Prescription drug costs have skyrocketed over the past decade, and employers are rightfully demanding answers (if not, they should). They’ve implemented wellness programs, switched insurance carriers, and restructured benefits offerings — yet pharmacy spend continues to balloon. The uncomfortable truth is this: many of the market practices designed to "manage" drug costs are in fact structured to inflate them. Chief among these practices is the way Pharmacy Benefit Managers (PBMs) construct formularies based on manufacturer rebates.

Employers, often with the best intentions, have unknowingly been caught in a system where incentives are stacked against them. It’s time to confront the reality: the traditional PBM model is not aligned with employer or patient interests. If companies want to regain control over their healthcare dollars, they must fundamentally rethink their relationship with PBMs — starting with how formularies are built and how prescription drugs are priced.

How Formularies Became a Trap/Rebate Wall

At its simplest, a formulary is just a list of covered prescription drugs. But the devil is in the details. PBMs don’t just create formularies based on which drugs are most effective or cheapest. Instead, they select drugs based largely on how much rebate money the drug manufacturer is willing to pay after the fact.

Here's the catch: those rebates are typically larger for expensive, brand-name medications. Cheaper, often equally effective generics usually offer no rebate at all. As a result, formularies are engineered to favor high-cost drugs that generate bigger rebates — even if those drugs aren't clinically superior.

In public statements, PBMs proudly tout the savings generated through rebate negotiations, but these savings are smoke and mirrors. What matters to employers and employees alike is not how much money is "saved" through rebates — it’s the net cost of providing drug benefits. When formularies are populated with high-cost drugs, that net cost balloons, rebates notwithstanding.

Hidden Costs Employers Don't See

Employers might assume that rebate checks they receive at the end of the year are a sign their PBM is doing a good job. In truth, those rebates often mask enormous overspending. Many employers are left celebrating a $500,000 rebate without realizing they overspent by $2 million to get it.

This problem is compounded by a lack of transparency. Most PBM contracts allow the PBM to retain a portion of the rebates as "spread," or they bury critical financial information behind complex reporting practices. These PBMs also own rebate aggregators and many times (if not all) employers are not aware of rebate aggregators' involvement. Employers are rarely given a full, auditable accounting of how their drug spend breaks down — gross costs, rebates, administrative fees, and true net costs.

Without transparency, employers cannot know: (i) how much rebate revenue the PBM and/or its rebate aggregator retained; (ii) how often a lower-cost therapeutic alternative was available but not promoted; and (iii) whether the formulary is structured to drive optimal patient outcomes or simply maximize rebate collections. In effect, employers are driving blind - trusting that their PBM's incentives are aligned with their own.  In most cases, they are not. 

How Employees Are Hurt in the Process

The rebate-driven formulary model doesn't just hurt the bottom line; it actively undermines patient care. When formularies are populated with overpriced drugs, employee out-of-pocket costs often rise. This isn't just because of co-pays — it's also due to coinsurance models, where employees pay a percentage of the drug’s retail price. Naturally, if the retail price is higher, the employee's share is higher too. A drug that costs $3,000 but offers a hefty rebate to the PBM is still a $3,000 drug at the pharmacy counter.

This dynamic discourages medication adherence. Patients skip doses, abandon therapies, or never fill prescriptions altogether because of unaffordable costs — leading to worse health outcomes, higher hospitalization rates, and ultimately, even greater employer healthcare spend down the line.

A Better Way: Aligning Incentives and Demanding Transparency

If employers want to escape this trap, they must reassert control over their pharmacy benefits programs. The following principles should guide every decision:

1. Prioritize Net Cost, Not Rebates - negotiations with PBMs must be centered around total drug cost, not rebate guarantees. Employers should refuse to be seduced by high rebate numbers that mask higher underlying costs. 
2. Demand Full Transparency - employers should require PBMs and subcontractors including rebate aggregators to disclose all sources of revenue related to employer's drug plan including retained rebates, fees, administrative charges and spread pricing models. 
3. Choose Pass-Through PBM Models - under a pass-through model, the PBM charges a flat administrative fee and passes 100% of rebates and discounts directly to the employer. This structure realigns incentives toward cost control and transparency.
4. Implement Clinical Oversight of Formularies - employers can work with independent clinical experts (who have no conflicts with PBMs) to review and recommend formulary structures based on clinical efficacy and cost-effectiveness — not rebate revenue.
5. Consider Carve-Outs and Alternative PBMs - many employers are carving out pharmacy benefits entirely from traditional medical insurance plans, choosing specialized PBMs with transparent, pass-through contracts.
    

Conclusion: Employers Must Lead the Reform

The traditional PBM model is built on hidden profits, misaligned incentives, and opaque financial practices. Employers can no longer afford to turn a blind eye to how their drug dollars are really being spent. 

Reclaiming control requires asking tough questions, demanding full transparency, and building benefits programs that prioritize patient outcomes and true cost management. This may require partnering with new vendors, renegotiating contracts, and sometimes walking away from legacy relationships.

But the alternative — continued escalation of pharmacy costs and employee dissatisfaction — is no longer tenable. Employers owe it to themselves and their employees to dismantle the rebate-driven house of cards before it collapses under its own weight.