How pharmacy economics are reshaping employer health plans

The U.S. healthcare industry is entering a pivotal moment in its debate over pharmacy benefit transparency, and HR executives—especially those overseeing self-insured health plans—are increasingly at the center of it.

In Congress, lawmakers have introduced legislation aimed at improving visibility into how pharmacy benefit managers (PBMs) operate and how prescription drug prices are set, while a growing number of lawsuits challenge opaque pricing practices, rebate arrangements and whether plan sponsors exercised appropriate oversight. Public scrutiny is rising as well, with high-profile business figures like Mark Cuban using conference stages, media interviews and social channels to urge employers to demand greater transparency (an argument that aligns with his business interest in reshaping how prescription drugs are priced and purchased). And that pressure has reached PBMs themselves: As of 2025, the CEOs of the three largest PBMs have all publicly stated that rebates would be returned to customers.

Against this backdrop, HR leaders need a clearer understanding of how pharmacy benefits actually work and what increasing calls for transparency could mean for their responsibilities going forward.

See also: What will it take to keep pharmacy benefits sustainable amid rising drug costs?

Two ways employers think about transparency

When employers say they have a “transparent” pharmacy benefit arrangement, they are usually not wrong. Many self-insured plan sponsors can review the formulary and tier structure, understand copays and coinsurance and confirm whether rebates are retained by the pharmacy benefit manager or passed back to the plan.

But pharmacy economics play out largely outside the four corners of the contract. Knowing how the plan is structured does not necessarily reveal how money actually moves through the system, how incentives are created, what makes up an administrative fee, or who ultimately bears the cost. And while federal rules now prohibit so-called “gag clauses,” legacy contracts, evolving enforcement and other contractual limitations can still restrict how pricing or quality information is accessed or shared, making it harder to validate how the benefit performs in practice.

True transparency extends beyond contract terms into outcomes. It requires understanding how list prices are set, why rebates exist, and how those rebates influence pricing behavior. It means seeing how manufacturer incentives affect which drugs are favored, how pricing decisions shift costs between the plan and participants and how those dynamics change depending on where an employee is in the deductible cycle. Most critically, it requires claims-level visibility—what was billed, what was allowed, what was paid and whether those transactions align with the intent of the benefit design.

This is where many well-intentioned employers overestimate what transparency delivers. A contract can be fully disclosed and still obscure economic reality. In practice, pricing may look competitive in aggregate, while placing a disproportionate burden on participants who rely on brand, mail-order, or specialty medications and are still in the deductible phase. Understanding where money flows is the start; understanding how and why it flows—and who ultimately pays—is what enables meaningful oversight.

Why rebates matter more than contracts reveal

One reason surface-level transparency falls short is the way rebates are embedded in drug pricing. For many brand-name and specialty medications, the pharmacy counter price reflects a list price that already includes rebate dollars negotiated between manufacturers and pharmacy benefit managers.

When a participant is in the deductible phase, they may pay that full list price out of pocket—even though a portion of that cost will later return to the plan as rebates. The result is a disconnect between who pays and who benefits, with real implications for affordability, employee experience and fiduciary oversight.

Recent research from the Employee Benefit Research Institute underscores just how quickly high-cost specialty drugs can reshape employer health plan economics, even when utilization remains relatively limited.

The reason is that plans evaluate drugs based on net plan liability, not just net pharmacy cost. Two drugs can carry the same list price at the pharmacy counter, yet produce very different outcomes for the plan if only one relies on rebates that lower costs after the point of sale, reducing the plan’s net cost without lowering what the employee pays at the counter. That tradeoff helps explain why a higher list price drug can still be preferred on a formulary, even when a therapeutically similar alternative costs less at the counter.

Where transparency gaps become governance risk

Most employers approach pharmacy benefit decisions with good intent. The challenge is complexity: As pharmacy pricing has grown more opaque and financially consequential, expectations around fiduciary oversight have evolved faster than many governance practices have adapted.

Under federal benefits law, plan fiduciaries are expected to act prudently and solely in the interest of plan participants. That does not require predicting outcomes or eliminating every inefficiency, but it does require a defensible process—understanding how vendors are compensated, evaluating whether arrangements align with participant interests and revisiting decisions as conditions change.

Transparency gaps make that harder. When employers lack insight into pricing incentives, rebate mechanics, or how costs are distributed between the plan and participants, it becomes difficult to demonstrate that decisions were made with full information. That is why recent litigation trends increasingly focus less on whether costs were high and more on whether plan sponsors meaningfully evaluated their arrangements, understood how fees and rebates operated and exercised ongoing oversight rather than relying on standard market practices.

In at least one recent case involving a large, self-insured employer, a court dismissed claims tied to prescription drug pricing after concluding that alleged point-of-sale overpayments did not constitute injury when viewed in the context of overall plan benefits. The decision illustrates how pharmacy benefit disputes are still being evaluated through fiduciary frameworks developed for other benefit types, even though prescription drug costs are incurred in real time and directly affect participants at the pharmacy counter. In that sense, exposure often comes not from a single “wrong” decision, but from being unable to document why an approach was chosen or how participant interests were weighed.

Where employer leverage really begins

Transparency alone does not reduce risk; how employers act on that information matters far more.

In Part 2 of this series, we’ll examine where employer leverage actually exists and how HR leaders can use it to strengthen governance and exercise greater control over pharmacy benefits without disrupting the participant experience.