Rising Pharmacy Costs: There’s No Better Time to Rethink PBM Models

Employer healthcare costs are showing little sign of slowing. Risk management and HR consulting firm Aon recently projected U.S. employer health plan costs will rise 9.5% in 2027, pushing average annual costs above $19,000 per employee. For HR and Rewards leaders, that pressure extends beyond the benefits budget. Eighty-three percent of employers that responded to a National Alliance of Healthcare Purchaser Coalitions survey said healthcare cost increases are limiting wage and salary increases, while 98% considered health and well-being benefits crucial to attracting and retaining employees.

In this environment, employers need to find ways to preserve meaningful benefits while controlling costs that increasingly compete with compensation and other workforce investments. Pharmacy benefits are a major part of that challenge as specialty medications, gene therapies, and glucagon-like peptide-1 (GLP-1) drugs put greater pressure on budgets.

The structure of the pharmacy benefit manager (PBM) relationship, therefore, matters — perhaps now more than ever. HR leaders should understand not only what medications cost, but also how their PBM makes money and whether that structure truly works in the plan’s best interest.

Predictability Starts With Economic Understanding

Traditional PBM arrangements often emphasize discounts and rebate guarantees. These metrics can look attractive during procurement, but they don’t always reflect the plan’s actual net cost.

If the PBM earns revenue through spread pricing, manufacturer payments or PBM-owned pharmacies, its compensation can increase when the plan sponsor spends more, creating a conflict of interest. Conversely, the lower the plan spend, the less money the PBM makes, creating a negative incentive for the PBM to keep costs down.

A pass-through model approaches the economics differently. Rather than retaining negotiated discounts, rebates or pharmacy spreads, those amounts are passed directly to the plan while the PBM earns a fixed administrative fee.

For HR teams, the value isn’t simply pricing transparency. Separating PBM compensation from medication costs can make spending more predictable. Removing drug pricing from PBM revenue also eliminates the core conflict of interest present in the traditional PBM model.

Some PBMs take transparency a step further and include fiduciary commitments (as defined in the Employee Retirement Income Security Act [ERISA]) in their service agreements, placing plan sponsors’ and plan enrollees’ best interests first while avoiding conflicts of interest. Under this model, the PBM is held to the same legal fiduciary standard for its services as ERISA-regulated health plans, including self-insured employers. According to research from consulting firm Marsh, 41% of large employers are evaluating different contracting models offered by major PBMs, while 37% are evaluating new and emerging PBMs.

Transparency Without Control Isn’t Enough

Greater pricing visibility doesn’t automatically give employers greater control. A contract may disclose pricing while restricting what pharmacies, clinical programs or outside solutions the plan can use.

PBMs should, therefore, consider ways to prioritize clinical appropriateness, employee access and lowest net cost rather than revenue tied to a particular dispensing channel. Of particular focus should be contract terms that:

Prohibit third-party oversight of high-cost claims;
Exclude independent, non-PBM-owned mail and specialty pharmacies;
Disallow independent prior authorization review; or,
Result in compensation going to the PBM or a PBM subsidiary from drug manufacturers.

Audit rights deserve similar scrutiny. Agreements can restrict available records, limit auditors, exclude affiliated entities or constrain remedies when discrepancies are identified.

HR leaders should ask three practical questions:

How does the PBM get paid? Understand all sources of PBM compensation beyond stated administrative fees.
Can the plan act on better options? Preserve flexibility to use lower-cost or more clinically appropriate solutions.
Can the employer verify the results? Audit rights and claims-data access should provide a practical way to test pricing, payments and performance.

Pharmacy Strategy Is Becoming Workforce Strategy

Pharmacy cost management is now a workforce issue. Rising costs can affect employee contributions, wages, benefit design and access to needed medications.

The goal shouldn’t be the largest discount or rebate guarantee on paper. Employers need a pharmacy benefit structure in which:

Costs are understandable;
Compensation is clearly defined;
Sourcing remains flexible;
Financial arrangements can be independently verified; and,
Incentives align with the plan and its members.

Greater control of pharmacy spending can ultimately protect both the benefits budget and the compensation and workforce investments competing for the same dollars.

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