By Shea Dimauro
PBM 101 is an educational series designed for self‑insured employers who want to better understand how pharmacy benefits actually work.
For context, I’m not claiming to be a PBM expert, just a plan sponsor trying to make sense of a very complicated system. There are plenty of nuances and exceptions, but these posts focus on the common setups so we can all better understand how pharmacy benefits work. I’m also here to learn, so if I miss something or misstate a point, please message me!
What is the Drug Supply Chain?
Most employer plan sponsors enter pharmacy discussions at the PBM level. But by the time a PBM applies benefit rules, a lot has already happened.
Here’s the foundational flow:
- Drug manufacturers create the medication and set an initial list price
- Wholesalers distribute drugs to pharmacies
- Pharmacies purchase and dispense the medication
- Patients receive the drug at the pharmacy counter
This entire process exists before the PBM is involved.
- PBMs do not manufacture drugs.
- They do not distribute drugs.
- They do not physically dispense medications to patients.
For employer‑sponsored health plans, PBMs step in after the supply chain is already in motion, to administer the pharmacy benefit on the employer’s behalf.
Two important caveats we’ll come back to later in the series:
1. While PBMs themselves don’t manufacture, distribute, or dispense drugs, some large PBMs are owned by, or own, companies that do, creating vertically integrated organizations.
2. PBMs don’t participate in the physical flow of a drug however, they are deeply involved in the financial outcomes of drugs through formularies, rebates, reimbursement, coverage and utilization rules.
Real World Analogy:
Before a restaurant manager ever steps in, food already exists.
- Farmers grow food.
- Distributors move it.
- Restaurants buy ingredients and prepare meals.
- Customers eat the meal.
The restaurant manager did not grow the food but they do decide:
- What makes the menu
- What gets featured nationwide
- Which suppliers get volume
- How costs are managed
In the same way, PBMs don’t manufacture drugs, but they do decide which drugs gain broad access, which are featured, and which receive meaningful volume.
Next week in PBM 101: AWP, WAC, and NADAC, what these acronyms actually mean, where they come from, and why a “discount” doesn’t always translate into real savings for employer plans.
