Pharmacy is the fastest-moving line in most employer health plans and the hardest one to see inside. Here is how PBM economics work, what a carve-out actually changes, and the Utah reporting law that puts some of it on the record.
A pharmacy carve-out means contracting directly with a pharmacy benefit manager rather than accepting the one bundled inside your medical plan. It gives the employer its own PBM contract, its own pricing definitions and its own rebate terms. Whether it saves anything depends entirely on what that contract says — not on the fact of carving out.
In my experience this is the part of a benefits programme employers understand least and are charged the most for. The medical side has claims you can look at. The pharmacy side has a pricing structure built out of defined terms, and the definitions are where the money moves.
What does a pharmacy benefit manager actually do?
A PBM sits between the plan, the pharmacies and the drug manufacturers. It builds the formulary, contracts with the pharmacy network, processes prescription claims, and negotiates rebates from manufacturers in exchange for formulary placement. It also runs the specialty pharmacy channel, which is where an increasing share of spend lands.
The PBM has several possible revenue sources: an administrative fee from the plan, the difference between what it charges the plan and what it pays the pharmacy, a share of manufacturer rebates, and margin from any pharmacy it owns. A contract that is silent on any of these is not a contract that has eliminated them.
How concentrated is the PBM market?
Very. In its interim staff report on prescription drug middlemen, published July 2024, the Federal Trade Commission reported that the top three PBMs processed nearly 80 percent of the roughly 6.6 billion prescriptions dispensed by U.S. pharmacies in 2023, and the top six processed more than 90 percent.
The same report found that pharmacies affiliated with the three largest PBMs account for nearly 70 percent of all specialty drug revenue, and described vertically integrated PBMs as having the ability and incentive to prefer their own affiliated businesses. The FTC also noted that several of the PBMs it ordered to produce information had not completed their submissions.
The report also describes rebate arrangements that work against cheaper alternatives: it found that PBMs and brand manufacturers sometimes agree to exclude lower-cost generic and biosimilar competitors from the formulary in exchange for larger rebates. And on the self-preferencing point it put a number on one example, finding that pharmacies affiliated with the three largest PBMs retained nearly 1.6 billion dollars in revenue in excess of estimated drug acquisition costs on just two cancer drugs in under three years.
Why this matters to a 200-person employer in Utah: you are not negotiating in a competitive commodity market. You are negotiating contract language with one of a small number of counterparties, and the leverage you have is in the definitions, not in the rate.
What can a Utah employer find out about its PBM?
More than most employers realise, because Utah licenses PBMs and requires them to report. Under the Pharmacy Benefit Manager Licensing Act, Utah Code section 31A-46-201, a person may not perform, offer to perform, or advertise any pharmacy benefits management service in the state unless licensed as a PBM, and may not use another person as a PBM knowing that person is unlicensed.
The reporting requirement is the more interesting one. Utah Code section 31A-46-301 requires a PBM operating in the state to report to the Utah Insurance Department, before 1 April each year and for the previous calendar year: every insurer, pharmacy or pharmacist in the state it held a contract with; the total aggregate value of all rebates and administrative fees attributable to enrollees of a contracting insurer; and, where applicable, the percentage of aggregate rebates the PBM retained under its agreement. The department publishes that retained-rebate percentage in its annual report.
Two limits are worth stating plainly rather than glossing over. The figures on rebate value and retention are protected records under Utah's Government Records Access and Management Act, and the department may not publish them in a way that identifies a specific submission or discloses a trade secret — so this is aggregate market information, not a lookup of your own PBM. And the reporting duty is framed around PBMs contracting with insurers. A self-funded ERISA plan's own PBM arrangement is governed federally, so the state report is context for your negotiation rather than a substitute for your own contract rights. The Utah Insurance Department's pharmacy benefit manager page lists the licensing requirement and forms.
Bundled or carved out: which fits?
