Pharmacy benefits are a significant part of an employer’s benefits strategy, affecting both plan spending and employees’ access to medications. A pharmacy benefit manager (PBM) administers those benefits, from processing claims and managing pharmacy networks to supporting clinical programs. How the PBM carries out that work can influence what the plan pays, what employers can see, and how members experience their benefits.

For benefits leaders evaluating a PBM, those differences can be difficult to distinguish in a request for proposal (RFP). Many PBMs market their services as transparent, pass-through, or modern, yet their contracts, compensation structures, and approaches to clinical execution may vary widely. Employers need to look beyond the terminology and examine how each arrangement would work for their plan.

A modern PBM brings those elements together through transparent economics, client-aligned incentives, accessible data, and lowest net cost execution. Each pillar of a modern PBM gives benefits leaders a way to evaluate the partnership and monitor whether savings opportunities reach the plan and its members.

How Does a Modern PBM Work?

A modern PBM administers the same functions as any PBM: claims adjudication, formulary management, pharmacy network contracting, manufacturer rebate negotiation, and utilization management. What changes is the fundamental model behind those functions. A modern PBM works under a transparent model that leverages client-aligned economics that employers can verify at any time.

The functions stay constant across PBM models, while the incentives and accountability attached to them change. For an employer, the difference appears in what each claim costs, what information the benefits team can verify, and whether the identified savings reach members at the pharmacy counter.

The table below compares how legacy and modern PBMs may handle these functions. Practices vary by PBM and contract, so use the comparison as a starting point for evaluating each arrangement.

Compensation and Contract Terms Set the PBM's Incentives

How a PBM is paid determines which outcomes it is rewarded for. For a plan sponsor, compensation terms affect plan cost directly and shape what a fiduciary needs to monitor over the course of the contract.

Pass-Through Pricing and Rebates

Under 100% pass-through pricing, the PBM bills the plan exactly what it pays the pharmacy for each claim. It also returns manufacturer rebates and discounts to the plan sponsor. Conversely, spread pricing involves the PBM billing the plan more than it reimburses the pharmacy and keeping the difference.

Rebate retention creates a misaligned incentive. When a PBM keeps part of each rebate, a higher-list-price drug with a larger rebate can earn the PBM more than a lower-cost alternative. That holds even when the alternative costs the plan less.

Pass-through describes a contract feature, and it does not guarantee full alignment on its own. Employers comparing transparent and pass-through contracts should confirm which payments pass through, including manufacturer administrative fees and other remuneration. They should also confirm how the PBM is otherwise compensated and whether ownership relationships affect formulary or pharmacy channel decisions.

Administrative Fees

Modern PBMs typically replace spread and retained rebates with a disclosed administrative fee, often a fixed per member per month (PMPM) fee. When that fee does not rise with drug prices or claim volume, the PBM is not paid more when plan spend rises.

Transparency and compensation structure are separate attributes. A PBM can disclose every fee and still be paid in ways that grow with drug cost or rebate volume. A PBM with a fixed fee can also limit what the plan sees, so each attribute needs its own review.

Request a complete fee schedule, including fees that sit outside the base administrative rate for reporting, data access, or compliance support. A fee listed in an appendix still counts toward the plan's total cost of administration. Comparing finalists on the base rate alone can understate what the plan will pay.

Claim-Level Data Lets Employers Verify Performance

Contract terms protect the plan only when the employer can verify them. A modern PBM gives the plan sponsor claim-level detail: plan paid, pharmacy paid, and member cost share on each claim.

Claim-level access lets a benefits team reconcile invoices, confirm pass-through on individual claims, and support an audit. It also lets the team answer a CFO's question about a cost increase from the data, without waiting for an annual review. Brokers and consultants can use the same files to benchmark the plan at renewal.

Modern PBM reporting typically adds drug-level rebate reporting, PMPM trend broken out by component, and savings by program. The most important distinction in those reports separates identified savings from realized savings. Identified savings estimate what the plan could save, while realized savings count prescriptions that changed and dollars the plan kept.

Ask any finalist to show a sample report with both figures side by side. A report that totals only identified opportunities can make two PBMs look alike when their execution differs.

Clinical Execution Determines Whether Savings Reach the Plan

Client-aligned compensation addresses the incentives that can work against the plan. Clinical and operational execution determines how much of the available savings the plan captures. For employers, execution affects plan cost and employee experience at the same time.

Formulary and Utilization Management Built Around Net Cost

A modern PBM structures its formulary around the lowest net cost among clinically appropriate options, including generics and biosimilars. Rebate size counts as one input to net cost and does not decide placement by itself.

The use of the pharmacy benefit is managed through utilization management tools such as prior authorization and step therapy, with staff reviewing requests against those criteria. Prior authorization applies when the pharmacy benefit plan requires approval before covering certain drugs. Review practices vary by PBM. Employers should ask who reviews requests, which clinical criteria apply, how a denied request escalates, and what turnaround the PBM reports. Those answers affect the employee experience as much as the plan's drug spend.

