What is a pharmacy benefit manager (PBM) and what do they do?

A pharmacy benefit manager (PBM) is an intermediary that manages prescription drug benefits for self-funded health plans. PBMs process pharmacy claims, negotiate drug prices with manufacturers and pharmacies, manage formularies, operate pharmacy networks, and administer specialty pharmacy programs. The three largest PBMs — CVS Caremark, Express Scripts, and OptumRx — manage pharmacy benefits for over 80% of insured Americans.

How do PBMs make money from self-funded employers?

Traditional PBMs earn revenue through spread pricing (charging employers more than they pay pharmacies), rebate retention (keeping a portion of manufacturer rebates), specialty pharmacy markups, and administrative fees. These revenue streams are often hidden in complex contract language. Transparent PBMs earn revenue only through disclosed administrative fees and pass through 100% of rebates and pharmacy pricing to the employer.

What is the difference between a traditional PBM and a transparent PBM?

Traditional PBMs (CVS Caremark, Express Scripts, OptumRx) earn hidden revenue through spread pricing and rebate retention. Transparent PBMs (Navitus, Capital Rx, RxBenefits) charge only disclosed administrative fees and pass through 100% of rebates and actual pharmacy costs. Self-funded employers typically save 10–25% on total pharmacy costs by switching from a traditional to a transparent PBM.

What should self-funded employers demand in a PBM contract?

Key PBM contract terms for self-funded employers: 100% rebate pass-through, pass-through pricing (no spread), audit rights with access to actual pharmacy invoices, formulary design rights, specialty pharmacy carve-out rights, transparent administrative fees, and termination provisions. These terms are standard with transparent PBMs and negotiable with traditional PBMs at renewal.

How often should self-funded employers review their PBM?

Conduct a PBM performance review annually, comparing actual results against contract guarantees. Issue a PBM RFP every 3–5 years to ensure competitive pricing. Conduct a claims audit every 2–3 years to verify contract compliance and identify overcharges. The pharmacy benefit is typically the second-largest cost driver after medical claims, making active PBM management one of the highest-ROI activities for self-funded employers.

Pharmacy

Pharmacy Benefit Managers (PBMs) in Self-Funded Plans

Pharmacy costs are the fastest-growing component of employer health spending — and PBMs sit at the center of it. Understanding how PBMs make money (often at your expense) is the first step to taking control of your pharmacy benefit.

How PBMs make money

PBMs generate revenue through multiple channels — many of which are not transparent to employers:

Spread pricing: The PBM charges the employer more for a drug than it pays the pharmacy, keeping the difference. This spread is often hidden in opaque contracts.

Rebate retention: Drug manufacturers pay PBMs rebates to favor their drugs on the formulary. PBMs often keep a portion of these rebates rather than passing them fully to the employer.

Administrative fees: Per-claim fees, network access fees, and other administrative charges that can add up significantly.

Specialty pharmacy margins: PBMs often own specialty pharmacies and steer high-cost specialty drugs through their own pharmacies at higher margins.

Pass-through vs. traditional PBM contracts

A pass-through (transparent) PBM contract eliminates spread pricing and passes 100% of rebates to the employer. The PBM charges a flat administrative fee per claim instead. This model aligns the PBM's incentives with the employer's — the PBM makes money from administration, not from drug costs.

Traditional PBM contracts are opaque by design. The PBM profits from the spread between what you pay and what pharmacies receive. Moving to a pass-through contract is one of the highest-ROI changes a self-funded employer can make.