Prescription drug costs continue to be a major financial burden for both individuals and companies, with prices in the U.S. averaging almost three times those in other countries. With rising drug prices affecting healthcare budgets, finding ways to control and reduce these costs is a priority. This is where pharmacy benefit managers (PBMs) come into play.

PBMs reduce prescription drug costs through manufacturer and pharmacy negotiations, generic and biosimilar substitution, formulary design, utilization management, clinical programs, and claims analytics. Each lever can lower net cost, and the PBM contract determines how much of that saving reaches the plan.

Negotiation Power: Securing Lower Drug Prices

One of the main ways PBMs reduce prescription drug costs is through their ability to negotiate with pharmaceutical manufacturers. By leveraging their large client base, PBMs can negotiate higher rebates to help lower prices for medications. This allows them to secure significant discounts, often in the form of rebates. Depending on the PBM's model, the PBM passes some or all of those manufacturer rebates to the plan sponsor to lower overall drug spend. Though this sounds like a great way to save on drug costs, legacy PBMs have been known to keep a portion of the rebate, instead of passing on the savings.

PBMs will typically have contracts with drug manufacturers to receive rebates based on the volume of prescriptions dispensed. The more drugs a PBM distributes, the more leverage they have when making these negotiations. These rebates also act as offers or incentives to get a drug included on a PBM's formulary. Additionally, PBMs negotiate directly with pharmacies to create networks that offer competitive pricing for medications. Network design also shapes where members fill prescriptions, which matters most for members who fill specialty drugs. A PBM that owns retail, mail-order, or specialty pharmacies may route claims to its own channels, so employers should ask how routing decisions are made and whether the lowest-net-cost source is used.

While their relationship with drug manufacturers and pharmacies gives PBMs significant leverage over the cost of prescription medications, there are other tactics they use to reduce drug costs. One of these is the promotion of generic medications and biosimilars.

Generics and Biosimilars

Generics are medications that are chemically identical to their brand-name counterparts but are sold at a much lower price. Many PBMs encourage the use of generic drugs when they are available. By substituting generics for brand-name drugs, employers and their employees can see significant savings on their overall drug spend. PBMs may also provide generic drug programs to educate their members and partners about the benefits of generics, helping to ensure that patients are prescribed the most cost-effective options.

In addition to generics, there are biosimilars. Biosimilar medications are ones that are highly similar (but not identical) to an already approved reference biologic drug. Unlike generics, which are made from simple chemicals, biosimilars are complex products derived from living organisms. While these more complex medications are not exact replicas of their reference counterparts, they have no clinically meaningful differences in terms of safety or effectiveness.

Despite their differences, both generics and biosimilars offer significant cost savings, providing patients with more affordable options without compromising on quality of care or treatment outcomes.

Formularies

A prescription drug list, also known as a formulary, is a list of medications that are covered by a health insurance plan. PBMs maintain formularies and steer patients toward medications that are both effective and affordable. Formularies can typically include a mix of brand-name and generic medications, prioritizing the most cost-effective options based on clinical efficacy, safety, and cost.

PBMs often categorize drugs on the formulary into tiers, with lower-cost medications (like generics) placed in lower tiers and high-cost medications (like brand-name specialty medications used to treat complex, chronic illnesses) in higher tiers. By placing low-cost generics and biosimilars on the formulary, at preferred lower tiers, PBMs can help reduce drug costs and alleviate financial burdens while ensuring that members receive necessary treatments.

Utilization Management

Utilization management (UM) refers to a set of strategies used by PBMs to assess the necessity, appropriateness, and efficiency of medications prescribed to patients. These strategies are designed to ensure that medications are used appropriately and that the lowest-net-cost appropriate treatments are prescribed. Common UM tools include prior authorization, step therapy, and drug utilization reviews. For employers, UM criteria are a plan design decision: well-administered reviews can lower spend, while slow or unclear reviews add member friction and HR escalations.

Prior authorization and step therapy carry the most cost impact:

Prior Authorization

Prior authorization is an approval a pharmacy benefit plan requires before covering certain drugs. A clinical reviewer confirms that the drug is medically necessary and that lower-cost, clinically appropriate alternatives have been considered. By limiting unnecessary prescriptions for high-cost medications, PBMs can reduce overall spending for employers and members.