Neither is automatically better. Bundling buys simplicity and a single point of accountability. Carving out buys contract control and, usually, transparency you have to ask for explicitly. The question is which problem you currently have.
| Bundled with the medical plan | Carved out to a separate PBM | |
|---|---|---|
| Contract | Terms set inside the medical arrangement | Your own contract, negotiated directly |
| Integration | Medical and Rx data together by default | Needs to be built; confirm before you sign |
| Administration | One vendor, one renewal | Two vendors to manage and reconcile |
| Typical fit | Smaller groups, or where admin capacity is thin | Self-funded groups with enough Rx spend to justify the work |
A carve-out generally only makes sense for a self-funded plan, because a fully insured employer is buying a packaged product and has no separate pharmacy risk to manage.
What does moving a pharmacy benefit actually involve?
The contract is the hard part; the mechanics are predictable but they are where member goodwill is won or lost. Plan the transition around the people who are mid-treatment, because they are the ones who will notice.
Expect to handle new identification cards and a member communication before the effective date, a file build between the new PBM and your medical administrator so accumulators such as the deductible and the out-of-pocket maximum continue to track correctly, and an agreed approach to open prior authorizations. Ask specifically whether existing authorizations transfer or have to be re-established, and get the answer in writing. A member on a stable specialty therapy who is asked to re-justify it in January is the single most avoidable complaint in this process.
Also confirm who owns the data. If your medical administrator has been receiving pharmacy data automatically, carving out can break the integrated reporting you relied on for utilization management unless someone rebuilds the feed. That work is usually possible, rarely automatic, and almost never mentioned in the proposal.
Finally, agree the run-out. Claims incurred before the switch will still arrive after it, and the contract should say who adjudicates and pays them.
Which contract terms decide whether it works?
These are the terms to read before the pricing summary, because the pricing summary is derived from them.
- How "generic" and "brand" are defined. Drugs can be reclassified between the two, and each category is priced under a different guarantee.
- Whether pricing is pass-through or spread. Under spread pricing the PBM keeps the difference between what it bills the plan and what it pays the pharmacy. Under pass-through it does not, and is paid an explicit fee instead.
- What share of rebates reaches the plan, and when. "One hundred percent of rebates" means little without a definition of which manufacturer payments count as rebates.
- What counts as specialty. The specialty list is usually the PBM's, and it can change during the contract term.
- Your audit rights. How often you may audit, who may perform it, which data you get, and the window for recovering an error.
You will see large savings percentages quoted in this market. Treat any of them as a hypothesis until it has been tested against your own claims file under the definitions in the contract in front of you — a projection built on someone else's utilisation is not a quote. The same discipline applies here as in a claims audit: the number is only as good as the terms that produced it.
Does this make sense below 200 employees?
Often not, and it is worth being direct about why. A carve-out earns its keep through negotiated contract terms, and the leverage behind those terms comes from pharmacy spend. Below a certain volume the administrative work and the integration cost can exceed what the better terms return.
That is a judgement about your numbers rather than a rule, and two things shift it. A smaller group with a concentrated specialty-drug population can have more pharmacy spend than its headcount suggests, which changes the arithmetic. A group already moving to self-funding is doing the contract work anyway, so the marginal effort of pricing pharmacy separately at the same time is much lower. If you are somewhere near the line, the cheap first step is to price both structures at the same renewal rather than to decide in the abstract.
What to do next
Ask your current adviser for three things in writing: your PBM's pricing basis, the rebate terms including what is excluded from the definition, and your audit rights. If those three cannot be produced quickly, that is itself the finding.
If you would like help reading a PBM contract or testing a carve-out proposal against your own pharmacy claims, get in touch. We advise employers across the Wasatch Front from Draper, and often look at pharmacy alongside stop-loss structure, since specialty drug claims are a common driver of both. This article is general information about plan design and is not legal, tax or clinical advice; your plan documents, your contracts and your advisers govern.
Tyson has specialized in employee benefits since 2010, helping C-suite executives and HR leaders build custom health plans that reduce costs and improve employee access to quality care.
Skyler partners with Utah employers to design strategic, data-driven employee benefits programs that align financial outcomes with workforce wellbeing — bringing the same boardroom-level thinking featured in Healthcare's C-Suite Solution to every engagement.