Demystifying Drug Costs

Austin Madison| November 11th, 2025

Benefits+, Pharmacy

After more than 20 years working in employee benefits management, I have seen a lot of changes in the way companies care for their people. One of the biggest shifts I’ve seen, and the one with the biggest impact on employers and workers, is how insurers and employers handle prescription drug benefits.

Twenty years ago, prescription drugs averaged around 10% of a company’s total outlay toward medical expenses. But over the past 10 years, the script has flipped—pun entirely intended. On average, drug benefits now make up close to 40% of an employer’s medical spending, and nearly 80% of the conversations our benefits-management teams have with clients are related to drug pricing.

Pharmacy spending has always been a complicated issue. These days, almost every health insurance company either owns its own pharmacy benefits manager (PBM), is owned by a PBM, or is owned by a parent company that also owns a PBM. In theory, this kind of vertical integration should save money and increase efficiency and quality of care. And sometimes it does! But more often the vertical integration does the opposite, creating confusion around data and actual savings.

PBMs and insurance brokers present potential clients with all kinds of strategies to save money on drug costs. It’s crucial, therefore, that CFOs and HR directors understand how the most common and popular of these programs work. Employers need to make sure the proposals and financial impact projections they receive are clear and accurate.

So, what are the cost-containment levers employers and brokers need to be familiar with? While not exhaustive, the following is a good starting point as you think through strategy and compare PBM solutions:

Switch to Biosimilars: Biological medications are extremely expensive and quite common. Biosimilars are highly similar to already FDA-approved biologics. They have no clinically meaningful difference in terms of safety, purity, and potency, and a significant cost difference.
Spread Pricing vs. Transparent/Pass-Through Pricing: Spread pricing means the PBM charges the health plan one amount for a drug and reimburses the dispensing pharmacy a lower amount, keeping the difference (spread) as revenue. Transparent or pass-through PBMs charge a fixed fee on top of the wholesale cost. Employers need to partner with advisers who can help determine the key differences between these approaches and recommend the best fit.
Rebates: Pharmacy rebates are payments that drug manufacturers provide to PBMs and health plans in exchange for favorable formulary placement. PBMs often position this as a way to offset high list prices, but often it causes employers to overlook less expensive options.
Patient Assistance Programs (PAP): Programs from drug manufacturers and/or patient support programs by which a drug is provided at little to no cost. This can provide significant savings, but there is concern that these programs may begin to dry up, as PBMs have begun to utilize them heavily.
GLP-1: Medications originally designed for Type-2 Diabetes that have become popular for weight loss. They’re effective, but also expensive. Employers need to determine their strategy around GLP-1s and how best to manage benefit and cost.
International Sourcing: A controversial strategy in which a PBM sources medications from countries where they can be purchased cheaper and shipped directly to members. This strategy sits in a gray legal area, and you should seek legal counsel before implementing it.

Drug pricing and pharmacy benefits management are only going to get more complex as time goes on and new kinds of therapies must be accounted for—and paid for. Employers need to seek guidance from brokers who have a deep understanding of this space and can advocate on behalf of the employer’s best interest. Contact us to learn more and put your future in focus.