Employer-sponsored insurance (ESI) is the predominant source of health coverage for working-age Americans. For these beneficiaries, decisions made by their employers regarding pharmacy benefit design can directly shape which medications are covered, what utilization controls apply, and how much they pay out of pocket.
Employers frequently contract with pharmacy benefit managers (PBMs) to negotiate with manufacturers, manage formularies and pharmacy networks, and administer utilization management tools intended to help control prescription drug spending. Although employers may delegate these responsibilities to PBMs, employers sponsoring self-funded health plans still generally act as fiduciaries under the Employee Retirement Income Security Act (ERISA). When acting in a fiduciary capacity, they are required to act in the interests of plan participants and beneficiaries when overseeing employee health benefits. However, because PBMs have assumed greater influence over prescription drug coverage and spending, employer oversight of these arrangements has received increasing attention.
Litigation, regulatory action, and calls for greater transparency are raising questions about whether employers have enough information to evaluate PBM compensation, contracting practices, and the effects of pharmacy benefit decisions on employee access to medications.
Balancing Cost and Access
Employers routinely make coverage decisions intended to limit the financial exposure of their health plans. Such decisions may exclude certain drugs from formularies, place medications on higher cost-sharing tiers, or require prior authorization, step therapy, or participation in a condition-management program. Although these strategies can help control spending and promote appropriate use, they may also delay treatment or leave employees without coverage for therapies recommended by their clinicians.
Coverage of GLP-1 medications for obesity illustrates this tradeoff. According to KFF, in 2025, only 19% of large employers offering health benefits reported covering GLP-1 drugs when prescribed primarily for weight loss, while 57% did not. KFF noted that the potential cost to employers reflects both the price of GLP-1 medications and the number of employees who could use them, particularly because treatment may continue over an extended period. Other employers have maintained coverage while imposing additional eligibility requirements. Business Group on Health reported that employers are using a range of measures to manage GLP-1 coverage, including verifying clinical eligibility, requiring participation in weight-management programs, limiting which providers may prescribe the drugs, and excluding certain medications from formularies. These decisions do not necessarily indicate a failure to comply with ERISA, which does not require employers to cover every available treatment. However, they demonstrate how cost-management choices made by employers and administered by PBMs can directly affect employees’ access to prescribed therapies.
These cost and access tradeoffs can become more difficult to evaluate when pharmacy benefit decisions are delegated to PBMs. Although PBMs can help employers negotiate lower drug costs, certain compensation arrangements may create incentives that do not fully align with the interests of the plan or its participants. The Federal Trade Commission (FTC) has reported that access to lower-cost drugs may be restricted as part of rebate negotiations between PBMs and manufacturers. In a separate case involving insulin, the FTC alleged that PBMs excluded lower-list-price products from formularies while giving preference to higher-list-price products offering substantial rebates. These practices can affect which medications employees can access and, in some circumstances, how much they pay for them.
Employer Oversight Under ERISA
ERISA-covered employer health plans may be either fully insured or self-funded. In a fully insured plan, the employer purchases coverage from an insurer, which assumes the financial risk for covered claims. In a self-funded plan, the employer pays claims from its own assets and may contract with a third-party administrator (TPA) to handle claims and other administrative duties. The funding structure may also affect fiduciary responsibility. According to DOL guidance, employers that sponsor self-funded plans typically retain authority over at least some aspects of plan administration, bringing those functions within ERISA’s fiduciary requirements. Employers with fully insured plans may also have fiduciary responsibilities when they retain decision-making authority over the plan. Outside administrators, meanwhile, generally do not become fiduciaries merely by carrying out administrative tasks; fiduciary obligations can arise when they have authority to make decisions affecting participants’ benefits.
ERISA also places responsibilities on plan fiduciaries when they hire outside service providers. DOL advises fiduciaries to consider the services provided and their cost when selecting a vendor and to review the arrangement periodically after it is in place. For employers contracting with PBMs, this may require examining not only total pharmacy spending, but also contract terms, compensation structures, formulary practices, and the quality of services provided.
Access to such information has become a growing policy concern. The Consolidated Appropriations Act, 2021 expanded health-plan transparency requirements and prohibited contractual provisions that restrict plan sponsors’ access to certain cost and quality data. The Purchaser Business Group on Health has urged employers to use the information made available under the law to more closely evaluate their vendors, including by reviewing compensation and claims, obtaining detailed information about vendor compensation, and requesting plan-level prescription drug data from PBMs.
