Pharmacy Benefit Managers (PBMs) sit between drug makers, health plans, pharmacies, and patients. They design formularies, set rules, and pay pharmacy claims. Two names dominate this space: CVS Caremark and Express Scripts. They are often called “middlemen.” That is accurate, but incomplete. They also control key levers that decide which drugs get used, what you pay at the counter, and how much your pharmacy earns. This article explains how they work, why they became so powerful, and what it means for patients, employers, and pharmacies.
What a PBM Does, in Plain Terms
A PBM manages the drug benefit for health plans and employers. It builds a pharmacy network, negotiates discounts with manufacturers, designs formularies, and processes claims.
Here is the basic flow:
- The plan hires a PBM to run its drug benefit.
- The PBM creates a formulary and usage rules (prior authorization, step therapy).
- A patient fills a prescription at a network pharmacy.
- The PBM approves or rejects the claim and decides how much the pharmacy gets paid.
- Manufacturers pay the PBM rebates to prefer their drugs.
This model exists because drug pricing is complex and fragmented. Plans outsource the work. PBMs grew by promising lower costs through volume discounts, tight formularies, and savings programs.
Who Are CVS Caremark and Express Scripts?
CVS Caremark is the PBM arm of CVS Health, which also owns Aetna (a major insurer) and CVS retail and specialty pharmacies. Express Scripts is the PBM owned by Cigna, another large insurer. Together with OptumRx (UnitedHealth), they process most prescriptions in the U.S. This concentration matters. It gives them leverage to extract bigger rebates from manufacturers and lower prices from pharmacies. It also creates conflicts. They can steer patients to their own mail-order or specialty pharmacies, which keeps profit inside the same corporate family.
How PBMs Shape Drug Prices
Formularies and rebates. PBMs decide which drugs are preferred. Manufacturers pay rebates to secure that placement. Why? Preferred drugs get more prescriptions. Over time, this rebate race pushes list prices up because rebates are paid as a percentage of list price. The “discount” looks good to the plan, but patients with deductibles or coinsurance often pay based on the higher list price at the counter.
Example: A drug’s list price is $600. The PBM negotiates a 40% rebate, so the net price to the plan is $360. A patient with 20% coinsurance pays 20% of $600 ($120), not 20% of $360 ($72), unless the plan applies point-of-sale rebate sharing. This is why high list prices hurt patients even when plans get rebates later.
Spread pricing. In some contracts, the PBM pays a pharmacy one amount and charges the plan more, keeping the difference (the spread). PBMs say the spread funds services and stabilizes plan costs. Critics say it obscures true prices and encourages underpaying pharmacies.
Utilization controls. Prior authorization and step therapy aim to prevent waste and favor cheaper options first. They can save money, but they also delay treatment and increase administrative burden. For some chronic and specialty drugs, these rules can cause avoidable gaps in care.
Copay accumulator and maximizer programs. Some plans do not count manufacturer copay cards toward a patient’s deductible. This lowers plan costs but can create a “benefit cliff” when assistance runs out and patients face full costs mid-year.
How PBMs Control Pharmacy Profit
PBMs set the reimbursement a pharmacy receives. That number, more than the retail price, decides the pharmacy’s margin.
- MAC lists for generics: PBMs maintain “maximum allowable cost” prices. If the MAC is below the pharmacy’s acquisition cost, the pharmacy loses money on the claim. Updates can lag market spikes, which squeezes small pharmacies.
- DIR and performance fees: In Medicare Part D, PBMs long used Direct and Indirect Remuneration (DIR) fees to reconcile payments months later based on “performance.” Pharmacies often could not predict these fees, turning a small profit into a loss after the fact. Starting in 2024, CMS moved most DIR to the point of sale. Patients now see lower prices up front, but reconciliation pressures for pharmacies remain through other fees and metrics.
- Audits and recoupments: PBMs audit claims for documentation errors. Some audits recover funds for real issues. Others hinge on technicalities, which can be costly for independents.
- Network design and steering: PBMs create preferred networks with lower pharmacy pay but higher patient traffic. They can also require use of their own mail-order or specialty pharmacies for certain drugs. This redirects high-margin prescriptions away from community pharmacies.
The result is uneven and often thin margins for pharmacies, especially on generics and specialty drugs. Pharmacies respond by adding clinical services, vaccinations, and adherence programs to diversify revenue, but the core fill-and-bill model remains tight.
Specialty Drugs: The Power Center
Specialty drugs treat complex or rare conditions and carry very high prices. PBMs commonly run their own specialty pharmacies—CVS Specialty for Caremark and Accredo for Express Scripts. They also manage limited distribution networks, which restrict which pharmacies can dispense certain drugs. Why? Manufacturers want consistent handling and data, and PBMs want to capture margin and control adherence. The downside is fewer choices for patients and loss of high-value prescriptions for local pharmacies.
