What is a pharmacy benefit manager (PBM)?

A pharmacy benefit manager (PBM) is a company that administers prescription drug benefits on behalf of employers, health plans, and insurers. PBMs negotiate drug prices with manufacturers, manage pharmacy networks, process claims, and develop formularies that determine which drugs are covered and at what cost.

How do PBMs make money at employers' expense?

PBMs profit through spread pricing (charging employers more than they pay pharmacies and keeping the difference), retaining a portion of manufacturer rebates rather than passing them through, and steering patients to their own specialty pharmacies. Transparent, pass-through PBM contracts eliminate these hidden revenue streams.

What is spread pricing in pharmacy benefits?

Spread pricing occurs when a PBM charges an employer more for a drug than it pays the pharmacy, pocketing the difference as profit. For example, a PBM might pay a pharmacy $10 for a generic drug but bill the employer $25 — a $15 spread. Pass-through contracts eliminate spread pricing by requiring the PBM to bill exactly what it pays the pharmacy.

What is a formulary and how does it affect drug costs?

A formulary is the list of covered drugs organized into tiers that determine patient cost-sharing. PBMs design formularies partly based on which manufacturers pay the highest rebates, which may not align with the lowest net cost for employers. Employers can negotiate formulary design rights to prioritize cost-effective generics and biosimilars.

What should employers look for in a PBM contract?

Employers should demand pass-through pricing (no spread), 100% rebate pass-through, audit rights with access to actual pharmacy invoices, formulary control, transparent administrative fees, and no exclusivity requirements for specialty pharmacy. Independent transparent PBMs like Navitus, Capital Rx, and RxBenefits offer these terms as standard.

Foundation

How PBMs Work: A Plain-English Guide for Employers

A pharmacy benefit manager (PBM) sits between your health plan and the pharmacy your employee uses. They process claims, negotiate drug prices, manage your formulary, and operate pharmacy networks. They also make money in ways that aren't always aligned with your interests.

The PBM's role in the drug supply chain

When an employee fills a prescription, here's what happens:

Employee presents at pharmacy

The pharmacist submits a claim to the PBM using the member's ID card.

PBM adjudicates the claim

The PBM checks formulary status, prior authorization requirements, and calculates the member's cost-sharing.

PBM pays the pharmacy

The PBM pays the pharmacy its contracted rate — which may be lower than what the PBM charges the employer (spread pricing).

PBM bills the employer

The employer is billed the ingredient cost plus dispensing fee. In a traditional contract, this may include spread.

Manufacturer pays rebate to PBM

The drug manufacturer pays the PBM a rebate for including their drug on the formulary. In a traditional contract, the PBM keeps a portion.

The three PBM revenue streams employers need to know

Spread pricing: The PBM charges you more than it pays the pharmacy and keeps the difference. This is the most common hidden cost in traditional PBM contracts.

Rebate retention: Drug manufacturers pay PBMs billions to favor their drugs on the formulary. Traditional PBMs keep a significant portion — sometimes 50% or more.

Specialty pharmacy steering: PBMs own specialty pharmacies (CVS owns Caremark; Express Scripts owns Accredo) and steer high-cost specialty drugs through their own pharmacies at inflated margins.

The Big Three PBMs

Three PBMs control approximately 80% of the US market: CVS Caremark, Express Scripts (Cigna), and OptumRx (UnitedHealth). This concentration gives them enormous negotiating power with drug manufacturers and pharmacies — but it also means limited competition and less incentive for transparency.

Independent and transparent PBMs — including Capital Rx, Navitus, and others — offer pass-through contracts that eliminate spread pricing and pass 100% of rebates to the employer. They're growing rapidly as employers demand more transparency.

Related tools

PBM Comparison Tool

Compare the Big 3 and independent transparent PBMs side by side.

PBM Contract IQ™

Upload your PBM contract for an AI-powered red-flag review.

Pharmacy Benefits 101

The full hub guide — cost drivers, contract types, and containment strategies.

PBM contract transparency ← Back to hub