Step Therapy

Step Therapy requires patients to try more affordable medications before they can progress to higher-cost options. Similar to prior authorizations, this approach helps ensure that more cost-effective treatments are tried first, avoiding spending on more expensive medications when a first-line option works.

Clinical Programs

PBMs often develop clinical programs to help identify effective and safe treatment options for patients. These programs often include disease management, medication therapy management, and adherence programs. By offering these services, PBMs can help patients manage chronic conditions more effectively, which may reduce the need for more expensive treatment later.

For example, a PBM might offer a program that supports the transition to biosimilars for patients with chronic conditions like rheumatoid arthritis. By guiding patients through the process of switching to a biosimilar, the PBM helps ensure the medication is effective and well-tolerated. This transition can significantly reduce treatment costs without compromising the quality of care, ultimately benefiting both the patient and the employer by lowering overall healthcare expenses.

Data Analytics

PBMs use data analytics to identify trends and optimize drug spend. By analyzing claims data, PBMs can find cost-saving opportunities and better manage drug utilization. They can identify patterns in prescribing behavior, identify medications that are unnecessary or are being overprescribed, and find areas where lower-cost alternatives could be used. For employers, the value of that analysis depends on access: a plan sponsor that receives claims-level data can verify rebate pass-through, track per member per month (PMPM) trends, and confirm whether savings recommendations were implemented.

How PBM Compensation Affects Savings

Every lever above can lower net drug cost, and the PBM's compensation model determines how much of that saving the plan keeps. Legacy PBM contracts can combine retained manufacturer rebates, pharmacy discounts that are not passed through, and spread pricing, in which the PBM charges the plan more for a prescription than it reimburses the pharmacy and keeps the difference. When PBM revenue rises with rebate size or drug price, the arrangement can favor higher-priced drugs that carry larger rebates over lower-net-cost alternatives.

Pass-through contracts address part of that misalignment: the plan pays what the pharmacy is paid, manufacturer rebates flow to the plan sponsor, and the PBM earns a fixed administrative fee. Employers should also confirm if all rebates and discounts pass through to the plan, whether ownership relationships influence formulary or pharmacy decisions, and what claims data the plan can audit.

How SmithRx Approaches Prescription Drug Cost Reduction

Employers evaluating these levers need a PBM whose incentives stay aligned with the plan. Modern, transparent PBMs like SmithRx provide clarity around what employers are paying for and the savings they are receiving. We combine transparent economics with a fixed PMPM administrative fee and 100% pass-through of manufacturer rebates, so our compensation does not increase when medication costs rise.

SmithRx's Drug Pathways Engine evaluates claims for the clinically appropriate, lowest-net-cost drug, pharmacy source, and available savings programs, and our team then supports members when a savings opportunity requires action. Drug Pathways, formerly Connect 360, includes programs for conditions such as autoimmune disease and Multiple Sclerosis (MS). Brokers and HR teams can see how these programs run in our Drug Pathways training.

In 2025, SmithRx clients saw PMPM pharmacy costs, the average monthly cost for each enrolled member, more than 20% lower than the industry benchmark. Clients and members also have full access to their data through the member and partner portals, which supports informed decisions and ongoing savings.

PBMs have real levers for lowering prescription drug costs, but the PBM's underlying model determines whether those savings reach your plan. To see how your current pharmacy spend compares, connect with a SmithRx representative.

Frequently Asked Questions

Do PBMs reduce prescription drug costs for employers?

PBMs can lower net drug costs through negotiation, formulary design, and utilization management, but the share of savings an employer keeps depends on contract terms such as rebate pass-through and spread pricing. Tracking net cost per claim and PMPM over time is the clearest way to judge whether a PBM is delivering savings.

What should employers ask when comparing PBMs on cost?

Ask how the PBM is paid, whether 100% of manufacturer rebates and pharmacy discounts pass through to the plan, and whether the plan receives claims-level data it can audit. Also ask whether the PBM owns pharmacies or other entities that could influence formulary or pharmacy routing decisions.

How do employers use PMPM to evaluate PBM savings?

PMPM divides total pharmacy spend by the number of enrolled members and then by the number of months, giving a consistent monthly cost per member. Comparing PMPM trends across renewals, or against a benchmark with a compatible definition, shows whether pharmacy costs are moving in the right direction.