What Is PBM Reform? Understanding Pharmacy Benefit Manager Changes

Rapid changes are underway in how Pharmacy Benefit Managers (PBMs) operate. Employers are fed up with rising costs and the sub-par experience legacy PBMs deliver to their members. The sheer increase in pharmacy spending cannot be overstated. In fact, it’s the fastest-growing component of health benefit costs today. One survey found that employer costs rose 7.7% in 2024—and that’s coming off the heels of an 8.4% in 2023. 

Employers and members have reached the end of their rope with traditional PBMs. There’s an increasing demand for PBM reform that’s coming from employers, medical professionals, and even lawmakers.

So, what’s being done to protect businesses and patients? PBM reform is the collective action at the federal and state levels establishing regulatory guidelines designed to curtail the damaging practices of legacy PBMs. 

Let’s discover precisely what PBM reform means in practice, what changes are essential to protect employers and employees, and how modern PBMs are providing a guiding vision for a reformed future of pharmacy benefits.

What is PBM Reform?

PBM reform isn’t just one singular law or policy that will fix decades of harmful practices by traditional pharmacy benefit managers. Instead, it’s an umbrella term for the plethora of action being taken to improve the pharmacy benefits experience. 

Yes, PBM reform is a collaborative effort at the federal and state levels to create new regulations that curb the harmful practices of traditional PBMs. These regulations are catching up to what some modern PBMs, like SmithRx, have been doing from the start: ending spread pricing, 100% rebate pass-through, and total transparency.

The word reform is intentional when talking about these sweeping changes (both proposed and enacted). The pharmacy benefits system is so broken that a few quick changes can’t deliver the progress required to meet the needs of employers and members—there has to be a fundamental shift in the way we structure pharmacy benefits practices. The opaque, damaging practices of the PBMs that have majority control over the United States’ market aren’t new: they’re systematic. 

What exactly is so harmful about the way traditional PBMs do business? Here are just a few practices that keep employers and members paying more (and getting less):

• Spread Pricing: This is a practice where a legacy PBM charges a health plan or insurer a higher price for a drug than it pays the pharmacy that dispensed it. The PBM then keeps the difference, or the "spread," as profit. What’s more, the opaque nature of their business model may mean employers can’t even see this is taking place.

• Opaque Rebate Structures: With traditional PBMs, there is little to no visibility in how discounts and rebates work. In exchange for placing a manufacturer's drugs on a health plan's preferred list (or formulary), PBMs often receive rebates. They may keep a portion of the rebate as profit, rather than passing all of the savings on to the employer or member, which can contribute to higher drug costs.

• Misaligned Incentives: To put it simply, legacy PBMs are notorious for placing their own interests above those of clients and members. They cover up huge conflicts of interest that prevent employers from saving money and members from getting optimal care. For example, some PBMs are actually also the insurer and the dispensing pharmacy. This is known as vertical integration.

Why Now? Key Drivers of Reform

There are a number of powerful factors that are driving the current push for PBM reform. The escalating cost of prescription drugs in the United States is the primary catalyst, as it places a huge burden on both employers and members. Employers and brokers are calling for greater transparency in how PBMs manage benefits, structure their pricing models, and pass along rebates. At the same time, patients are becoming more vocal about their high out-of-pocket costs, which they increasingly associate with pharmacy benefit managers. 

These patients aren’t just employees, they’re also constituents. Their calls for action have bubbled upward to both the federal and state governments. A wave of bills and regulations have been introduced at the state level, specifically targeting PBM practices, with many states enacting laws to increase transparency, prohibit spread pricing, and address conflicts of interest. At the federal level, bipartisan support for PBM reform is mounting, with lawmakers scrutinizing the questionable business models of legacy PBMs and considering legislation to enhance transparency and promote competition.

Unsurprisingly, media scrutiny of legacy PBMs is at an all time high. There are very human, personal stories of members being deeply affected by traditional PBM’s damaging practices and journalists are keen to share these experiences. With each new government report, news expose, and law proposed, the collective consciousness around the need for transparency and reform in PBMs grows. 

Though external pressures are pushing for a systematic change to the practices of legacy PBMs, there are also good actors fundamentally redefining the PBM space and leading the industry forward with radically transparent practices.

Core Areas of PBM Reform

One core PBM reform is an effort to increase transparency and accountability. Other reforms address financial practices that have historically driven up drug costs for patients and employers, while also seeking to realign PBM incentives with the goal of better healthcare outcomes.

Rebate Transparency and the Elimination of Spread Pricing

Efforts to establish rebate transparency and eliminate spread pricing aim to ensure that savings from drug manufacturers are reflected in the final price of drugs that employers and members pay, rather than being kept as profit by the PBM.

Real-Time Price Disclosure and Data Access

PBM reforms are focused on giving clients and members access to real-time price disclosure to help them make informed decisions and avoid surprise costs—as well as unprecedented levels of access to their own data so they can make the best financial decisions for themselves.

Formulary Design Reform

On top of enhanced access to pricing and data, reform also supports a shift toward value-based formularies that prioritize a drug's effectiveness and true cost over the size of its rebate.

Accountability and Fiduciary Responsibility

Ultimately, these reforms aim to help businesses establish solid fiduciary responsibility, which is the legal responsibility for plan sponsors to act in the best interest of their members. Traditional PBM practices are in direct conflict with these fiduciary requirements—so reform requires total realignment of their incentive structure and true accountability in their financial models.

On the Leading Edge of Reform: SmithRx's Innovative Model

At SmithRx, we’re not waiting for legislative reform to happen, we are leading the charge with a business model founded on the principles of transparency and alignment with client and member interests.

Transparent, Pass-Through Model

SmithRx is a new kind of PBM that doesn’t rely on misleading practices like spread pricing or hidden fees to do business. Instead, our transparent, pass-through model works by charging a flat administrative fee—and then we pass on all rebates, discounts, and other savings directly to the employer. This model ensures 100% visibility into spending and passes the lowest true cost onto members. 

Clinically-Backed Formulary and Real-Time Data Insights

Instead of a rebate or discount-focused approach that leverages back-room deals, SmithRx prioritizes formularies that are clinically effective and affordable. This pricing structure is supported by real-time insights and rebate visibility, which give employers instant access to their spending data to make informed decisions.

Moving Forward with a Modern PBM

The reign of legacy PBMs practices is coming to an end—and a new era of transparency and accountability is dawning. This isn't just about regulatory changes; it's a fundamental shift in how the industry operates. 

Be part of the change that’s coming to pharmacy benefits. Talk with our team of PBM experts today to learn just how easy (and impact) making the switch could be for your business.