Supply Chain Participants
| Participant | Role | Revenue Source |
|---|---|---|
| Manufacturer | Develops and produces drugs; sets list price | Drug sales (net of rebates) |
| Wholesaler | Distributes drugs from manufacturer to pharmacy | Distribution margin (1–3%) |
| Pharmacy | Dispenses drugs to patients | Dispensing fee + drug cost markup |
| PBM | Adjudicates claims; manages formulary; negotiates rebates | Admin fees + rebate retention + spread pricing |
| Employer plan | Pays for drugs; bears financial risk | None — pays all costs |
PBM Revenue Sources
PBMs earn revenue from multiple sources: (1) administrative fees paid by the employer; (2) rebates from manufacturers — PBMs negotiate rebates for formulary placement and retain a portion; (3) spread pricing — the difference between what the PBM pays the pharmacy and what it charges the employer; and (4) DIR fees — fees charged to pharmacies that are not passed to the employer.
The Transparency Problem
IQ Insight
The drug pricing supply chain is deliberately opaque. Each participant has financial incentives to maintain opacity — transparency would reveal the margins they earn and create pressure to reduce them. The employer is at the end of the supply chain and bears the full cost — but has the least visibility into how that cost is determined. Transparency is the employer's most powerful tool for cost management.