What Is a Pharmacy Benefit Manager and How Do They Make Money?

BLUF: Most PBMs make money through spread pricing and rebate retention. Understanding how they operate can help you keep more money in your business.

If you're an employer offering health insurance, your pharmacy benefit manager (PBM) might be costing you more than necessary. Here's what you need to know about how these companies operate and why it matters to your bottom line.

What Is a Pharmacy Benefit Manager?

A pharmacy benefit manager sits between your health plan and the pharmacy. They negotiate drug prices, manage formularies, and process prescription claims for your employees.

PBMs are supposed to use their size and expertise to get better drug prices. The reality is more complicated. Many PBMs have multiple revenue streams that aren't always obvious to employers.

The Two Main Ways PBMs Generate Revenue

Spread Pricing

This is where PBMs charge your plan one price and pay the pharmacy a different (usually lower) price. They keep the difference.

Here's a simple example:

• PBM charges your plan $100 for a prescription

• PBM pays pharmacy $75 for the same prescription

• PBM retains the $25 spread

This markup often isn't visible in your standard reporting, making it hard to track how much you're actually paying above pharmacy costs.

Rebate Retention

Drug manufacturers pay rebates to PBMs for favorable formulary placement. These rebates can be significant, sometimes 30-40% of a drug's list price.

The key question: How much of these rebates get passed back to you? Many PBM contracts allow them to keep a portion of manufacturer rebates rather than passing 100% back to plan sponsors.

Signs Your PBM Arrangement Could Be Better

Consider reviewing your PBM relationship if:

• You can't access detailed claims-level data

• Rebate sharing terms aren't clearly defined in your contract

• Generic drug costs seem high compared to retail cash prices

• You're getting limited transparency into actual drug costs

• Your PBM discourages questions about pricing methodology

What Employers Can Do

Review Your Contract

Ask for a copy of your PBM contract and pay attention to:

• How rebates are calculated and shared

• What fees you're paying beyond claims processing

• Your rights to data and reporting

• Contract terms around pricing transparency

Request Better Data Access

You should be able to see:

• Claims-level prescription data

• Rebate details by individual drugs

• Net costs after all discounts and fees

• Performance metrics for your plan

Consider Transparent Alternatives

Fully transparent, pass-through PBMs operate differently. They charge a clear administrative fee and pass through 100% of rebates and discounts to you. No spread pricing, no hidden revenue streams.

These arrangements can result in significant savings (often thousands or millions annually depending on your size) while providing clearer visibility into your prescription drug spend.

The Bigger Picture

When PBMs retain spreads and rebates, it impacts everyone:

• Your health insurance costs increase

• Employees face higher out-of-pocket expenses

• Your healthcare budget gets stretched

• Money flows away from your local community

The solution goes beyond just switching PBMs. It's about rethinking how you purchase healthcare benefits entirely. When you combine transparent pharmacy benefits with other innovative approaches like direct primary care, you can offer better benefits while controlling costs.

Your employees get genuine access to affordable medications. You get predictable expenses without surprise fees. Your community benefits from keeping more healthcare dollars local.

Next Steps

Your current PBM contract has terms that may not be working in your favor. Before your next renewal:

1. Request and review your current PBM contract

2. Ask for detailed claims and rebate reporting

3. Get quotes from transparent PBM alternatives

4. Calculate potential savings from full pass-through arrangements

The PBM industry has conditioned employers to accept limited transparency and complex fee structures. But clearer, more straightforward options exist.

Want to see if you're overpaying for pharmacy benefits? The first step is getting visibility into your current costs. Once you have the real numbers, you can make an informed decision about whether your current arrangement serves your interests.