Why Vertical Integration Matters
CVS owns Caremark, Aetna, and retail/specialty pharmacies. Cigna owns Express Scripts and health plans. This integration can align incentives to manage total cost of care. It also creates self-dealing risk: the PBM can set rules that send prescriptions to its own pharmacies and insurers. When the rule-maker is also the seller, transparency and oversight become critical. Without them, rivals and independents are disadvantaged, and patients have fewer options.
For Employers and Health Plans: How to Buy PBM Services
PBM contracts decide where the money goes. Small clauses have big effects. Key choices:
- Traditional vs pass-through pricing: Traditional PBMs keep spreads and portions of rebates. Pass-through PBMs charge an admin fee and pass all rebates and network payments through at cost. Pass-through offers clarity, but admin fees can look higher on paper. Ask for both models and compare total cost.
- Rebate guarantees vs point-of-sale rebates: Guarantees are predictable, but savings arrive after the fill. Point-of-sale sharing lowers patient costs immediately and improves adherence.
- MAC and brand pricing references: Use clear benchmarks (e.g., NADAC or WAC-based with fixed discounts) and tight update timelines for MAC lists. Require appeal rights with response deadlines.
- Audit rights and data access: Secure claim-level data, ingredient cost, fees, and rebate reporting by NDC. Without data, you cannot verify savings.
- Accumulator/maximizer policies: Decide up front whether manufacturer assistance counts toward deductibles. Understand member impact and communication needs.
- Steering limits: If member choice matters, restrict mandatory mail or specialty steering, or require parity if owned pharmacies are favored.
For Patients: How to Navigate PBM Rules
- Check the formulary before starting a drug. Ask your prescriber for a preferred option first to avoid delays.
- Appeal denials. Prior authorization and step therapy can be overturned with strong clinical notes. Ask your clinic to cite earlier failures or contraindications.
- Ask the pharmacy for the cash price. Sometimes a discount card or cash price beats your plan price. Many states now ban gag clauses, so pharmacists can tell you the cheaper route.
- Use manufacturer copay programs wisely. Ask if your plan uses accumulators. If yes, budget for when assistance ends.
- Consider 90-day fills and adherence packaging. These can lower trips and reduce rejected claims from late refills.
For Independent Pharmacies: Surviving PBM Pressure
- Measure your true acquisition cost vs reimbursement. Track NADAC, invoice costs, and appeal low MACs with documentation. Escalate patterns to your PSAO and state regulators.
- Manage DIR and performance metrics. Monitor adherence measures monthly. Proactive sync and outreach protect both patients and margins.
- Diversify services. Vaccines, point-of-care tests, chronic care management, and transitions-of-care generate non-dispensing revenue and improve star measures.
- Choose niches. Compounding, LTC, hospice, or specialty-lite categories with manufacturer support can reduce head-to-head competition.
- Tight audit readiness. Standardize documentation, eRx validation, and signature capture. The best audit is the one that finds nothing.
- Review contracts and steerage clauses. Understand mail-order requirements, specialty carve-outs, and any below-cost risks before signing.
Regulation and Reform: What’s Changing
Regulators have increased scrutiny of PBMs. Several states restricted spread pricing in Medicaid, tightened MAC update rules, and banned gag clauses. Medicare Part D moved DIR to the point of sale in 2024 to lower patient prices. The Federal Trade Commission has been reviewing PBM business practices, including steering and rebates. Proposed ideas include more transparent contracting, banning spread pricing across public programs, unbundling PBM services, and curbing formulary choices that depend mainly on rebates. Each reform has tradeoffs. For example, banning rebates without changing list price dynamics could shift costs elsewhere. The details matter.
A Short, Concrete Example
Consider a branded drug with a $1,000 list price:
- The PBM negotiates a 50% rebate and charges the plan $1,000 at the counter, then returns $500 later.
- The patient with 30% coinsurance pays $300 at the counter, even though the net plan cost is $500. If the plan shared rebates at the point of sale, the patient would pay $150 instead.
- If the PBM requires mail-order through its own pharmacy, the fill moves away from the local pharmacy, which loses the margin and the patient relationship.
This shows how PBM design affects patients, plans, and pharmacies at the same time.
Bottom Line
CVS Caremark and Express Scripts are not just claims processors. They are rule-makers with the power to pick winners: which drugs get used, which pharmacies get paid, and how much patients spend today versus later. They gained that power because plans needed expertise and scale. The challenge now is balancing that scale with transparency, fair pharmacy payments, and drug choices based on value, not rebate size. Patients, employers, and pharmacies do better when contracts are clear, data are open, and incentives line up with outcomes rather than list prices.
I am a Registered Pharmacist under the Pharmacy Act, 1948, and the founder of PharmacyFreak.com. I hold a Bachelor of Pharmacy degree from Rungta College of Pharmaceutical Science and Research. With a strong academic foundation and practical knowledge, I am committed to providing accurate, easy-to-understand content to support pharmacy students and professionals. My aim is to make complex pharmaceutical concepts accessible and useful for real-world application.
Mail- Sachin@pharmacyfreak.com