Why it matters
Prescription drugs are one of the fastest-growing parts of most plans' costs, and nearly every dollar of them passes through a PBM. The PBM sits between your plan, the pharmacies that fill prescriptions and the drugmakers that pay rebates. It sees every price in that chain. Your plan usually sees only some of them.
That's not a problem in itself. A PBM does real work, and it has to be paid. The question is how. The same claim can cost your plan very different amounts depending on whether your contract pays the PBM a flat fee, lets it keep a spread on each prescription, or lets it keep part of the rebates. Two plans with the same drugs and the same members can end up with different drug costs because of contract terms alone.
The market is concentrated. In 2025, three PBMs (CVS Caremark, Express Scripts and Optum Rx) processed about 80% of U.S. prescription claims (Drug Channels Institute, March 2026). Each is part of a larger health company that may also own an insurer, specialty pharmacies or mail-order pharmacies.
What a PBM does
- Helps decide which drugs are covered. The PBM builds and maintains the formulary, the list of covered drugs and their tiers. Your plan, or your insurer for a fully insured plan, approves the design; the PBM recommends and runs it.
- Builds the pharmacy network. It contracts with retail, mail-order and specialty pharmacies and sets what each is paid.
- Processes claims. It adjudicates each prescription at the pharmacy counter in real time: checks coverage, applies the member's copay or coinsurance, and pays the pharmacy.
- Negotiates rebates. Drugmakers pay rebates to have their drugs covered or placed on a preferred tier. The PBM, or a rebate aggregator it works with, negotiates and collects them.
- Runs utilization management. Prior authorization, step therapy and quantity limits are typically PBM programs.
How a PBM gets paid
A PBM can earn money in several ways. Not every PBM uses all of them, and the mix depends on your contract.
- Administrative fees. A fee per claim or per member per month. These usually appear on your invoice.
- Spread. In a spread-pricing contract, the PBM charges your plan one price for a prescription and pays the pharmacy a lower one, and keeps the difference. Spread is most common on generic drugs. In a pass-through (sometimes called transparent) contract, the plan pays what the pharmacy was paid, and the PBM earns a fee instead.
- A share of manufacturer rebates. Some contracts pass all rebates to the plan; others let the PBM keep a portion or keep certain fees that drugmakers pay alongside rebates.
- Other revenue. Manufacturer administrative fees, payments from pharmacies, and margins at PBM-owned mail-order or specialty pharmacies can add to a PBM's compensation.
Depending on your contract, the spread and retained rebates may not appear separately on your invoice. That's the main reason contract terms and audit rights matter.
Worked example: one claim, two drugs
All amounts are illustrative.
The spread. A generic prescription under a spread-pricing contract:
| Measure | Amount |
|---|---|
| Plan pays the PBM | $40 |
| PBM pays the pharmacy | $28 |
| Spread the PBM can keep | $12 (30% of what the plan paid) |
The $12 is revenue to the PBM, not necessarily profit; it may help cover the PBM's costs in place of a higher administrative fee.
The rebate incentive. Two hypothetical, clinically comparable drugs. The PBM keeps 20% of any rebate. Other fees and member cost sharing are left out.
| Measure | Drug A | Drug B |
|---|---|---|
| Cost before rebate | $600 | $350 |
| Manufacturer rebate | $200 | $0 |
| PBM keeps (20% of rebate) | $40 | $0 |
| Rebate returned to plan | $160 | $0 |
| Plan cost after rebate | $440 | $350 |
Drug A costs the plan $90 more ($440 − $350), but it earns the PBM $40 more. This shows a possible incentive under a contract where the PBM keeps part of the rebates. It doesn't mean rebates always raise costs; many drugs with rebates are still the lower-cost choice.
Members can feel it too. Your deductible or coinsurance may be calculated on the cost before rebates reduce it, so a member paying 25% coinsurance on Drug A could pay based on $600, not $440. Benefit design decides the actual out-of-pocket cost; members with flat copays, or plans that apply rebates at the pharmacy counter, may not see this.
Read the transcript
Your plan pays forty dollars for a prescription. The pharmacy gets twenty-eight. In some contracts, the other twelve can stay with the company in the middle: your PBM.
A pharmacy benefit manager helps decide which drugs are covered, builds pharmacy networks, processes claims, and negotiates rebates. In 2025, three PBMs processed about eighty percent of U.S. prescription claims.
Three ways a PBM can earn money: administrative fees, the spread between what it charges your plan and pays the pharmacy, and a share of manufacturer rebates. Depending on your contract, some of those amounts may not appear separately on your invoice.
Here's a hypothetical. Drug A costs six hundred dollars before rebates. The manufacturer rebates two hundred. If the PBM keeps forty, your plan gets one sixty back and pays four forty net. Drug B costs three fifty, without a rebate. A costs your plan ninety dollars more, and earns the PBM forty dollars more.
A 2026 federal law requires full rebate pass-through to covered plans or their insurers, plus annual audit rights. For calendar-year ERISA plans, they apply to PBM contracts for 2029 and later. Review your contract now.
Ask your broker: How does our PBM get paid, and what does it keep? How much of our rebates comes back? And can we audit the payments and records? Find out more at actuariallysound dot com.
What's changing: the 2026 federal PBM law
The Consolidated Appropriations Act, 2026 (signed February 3, 2026) added federal PBM rules for employer group health plans, both self-funded and fully insured (Mercer, Jenner & Block):
- 100% pass-through. PBMs must pass all rebates, fees, alternative discounts and other manufacturer remuneration to the ERISA group health plan, or to its insurer for a fully insured plan.
- Annual audit rights. Plans can audit the PBM's rebate records at least once a year with an auditor they choose.
- Reporting. PBMs must send detailed drug spending and rebate reports, at least twice a year, to larger plans (generally those with 100 or more employees).
Timing. The requirements apply for plan years beginning on or after August 3, 2028, which is January 1, 2029 for calendar-year plans. Pass-through applies to PBM contracts entered into, renewed or extended for those plan years; a contract already in place keeps its terms until it renews. A three-year contract signed in 2027 could run on today's terms into 2030.
Separately, the Department of Labor proposed a PBM fee-disclosure rule in January 2026 for self-funded ERISA plans (Federal Register). A final rule cleared White House review in October 2026 but had not been published as of October 27, 2026.
Your current contract sets the terms. If you're signing or renewing a PBM contract now, ask for full rebate pass-through, a clear list of every way the PBM is paid, and audit rights, rather than waiting for the law to require them.
Common misunderstandings
Questions to ask your broker
- How does our PBM get paid, and what does it keep? Ask for every source of PBM compensation under your contract: administrative fees, spread, retained rebates and manufacturer fees, and any revenue from PBM-owned pharmacies.
- How much of our rebates comes back? Ask for the percentage passed through, whether it covers all manufacturer payments or only "rebates" as the contract defines them, and how often they're paid.
- Can we audit the payments and records? Ask whether your contract gives you the right to audit claims and rebate records with an auditor you choose, how often, and who pays for it.