What does a PBM do for your plan?
A pharmacy benefit manager (PBM) runs your plan’s prescription drug benefit. It sits between your plan, the pharmacies and the drug makers, and its contract decides what your plan pays for each prescription and what the PBM keeps.
Most PBMs handle four core jobs:
- The formulary. The list of covered drugs, usually set by a pharmacy and therapeutics committee and organized into tiers, with generics at the lowest cost share and specialty drugs at the highest.
- Manufacturer rebates. Payments from drug makers, often tied to where a drug sits on the formulary.
- The pharmacy network. Contracts with retail, mail order and specialty pharmacies, including what each is paid.
- Claims processing. Checking each prescription against the formulary and plan rules, setting the member’s cost share and paying the pharmacy.
Every one of those jobs is also a place where the PBM can earn money. That is why choosing a PBM is mostly a contract decision. For how drug coverage fits next to the medical plan, see medical vs. pharmacy benefits.
Why does the contract matter more than the quote?
Employers who pick a PBM on its quoted discounts often find the discounts depend on definitions the PBM controls. A bid that looks cheaper can cost more once you read what “generic” means, which payments count as rebates and how guarantees are measured.
ERISA also asks your plan’s fiduciaries to act prudently and to pay only reasonable plan expenses. Choosing and monitoring service providers, including the PBM, is part of that duty, and ERISA judges it on process. A documented evaluation is the record that shows your committee did it.
The contract terms to check first.
| Term | What to look for | Red flag |
|---|---|---|
| Drug definitions | Fixed, objective definitions of brand, generic and specialty, tied to a named source | The PBM can reclassify drugs, or “specialty” means anything on its own list |
| Rebate definition | Rebates defined to include all manufacturer payments: rebates, fees, alternative discounts and other remuneration | A narrow definition that leaves out “administrative fees” or payments to an affiliated rebate aggregator |
| Rebate pass-through | What share reaches your plan, how often, and how it is reported | Pass-through of “rebates” only, as the PBM defines them |
| Spread pricing | Pass-through pricing, where the plan pays what the pharmacy is paid | The PBM may keep the difference between what it charges your plan and what it pays the pharmacy |
| MAC pricing | How maximum allowable cost lists for generics are set, updated and applied to your plan | Different MAC lists for billing your plan and paying pharmacies, or no access to the list |
| Pricing guarantees | Guarantees measured drug by drug or by channel, with true-up dates | Guarantees blended across categories so overperformance in one hides underperformance in another |
| Audit rights | Your plan can audit claims and rebate contracts at least once a year, with an auditor your plan selects | Audits limited to the PBM’s chosen auditor, short lookback periods, or high fees to audit |
| Data ownership | Your plan owns its claims data and gets it, at claim level, on request and at termination | Data treated as the PBM’s property, or released only in summary form |
| Specialty pharmacy steering | Your plan decides whether specialty drugs must go through a particular pharmacy | Mandatory use of a specialty pharmacy the PBM owns, with no price test |
| Termination | Termination without cause on reasonable notice, and a clear handoff of data and files | Long terms, penalties to leave, or rebates withheld after termination |
The definitions come first because almost every pricing promise depends on them. A strong spread or rebate clause is worth little if the PBM can decide which drugs fall under it. For more on the most common pricing issue, see PBM spread pricing.
Data access is also protected by federal law. The Consolidated Appropriations Act, 2021 bans gag clauses that stop your plan from getting its own de-identified claims data, and your plan attests to that every year. See the gag clause attestation.
What questions should you ask every PBM?
Ask each bidder the same questions, in writing, so the answers can be compared:
- Revenue. List every way you are paid on our plan: administrative fees, spread, retained rebates, specialty and mail order margins, and payments from manufacturers or affiliates.
- Rebates. How do you define rebates? Does your definition include payments received by an affiliated rebate aggregator or group purchasing organization? How much reaches our plan, and when?
- Pricing. Do you offer pass-through pricing? If not, how is spread calculated and reported to us?
- Generics. How are your MAC lists set? Do you use the same list to bill our plan and to pay pharmacies?
- Specialty. Is any pharmacy you own required for specialty drugs? Can we carve specialty drugs out or use another pharmacy?
