formulary exception—a written request to your insurance company asking them to cover the drug anyway or move it to a lower tier. The request usually comes from your doctor and includes a clinical reason why this specific drug is necessary for you. Insurance companies approve some exceptions, especially if you have tried the preferred drug and it did not work or caused side effects. The process typically takes a few days to a week.

Comparing Prices and Using Coupons

Pharmacy prices vary. A drug that costs $50 at one pharmacy might cost $80 at another, even in the same town. If you use your insurance, the price is set by your plan's negotiated rate, so shopping around will not help. But if you pay cash, you should compare prices. Use free tools like GoodRx, SingleCare, or RxSaver to see the cash price at different pharmacies near you. Sometimes the cash price is lower than your copay, especially for generic drugs.

Manufacturer coupons can also lower your cost. Many drug companies offer coupons that reduce the copay for their brand-name drugs. You can find these on the manufacturer's website or through coupon aggregators. Some patient assistance programs run by manufacturers offer free or low-cost drugs to people who meet income requirements. Your pharmacist or doctor's office can help you find these programs. Keep in mind that using a manufacturer coupon may prevent your insurance company from counting that cost toward your deductible or out-of-pocket maximum, so do the math before you decide.

What Happens When Your Drug Is Not Covered

If your insurance plan does not cover a drug at all, you have several paths forward. First, ask your doctor whether a covered alternative exists that might work for you. If not, request a formulary exception. If the insurance company denies the exception, you can appeal the decision. The appeal process varies by plan, but you typically have 30 to 60 days to submit additional information from your doctor explaining why this drug is medically necessary.

If the appeal fails or you do not want to wait, you can pay cash. Call several pharmacies to compare prices, and check for manufacturer coupons or patient assistance programs. Some people find that paying cash for one or two doses while appealing the insurance decision is faster than waiting for the appeal to be resolved. Your doctor's office may have staff who specialize in insurance issues and can help navigate this process.

Frequently Asked Questions

Can my doctor override my PBM's decision about what drug I get?

Your doctor can prescribe any drug they believe is medically appropriate, but your insurance company (through the PBM) decides whether to cover it. If your doctor prescribes a non-covered drug, you can request a formulary exception, and your doctor can submit a letter supporting the request. The insurance company makes the final decision, though doctors' recommendations carry weight in appeals.

Why does my copay change when I refill the same prescription?

Your copay can change if your plan's formulary changes (which happens once a year for most plans), if you have met your deductible or out-of-pocket maximum, or if the pharmacy's contracted price with your insurance company changed. Check your plan documents or call your insurance company to understand what changed.

Is it ever cheaper to use cash instead of insurance?

Yes, sometimes. Generic drugs especially can have low cash prices at some pharmacies. Use a price comparison tool to check the cash price, then compare it to your copay or coinsurance. If the cash price is lower and you have not met your deductible, paying cash might save you money—but it will not count toward your deductible or out-of-pocket maximum.

What should I do if I cannot afford my prescription?

Talk to your pharmacist or doctor about lower-cost alternatives, request a formulary exception to a cheaper covered drug, look for manufacturer coupons or patient assistance programs, or ask about the pharmacy's generic or discount programs. Many pharmacies offer $4 lists for common generic drugs. If you are uninsured or underinsured, community health centers and nonprofit organizations sometimes offer free or low-cost medications.

Can I switch to a different PBM?

You cannot choose your PBM directly—your insurance plan or employer does. If you are unhappy with your coverage, you can switch insurance plans during open enrollment (usually November through December for employer plans, or October through December for Medicare and Marketplace plans). When comparing plans, review the formularies to see which covers your medications at the lowest cost.