Why Are Our Pharmacy Costs Exploding? Understanding PBMs and Prescription Spend
Pharmacy costs are crushing a lot of small and midsize employers right now, and for most owners it feels like it came out of nowhere. You didn’t suddenly start hiring different people—but your renewal now shows pharmacy running hotter than medical, and a few drugs are eating a disproportionate share of your budget.
A big part of that story runs through a player most business owners never see directly: PBMs, or Pharmacy Benefit Managers. They sit between drug manufacturers, pharmacies, and your health plan, and they have a huge influence on what you pay and what your employees experience at the counter.
Why pharmacy costs are exploding
For employers, prescription spend is being pushed up by a few key forces:
Specialty and GLP‑1 drugs. A small number of high‑cost medications now account for a very large share of total drug spend, especially specialty drugs and GLP‑1s for diabetes and weight loss. One or two employees on these therapies can materially move your entire health plan cost.
Drug inflation and mix. Overall drug prices continue to rise, and the mix is shifting toward higher‑cost therapies, which is why many projections show prescription spending outpacing general inflation and growing ~7–8% annually through the mid‑2020s.
Opaque supply chain economics. Manufacturers, wholesalers, PBMs, and pharmacies all touch the same prescription dollar, and their incentives are not always aligned with lowering your net cost as an employer.
PBMs sit in the middle of this ecosystem.
What PBMs actually do
PBMs were originally created to help insurers and large employers manage the complexity of prescription benefits. In practice, most PBMs now:
Manage the formulary (which drugs are covered, preferred, or excluded).
Negotiate rebates and discounts with drug manufacturers.
Define the pharmacy network your employees can use and what those pharmacies are paid.
Administer claims and utilization rules, including prior authorizations and step therapy.
On paper, PBMs should reduce costs through scale and negotiation. The challenge is that many traditional PBM models are built on revenue streams that are hard for an employer to see—so it’s not always obvious whether they’re lowering your net spend or just changing where it shows up.
How PBM practices can drive costs up
Several common PBM practices contribute to the “why is this so expensive?” feeling:
Spread pricing. In a spread‑pricing model, the PBM charges the employer one amount, reimburses the pharmacy a lower amount, and keeps the difference as margin. You see a claim cost on your report, but you don’t see what the PBM actually paid or how much spread they retained.
Rebate‑driven formularies. PBMs negotiate rebates with manufacturers, often tied to where a drug sits on the formulary. If the contract isn’t aligned with employer interests, the PBM may favor high list‑price drugs that generate bigger rebates—even when less expensive, clinically similar alternatives exist—pushing up gross spend even if rebates offset some of it later.
Limited transparency. Many employers lack clear visibility into the true net cost of drugs, how rebates flow, and how much of the financial value is kept by the PBM versus passed back. Surveys show PBM satisfaction at multi‑year lows, with employers frustrated by rising costs and opaque reporting.
Weak specialty management. Without tight controls—appropriate prior auths, step therapy, site‑of‑care strategies, biosimilar adoption—specialty pharmacy costs can spiral quickly.
The takeaway: PBMs are not automatically “bad,” but if you don’t understand the model you’re in, you’re likely overpaying or carrying more risk than you realize.
What small and midsize employers can do
You don’t need to become a pharmacy actuary to get control. But you do need to ask better questions and align your advisors and vendors with your goals.
Key moves:
Clarify how your PBM is paid. Ask whether your arrangement uses spread pricing or a pass‑through/net‑pricing approach, and what percentage of manufacturer rebates and fees are contractually passed back to you.
Push for transparency. More “modern” or pass‑through PBMs build their revenue around clear admin fees and give employers detailed reporting on ingredient cost, dispensing fees, and rebates, so you can see your true net cost.
Tighten specialty and high‑cost drug controls. Work with your advisor to ensure sensible prior auth criteria, step therapy where clinically appropriate, and aggressive use of generics/biosimilars and lower‑cost sites of care.
Align plan design with behavior. Tiered copays or coinsurance, clear communication about preferred drugs and pharmacies, and employee education around lower‑cost options can all bend your pharmacy trend without simply shifting cost to employees.
Make pharmacy part of your benefits strategy. Treat pharmacy as a strategic lever, not an afterthought. Rising drug spend flows straight into your renewal, your payroll budget, and your ability to invest in wages and other benefits.
For a tax‑smart employer like the ones Abbott Family Insurance serves, the right sequence is: optimize your medical and pharmacy structure first, then use tools like a Self‑Insured Medical Reimbursement Plan (SIMRP) to stretch each benefit dollar further through payroll tax efficiency, instead of just writing bigger checks each year.