- Formulary. Can we choose or change the formulary? How do you decide where a drug sits, and how do you tell us about changes?
- Audit. How often can we audit, with whose auditor, how far back, and at what cost to the plan?
- Data. Will we receive claim-level data, in a usable format, during the contract and after it ends?
- Clinical programs. What do your prior authorization, step therapy and specialty programs save, and how is that measured?
- Service. What service levels and performance guarantees do you offer, and what happens when you miss one?
- Exit. What does it cost us to leave, and how is the transition handled?
What are the red flags in a PBM bid?
The clearest red flags are loose definitions, restricted audits and a costly exit:
- Discounts with no definitions. Large discount guarantees paired with loose brand, generic or specialty definitions.
- “100% of rebates” with a narrow rebate definition. The headline promise means little if fees and other payments are left out.
- No pass-through option. A PBM that will not show what the pharmacy was paid for each claim.
- Restricted audits. Audit rights that are limited to the PBM’s auditor, a sample, or a short window.
- Summary-only data. Reports instead of claim-level data your plan can analyze.
- Mandatory owned pharmacies. Specialty or mail order steering to the PBM’s own pharmacy with no price comparison.
- A hard exit. Termination penalties or rebates held back after you leave.
How does a PBM RFP work at Ethos Benefits?
When a PBM needs to be replaced, Ethos Benefits runs the search through Ethos Fiduciary Procurement. The steps are the same for every plan:
| Step | What happens |
|---|---|
| 1. Requirements | Your plan’s pharmacy needs, limits and scoring weights, agreed with your committee before any PBM is contacted |
| 2. Standardized questionnaire | Every bidder answers the same 43 questions across 11 topic areas, from pricing and rebates to clinical programs, data and service |
| 3. Contract terms | Every bidder must accept, reject or modify the same 29 contract terms |
| 4. Weighted scoring | Answers and contract terms are scored separately, then blended: the questionnaire at 60% and the contract terms at 40% |
| 5. Finalists | Follow-up questions, references and contract positions narrowed to a short list |
| 6. Negotiation and redlines | The chosen PBM’s contract marked up clause by clause and negotiated before it is signed |
| 7. Implementation | Data, file feeds, communications and transition of care handled for the change |
| 8. Quarterly monitoring | The PBM measured against its contract and guarantees with your committee every quarter |
Scoring the contract separately matters because a PBM can answer every question well and still offer a contract that protects itself instead of your plan. The weights can change with your plan’s priorities. The method does not. Not every review ends in a new PBM: sometimes the current contract can be renegotiated, and Ethos’s pharmacy and PBM review starts there.
What does federal law now require of PBMs?
The Consolidated Appropriations Act, 2026 (Public Law 119-75, signed February 3, 2026) added new rules for PBMs serving group health plans. They apply to PBM contracts entered into, renewed or extended for plan years beginning on or after August 3, 2028, which is January 1, 2029 for calendar-year plans.
| Requirement | What it means for your plan |
|---|---|
| Reports to the plan | The PBM must send your plan a report at least every six months, or quarterly on request, covering drug-level pricing, what the plan paid compared with what pharmacies were paid, rebates, and use of PBM-affiliated pharmacies |
| 100% pass-through (ERISA plans) | The PBM must remit 100% of rebates, fees, alternative discounts and other drug-related remuneration to the plan (or its insurer), quarterly, within 90 days after each quarter ends |
| Audit rights (ERISA plans) | Rebate records must be open to audit at least once a plan year, and rebate contracts with manufacturers and aggregators must be available for audit, by an auditor your plan selects and the PBM does not pay |
| Service fees | PBMs may still charge bona fide service fees that are transparent and quantifiable |
The law does not lift your committee’s duty to monitor the PBM. A contract signed now will likely run into these dates, so it makes sense to evaluate bids against the rules that are coming, not only the ones in force today.
How to compare the finalists.
- Model the bids on your own claims. Reprice your plan’s recent prescriptions under each finalist’s terms rather than comparing average discounts.
- Line up the contract positions. For each key term, show which finalists accepted, rejected or modified it.
- Weigh clinical and member impact. Note formulary changes, pharmacy access and any drugs members would need to switch.
- Record the decision. Keep the scores, the reasons and the committee’s vote with your plan records.
