Pharmacy benefit managers work as third parties that go between health insurance providers and drug manufacturers.

Pharmacy benefit managers (PBMs) help negotiate costs and payments between drug manufacturers, pharmacies, and healthcare insurance providers. PBMs also create prescription drug lists, called formularies.

This article looks at the role of PBMs, formularies, and prescription medication costs.

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PBMs are companies that work as a third party between healthcare insurance providers and pharmaceutical companies.

PBMs help control drug costs, public access to medications, and how much payment pharmacies receive.

PBMs are not involved directly in distributing prescription medications, according to the National Association of Insurance Commissioners. PBMs deal with negotiations and payments throughout the supply chain, from manufacturers to health insurance providers.

PBMs work alongside:

  • drug manufacturers
  • wholesalers
  • pharmacies
  • health insurance providers

Once a new medication becomes available, a drug manufacturer will negotiate with wholesalers. The wholesalers will sell the drug and provide pharmacies with it.

PBMs represent health insurance providers when making agreements with drug manufacturers. Drug manufacturers pay PBMs rebates. PBMs will also make payments to pharmacies, on behalf of the health insurance providers, for the drugs the insurer dispenses.

PBMs are responsible for negotiating costs with drug manufacturers, including discounts and rebates.

PBMs also create and maintain formularies. A formulary is a list of prescription medications that a health insurance plan will cover.

A formulary is an up-to-date list of evidence-based medications that healthcare experts currently recommend to treat medical conditions. The main role of a formulary is to promote the safe and effective use of the medications that are the most affordable.

If necessary, healthcare professionals may also access medications not listed on the formulary.

Each healthcare insurance plan will have its own formulary. Usually, they will include an online link to the formulary alongside the plan details. People will then be able to search the formulary to ensure it includes the prescription drug they require.

If the formulary is not available online, people can contact the insurance provider to learn what is on the formulary.

If the formulary does not contain a person’s specific medication, a similar drug should be available.

Healthcare plans categorize prescription drugs into four tiers, based on out-of-pocket costs, drug availability, and the medication’s clinical effectiveness.

The tiers are:

  • Tier 1: These are usually generic versions of brand-name drugs and have the lowest copayment costs.
  • Tier 2: These are usually brand-name drugs that are more affordable, with medium copayment costs.
  • Tier 3: These are usually brand-name drugs that have a generic version available, with the highest copayment costs.
  • Tier 4: These are specialty drugs to treat severe health conditions.

Tier 1 and tier 2 drugs have a lower copayment costs because they are the preferred drugs of choice on the formulary. Tier 3 drugs are non-preferred and tier 4 drugs are specialty drugs, so these two tiers have higher copayment costs.

For non-Medicare members

People who are not Medicare members may be able to access tier 4 drugs only at certain pharmacies within their state.

People will need to check with a healthcare professional or insurance provider to find out how much a tier 4 drug will cost them and where it is available.

For Medicare members

Medicare members may also be able to get tier 4 drugs only from certain specialty pharmacies.

In some cases, if a healthcare professional prescribes a higher-tier drug because they believe it is necessary, people may be able to ask for an exception in their Medicare plan. This exception may lower the copayment or coinsurance costs of the drug.

A prescription drug benefit helps cover the costs of prescription drugs.

For people without Medicare, specialty drugs will be listed under a higher tier, and people may have to pay a set copayment for each prescription they fill. This will count toward a person’s total federal out-of-pocket limit.

In some cases, insurance providers may not cover non-preferred drugs or specialty drugs outside of specific pharmacies.

For people with Medicare, specialty drugs will count as tier 4 drugs. People will pay a copayment when they fill their prescription, which will count toward their tier 4 out-of-pocket limit.

The cost of a prescription drug may vary depending on which tier the drug is in and what healthcare insurance a person has.

People can find out how much a prescription drug will cost them by looking at the formulary of their insurance plan. Insurance providers can update formularies, though, so costs may change over time.

Prescription drug costs may vary between different pharmacies. For people without healthcare insurance, NeedyMeds provide a search tool to figure out prescription drug costs, as well as support for covering costs.

Some pharmacies may require people to have two ID cards — one card from their healthcare insurance plan and one from the PBM company.

A person may get a generic drug instead of a brand-name drug if it is an equivalent medication or provides the same proven benefits. This is done to lower costs.

In most cases, generic drugs will be lower tier, or preferred, on a formulary than brand-name drugs.

The Food and Drug Administration (FDA) requires generic drugs to have the same clinical benefits, risks, dosage, and quality as the brand-name equivalent.

If a person cannot take a generic drug for medical reasons, a doctor may write a prescription with “dispense as written (DAW).” This means a pharmacist will give a person the brand-name drug rather than the generic equivalent.

A doctor can file an FDA MedWatch form if a person needs a brand-name drug instead of an available generic equivalent, which means the person has to pay only coinsurance.

Without this form, a person will have to pay coinsurance plus the difference in cost between the two drugs.


The Wisconsin Department of Employee Trust Funds provides the following examples of the potential cost differences between a brand-name prescription and a generic prescription, with and without an FDA form.

The cost of a 30-day supply of statins for a person who has no medical need for a brand-name drug instead of the generic version, without an FDA MedWatch form:

Cost with insuranceCost before insurance
Brand-name statin$1,250$2,000
Generic equivalent$5$900

If a person had a medical need for the brand-name drug and the doctor filled out the FDA MedWatch form, the cost for the same medication above would be $150 for the brand-name drug with insurance and $2,000 for the same drug before insurance.

A PBM works as a third party between drug manufacturers, pharmacies, and health insurance providers.

PBMs also create and maintain formularies, which are lists of approved prescription medications. A formulary is split into different tiers, depending on drug availability and costs.

People may pay more for higher tier drugs, which may be specialty drugs. If a generic version is available of a brand-name drug, it will be an equivalent medication but will usually have lower copayment costs.