At the same time, lawsuits challenging employers’ management of prescription drug benefits have increased scrutiny of the fiduciary responsibilities associated with PBM arrangements. Plaintiffs in these cases have alleged, among other things, that plan fiduciaries failed to adequately oversee prescription drug costs or agreed to arrangements that resulted in excessive costs to plans or participants. The outcomes have varied, with courts dismissing some claims while allowing others to proceed, but the litigation has drawn greater attention to the processes employers use to select and monitor PBMs.
Separately, the DOL proposed a rule in January 2026 that would require PBMs serving employer-sponsored self-insured group health plans to disclose additional information about rebates, fees, spread-pricing revenue, pharmacy payments, and other compensation. The proposal is intended to give plan fiduciaries greater visibility into how PBMs are compensated and additional information for evaluating their arrangements with PBMs. The proposal was issued pursuant to an April 2025 executive order directing the department to improve transparency around the direct and indirect compensation PBMs receive from employer-sponsored health plans. The rule has not yet been finalized.
Employer Responses
Several employers have begun reconsidering traditional arrangements as they seek control over pharmacy spending and benefit design. One alternative is a PBM arrangement that relies primarily on disclosed administrative fees rather than one in which the PBM retains some of the revenue generated through drug purchasing and reimbursement. In a pass-through arrangement, rebates and other negotiated savings are returned to the health plan, and the PBM does not retain the difference between the amount charged to the plan for a prescription and the amount paid to the pharmacy.
One employer moving toward this approach is Eli Lilly. Effective January 1, 2026, Lilly replaced CVS Caremark with Rightway as the PBM for employees enrolled in its medical plan. Rightway describes its model as 100% pass-through and is considerably smaller than CVS Caremark. The decision came several months after CVS Caremark removed Lilly’s obesity drug Zepbound from its standard commercial formulary and retained Novo Nordisk’s Wegovy as the preferred product. However, Lilly did not state that the formulary change prompted its decision. In May 2026, CVS Caremark announced that Zepbound would return to its commercial formularies as an additional preferred option beginning October 1, 2026, for plan sponsors that elect to cover weight-management medications. Lilly has not publicly indicated whether CVS Caremark’s revised formulary will affect its PBM arrangement with Rightway.
A cost-plus pharmacy arrangement offers another way for employers to exercise greater control over prescription drug pricing. Under this model, reimbursement can be based on the pharmacy’s acquisition cost for a medication plus agreed-upon amounts for overhead and margin, rather than a traditional reference-price methodology. This approach can give employers greater visibility into how pharmacy reimbursement is determined. Caterpillar used this approach when the company directly negotiated cost-plus pharmacy agreements with Walmart and Walgreens, retained audit rights, and created a preferred pharmacy network while continuing to use a PBM for other administrative functions. Caterpillar reported that the strategy was intended to improve pricing transparency and eliminate unnecessary pharmacy spending.
In-house formulary development offers another alternative to relying on a PBM’s standard formulary. Under this approach, the employer takes a more direct role in determining which medications are preferred or excluded based on factors such as clinical effectiveness and overall value. The University of Southern California is one employer that has taken greater control over formulary design. According to the Purchaser Business Group on Health, USC developed its own formulary as part of changes that resulted in a 40% reduction in drug spending over one year.
A transparent PBM arrangement focuses less on a single pricing method and more on the employer’s ability to see how the PBM is compensated and how pharmacy benefit dollars are spent. Transparent arrangements may provide greater insight into rebates and discounts, administrative fees, and pharmacy reimbursement and may also incorporate pass-through pricing. One employer that moved to this approach is Compassion International, which transitioned to Navitus, a PBM that describes its model as transparent and fully pass-through. In a case study of the arrangement, Navitus reported that Compassion International’s average net per-member-per-month pharmacy cost decreased by 23% over 12 months.
Considerations Moving Forward
The growing role of PBMs in employer-sponsored health plans has brought greater attention to the responsibilities employers retain when pharmacy benefits are administered by outside vendors. Ongoing fiduciary litigation continues to test the extent of those responsibilities, while DOL’s proposed PBM fee disclosure rule would give fiduciaries additional information about PBM compensation and potential conflicts of interest.
How these issues develop will help define the future of employer oversight of pharmacy benefits. Stakeholders should continue to monitor policy and industry developments as expectations for plan fiduciaries continue to evolve.
Research support for this article was provided by Marissa Kieser.
