Pharmacy Benefits: What Employers Should Know

Key Factors Driving Pharmacy Benefit Costs

Pharmacy benefit costs do not rise uniformly. Four specific factors account for the bulk of cost pressure, and each operates through a distinct mechanism.

Specialty Drugs and High-Cost Medications

The numbers here reflect a stark imbalance. Specialty drugs account for over 50% of total pharmacy spending despite representing less than 2% of prescription claims. The specialty pharmaceutical market reached nearly $130 billion in 2024 and is projected to exceed $965 billion by 2030. Within your own plan, just 2% of employees drive 50% of all drug spend, with specialty medications averaging over $84,000 annually per prescription.

Gene therapies present extreme examples, with price tags between $2 million and $4 million per dose. Total drug spending reached $301 billion in 2021, a 43% increase since 2016, even though specialty prescription volume grew by only 0.5% over that same period. The cost growth is driven by price per prescription, not by how many prescriptions are being filled.

PBM Fees and Rebate Structures

Total manufacturer rebates paid to PBMs reached $334 billion for all brand-name drugs in 2023. PBMs pass 91% of those rebates to commercial insurers on average, retaining the remainder through various mechanisms.

Generic vs. Brand-Name Drug Pricing

Generic drugs cost 80% to 85% less than brand-name equivalents. Yet brand-name drugs account for 80% of total prescription spending, despite filling only 20% of prescriptions. Generic pricing becomes more competitive as market entrants increase; prices drop approximately 20% after three competitors enter and fall 70% to 80% after three years with at least 10 competitors in the market.

Formulary Design and Drug Selection

Formulary construction does not always reflect lowest net cost. PBMs negotiate rebates contingent on excluding lower-cost competitor drugs from formularies or placing them on higher cost-sharing tiers. A drug with a $300 list price and a $120 rebate may be placed in a preferred tier over a $150 drug with no rebate, even though the net cost to the plan is higher under the rebate arrangement. Tools like Inside Rx can help employees access prescription savings that exist outside traditional formulary constraints.

What Employees Need From Pharmacy Benefits

Pharmacy benefits are the health insurance component employees interact with most frequently. Cost, access, information, and convenience all shape that experience, and gaps in any of these areas carry measurable consequences for health outcomes and plan utilization.

Access to Affordable Medications

Cost is the most direct barrier to medication adherence. 26% of employees reported not filling a needed prescription in the past year due to cost, and 54% encountered an unexpected cost when picking up a prescription. Employees who cannot afford their medications tend to skip treatments or ration doses, outcomes that typically result in more expensive interventions later.

Generic alternatives are the most straightforward cost-reduction tool available to employees. They cost 80% to 85% less than brand-name equivalents, and clear pathways to these options, without requiring employees to sacrifice clinical effectiveness, are a basic expectation of a well-designed pharmacy benefit.

Clear Information About Coverage and Costs

78% of employees want to see their exact out-of-pocket costs before picking up prescriptions at the pharmacy. 71% said they would find it helpful to receive clear explanations of how their pharmacy benefit works and how costs are calculated for their specific plan. These figures reflect a straightforward expectation: employees want to know what they owe before they are standing at the counter.

Prior authorization is a consistent source of friction. Among employees who have experienced it, 81% want real-time updates on the status of their requests. Only 28% agreed that their employer helps them navigate pharmacy benefits, a gap that indicates most employees are managing this complexity on their own.

Convenient Pharmacy Options

Nearly 80% of employees managing prescriptions want a centralized digital tool to track prescriptions, dosages, and refill dates. Home delivery removes the need to schedule pharmacy visits and eliminates wait times. Access to both retail and specialty pharmacy locations accommodates different medication types and employee preferences.

Support for Chronic Condition Management

Employees managing complex or chronic conditions require more than standard coverage access. Condition-specific pharmacist support helps employees adhere to treatment plans and manage medication interactions effectively. Automatic refill services address a documented problem: up to 50% of the population does not fill prescriptions when they are due. Tools like Inside Rx can extend prescription savings access beyond what standard formularies provide, offering an additional resource for employees managing ongoing medication costs.

Questions Employers Should Ask Their Pharmacy Benefit Providers

The right questions surface how your PBM makes decisions, where its financial interests lie, and whether its contract terms actually protect your plan. These six areas warrant direct answers before you sign or renew.

How are formulary decisions made?

Formulary decisions should originate from a pharmacy and therapeutics (P&T) committee comprised of physicians, pharmacists, and healthcare professionals. Ask who sits on the committee, how frequently they convene, and what criteria govern drug selection, specifically, whether clinical effectiveness or rebate size carries more weight in placement decisions.

What percentage of manufacturer rebates will we receive?

PBMs pass an average of 91% of rebates to commercial insurers, meaning some retain as much as 13%. Require clear contractual language specifying 100% pass-through of rebates, manufacturer administration credits, and price protection payments tied to inflation.

How do you ensure the lowest net cost for our plan?

Request specifics, formulary management strategies, how frequently the PBM conducts market checks to keep pricing competitive, and whether specialty carve-out options are available. The PBM should be able to demonstrate that preferred drug placement decisions are based on total net cost, not rebate size alone.

What measures exist to promote generic drug use?

Generic dispensing rate is a direct cost lever. Ask about tiered copayment structures that incentivize generic selection, mandatory generic substitution policies, and step therapy protocols that require trying generics before brand-name alternatives.

How transparent is your pricing structure?

Establish whether the PBM operates on a pass-through or spread pricing model. Contracts built on genuine transparency itemize all administrative fees, rebate arrangements, and performance guarantees without requiring additional requests to access that information.

What data and audit rights do we have?

Unrestricted access to claims data is non-negotiable, as is the contractual right to conduct annual audits covering both claims and rebates. Confirm that any funds recovered through audits are returned to your plan rather than retained by the PBM. When reviewing your pharmacy benefits strategy, Inside Rx helps make prescription savings more accessible, giving you another way to support employees and manage medication costs.