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Employers and legislators aren’t perfectly aligned on PBM reform

David Dross

Partner, Mercer Pharmacy Practice
Beth Umland

Director of Research, Health, Mercer

May 15, 2025

Policymakers are focused on reducing prescription drug costs, with much of their attention centered on Pharmacy Benefits Managers. The results of our recent Survey on Health Policy 2025 show that employers are not as focused on certain issues as legislators seem to be – and also that many employers want to know more about the reforms they are proposing before taking a position. In the survey we described 10 current proposals and provided, when possible, Mercer’s estimate of the impact the reform might have on employers’ pharmacy benefit costs. Respondents were asked if they favored or opposed the proposal or needed more information to form an opinion. We asked this same question in 2023.

The biggest jump in support since 2023 was for a spread pricing ban – 48% of respondents favor a ban, compared to just 34% of respondents in 2023. There has been substantial discussion over the past two years about the impact of spread pricing, with many observers indicating that this practice increases prices. While it is unclear that a spread pricing ban would reduce prices, it appears this commentary has influenced employer perceptions.

For two proposals – detailed PBM reporting and 100% rebate pass-through to plan sponsors – employer support was very high. Proposals to require PBMs to act as fiduciaries and the spread pricing ban received more modest support.

On the five issues that reduce plan sponsors autonomy – steerage restrictions, “any willing provider” networks, point-of-service rebates, maximizer bans and mandated dispensing fee levels – support ranged from low to very low. Notably, substantially more respondents now oppose steerage restrictions (47%) now than did in our prior survey (35%). This provision is one of the most common in state legislation and some employers may have been affected by network restrictions.

Given the complexity of much of the legislation, it’s not surprising that, for 5 of the 10 proposals, the most common response was “need more information.” Accordingly, we’ve provided brief descriptions of each proposal below.

Clearly, employers need to know more about the evolving legislative landscape and how proposed changes might affect their programs. Pharmacy benefits have become the biggest driver of health plan cost growth and are of critical importance to plan members. The survey provided one avenue for employers to share their views on consequential reforms. As we’ve seen many times, when employers speak up about pending legislation, their voices have influenced the outcome.

Click on the links below to learn more about the ten proposals included in the survey:

The most widely used drug pricing benchmark is Average Wholesale Pricing. It is the undiscounted list price – similar to a “billed charge” on the medical benefit. But these days an AWP is neither an average nor an indication of the wholesale price, so it's a misnomer. An alternative methodology, National Drug Acquisition Cost is the most commonly proposed alternative. Legislators often propose NADAC as they are familiar with it through Medicaid. NADAC is publicly available data and an indication of acquisition cost for some pharmacies, but not an available metric for every drug in the market – specialty drugs are excluded. NADAC dispensing fees are typically four to five times higher than typical commercial rates. The cost impact to plan sponsors will vary but Mercer estimates the cost impact will be 5-7% of spend due to higher dispensing fees. The higher dispensing fees are a pass-through to the plan sponsor and are an additional cost with no enhanced value.

Policymakers are very focused on PBM profitability, and proposed legislation commonly includes provisions to ban “spread pricing” which they view as an unfair business practice. In “traditional” contracts, PBMs employ spread pricing, where they pay the dispensing pharmacy a certain rate and bill the plan sponsor and member at a higher rate, retaining the difference as revenue. Alternatively, in “pass-through” contracts, PBMs do not make any spread on claims but charge the plan an administrative fee instead. In these instances, they may charge a dispensing fee, an administrative fee and sometimes shipping charges, all of which help to offset the revenue lost by moving away from spread pricing. A spread ban would not necessarily reduce costs – PBMs may revise pricing structures to generate revenue through various fees and other revenue streams.

To help health plan members afford higher-priced drugs, pharmaceutical manufacturers often provide members with direct financial support through copay coupons or other methods that reduce and sometimes eliminate all out-of-pocket costs for that drug. Manufacturer financial assistance significantly reduces or eliminates member incentives to try lower-cost therapies that could be as effective. To address this issue, PBMs began offering  co-pay accumulators and maximizer programs. Member pushback, driven by patient advocacy groups, has prompted legislative proposals to eliminate these programs. The cost impact will vary but may be material for many plan sponsors. The bigger concerns with this proposal may be the continuing erosion of plan sponsor autonomy in designing their own plan designs to control and reduce costs.

PBMs often encourage that maintenance and/or specialty medications be accessed through mail-order or tight retail networks. Legislative proposals focused on restricting a PBM’s ability to mandate use of an affiliated mail-order facility or retail pharmacy seek to bring business back to local pharmacies, increase competition and lower costs. Mercer estimates a gross cost impact of 0-2.5%. If the legislation addresses mail-order its impact is less if “Mail at Retail” options remain viable. If the legislation addresses any “affiliated pharmacy” it may have a big impact as it can include mail-order, specialty pharmacies and retail pharmacies.

Local, non-chain pharmacies, have expressed concern about being shut out of large PBM networks or having to accept contractual terms that threaten their profitability. In response, legislative proposals often include provisions to curtail network steerage to large pharmacy chains, open pharmacy networks to include any licensed pharmacies willing to accept PBM contractual terms, or require PBMs to meet a network adequacy requirement. Restricting network design limits a plan sponsor’s ability to manage cost, quality and service. A broader network may increase PBM costs and fees. Mercer estimates a gross cost impact of 0-3%.

Rebates are paid by pharmaceutical manufacturers to get preferred placement on a PBM’s formulary. While many contracts today have 100% pass-through of rebates, some contracts allow PBMs to retain a certain percentage of the rebate value as revenue. The PBM may also charge pharmaceutical manufacturers a fee for administering rebates – distributing rebate payment to each plan sponsor based on factors such as formulary and utilization management programs. Plan sponsors use rebates to either reduce plan costs or to lower participant contributions. The cost impact of a legislative mandate will vary based on current rebate terms.

A plan sponsor may choose to share rebates with members, but the vast majority retain the rebates to reduce plan costs or participant contributions. Some advocacy groups feel the rebate should be paid to the participants since their utilization generates the rebate. Legislative proposals requiring rebates to pass-through to members at the point of sale may result in higher net costs to the plan which may result in higher employee contributions for all participants. Mercer estimates net plan cost impact of 2 - 6%. Member cost impact varies significantly based on claim utilization and plan design: Little or no impact for 90-95% of members; Up to 70% savings for the 5-10% of members in a coinsurance/deductible plan with brand Rx utilization.

Therapies for diabetes have long been a top category of spend for plan sponsors. To ensure continued formulary placement, manufacturers pay rebates on insulin products to PBMs that are then passed on to self-insured plans. These rebates can total upwards of 70% of the list price. Despite these rebates, newer more efficacious forms of insulin have become essentially unaffordable for insulin-dependent people enrolled in a high-deductible health plan. Under a legislative proposal to cap insulin prices at $35 for a 30-day supply, members can expect lower-out-of-pocket costs. It is possible that lower insulin prices may increase adherence. While this may trigger a short-term cost increase to the plan, it could lead to lower overall long-term costs due to better management of diabetes. The overall cost impact to plan sponsors will vary based on current plan design.

Reporting requirements vary by state, but they typically include basic claims reporting. They may also require the PBM to provide acquisition cost data so that the PBM’s profit can be determined. In nearly all cases, the data is shared solely with the state and employers do not see it – so for employers this activity has little direct impact.

The debate about whether PBMs are fiduciaries under ERISA has arisen largely because of concerns regarding the business model of many “spread based” vertically integrated PBMs. The three biggest PBMs have all vertically integrated with major health carriers, and one has its own retail pharmacy network and brick and mortar stores throughout the US. This diversification has made it hard to identify and follow the revenue streams and has the potential to result in misalignment of incentives. As a result, some state legislation includes requirements for PBMs to adhere to fiduciary guidelines to act in the best interests for plan participants and defray reasonable plan expenses. The cost impact to employers is unclear.

About the author(s)

David Dross

Beth Umland

Employers and legislators aren’t perfectly aligned on PBM reform

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Employers and legislators aren’t perfectly aligned on PBM reform

Mandated pharmacy reimbursement levels.

Ban on spread pricing.

Ban on copay maximizer/accumulator programs.

Pharmacy steerage restrictions.

Networks must include any licensed pharmacy.

100% rebate pass-through to plan sponsor.

Up to 100% rebate pass-through to members at the point of sale.

Cost-sharing cap on insulin.

Detailed PBM financial reporting to plan sponsors

Require PBMs to act as ERISA fiduciaries

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