Moving Members to Lower-Cost Options

Identifying a biosimilar or a lower-cost pharmacy is only one part of the equation for saving. Moving a member to that option takes people: member outreach, prescriber coordination, and support at the pharmacy counter when a claim needs action.

Pharmacy routing deserves the same scrutiny. When a PBM's parent or affiliate company also owns mail-order or specialty pharmacies, vertical integration can create a conflict over where claims are directed. A modern PBM routes claims based on cost and clinical fit, without regard to pharmacy ownership.

Employers should ask each finalist how members are supported through a medication or pharmacy change, including who contacts the member and prescriber. Clear answers let the benefits team judge the employee experience before go-live.

What the 2026 Federal PBM Rules Change for Employers

Federal PBM reform moved from proposal to law in 2026. Congress enacted PBM provisions in the Consolidated Appropriations Act, 2026 (CAA 2026), signed February 3, 2026.

The Department of Labor finalized its PBM fee disclosure rule in late October 2026, and the Federal Register published it on November 2, 2026. The rule covers PBMs and affiliated brokers and consultants serving large self-insured ERISA group health plans, generally those with 100 or more employees or participants, starting with plan years that begin on or after July 1, 2027. These service providers must disclose direct and indirect compensation, including manufacturer payments, spread compensation, pharmacy recoupment, and price protection arrangements. Disclosures arrive semiannually, or quarterly on request, and plan fiduciaries can audit their accuracy.

Separately, CAA requires PBM service providers to pass through 100% of rebates, fees, alternative discounts, and other remuneration to ERISA group health plans. That requirement applies to plan years beginning on or after August 3, 2028. Disclosure tells employers what a PBM earns. It does not set the formulary, route claims, or move members to lower-cost options.

For a fiduciary, the rules make the compensation lever easier to monitor. Data rights and clinical execution remain contract and evaluation questions, and employers renewing before these dates can ask finalists to provide comparable disclosure now.

Questions to Ask When Evaluating a Modern PBM

Add these subjects to your RFP alongside broader questions to ask about PBM pricing to test contract, data, and execution.

• How is the PBM compensated in total, including every fee outside the base administrative rate?

• Is pharmacy pricing pass-through on every claim across retail, mail-order, and specialty channels?

• Which manufacturer payments pass through to the plan, including administrative fees and other remuneration?

• Does the PBM or its parent own pharmacies or group purchasing organizations that receive plan claims?

• What claim-level data can the plan access, download, and audit under the contract?

• Who supports members when a lower-cost option requires action from the member or prescriber?

Answers tied to contract language give a fiduciary something to monitor after go-live.

SmithRx's Truly Modern PBM Model

Benefits leaders evaluating a PBM need aligned economics, data they can verify, and savings that reach the plan through filled prescriptions. We built our service around all three. We earn a fixed PMPM administrative fee and pass through 100% of manufacturer rebates. The plan pays exactly what the pharmacy is paid, with no spread pricing, and our compensation does not increase when medication costs rise.

SmithRx's Drug Pathways Engine evaluates every claim for the right drug, the right source, and the right price. It considers all clinically appropriate options, including generics and biosimilars, along with available manufacturer savings programs. Source routing is pharmacy-agnostic: we do not own pharmacies or use preferred network arrangements to influence where a claim is directed.

Employers and brokers can always review claim-level data, PMPM, rebate pass-through, and Drug Pathway savings in the SmithRx Partner Portal. In 2025, SmithRx clients saw 20%+ lower PMPM than the industry benchmark. For a benefits team, the pillars of a modern PBM become verifiable, because the economics, data, and clinical work trace to the same claims.

A modern PBM earns the label through terms a benefits leader can test: compensation, data access, and how savings become filled prescriptions. Federal disclosure will make the first easier to see for large self-insured plans, while data rights and clinical execution still separate one model from another.

If you'd like to dive deeper into SmithRx's modern model, speak with a member of our team.

Frequently Asked Questions

Can a large legacy PBM offer a pass-through contract?

Yes, some large PBMs offer pass-through options, though costs can shift between books when a PBM runs pass-through and spread contracts side by side. Annual-average pharmacy reimbursement terms can make that shift possible, so ask whether the PBM takes spread for any client.

Does the new DOL rule apply to fully insured plans?

No, not its detailed disclosure requirements. The Department of Labor’s final rule applies those requirements to large self-insured ERISA plans, which leaves fully insured plans outside its scope. Fully insured plans remain subject to the disclosure requirements in CAA 2026.

How do modern PBMs differ from legacy options?

Modern PBMs combine transparent contracts, client-aligned incentives, and accessible data. Legacy PBM arrangements may include spread pricing, retained rebates, or incentives tied to affiliated pharmacies that can limit visibility or create misalignment. Practices vary by PBM and contract, so employers should evaluate compensation, data access, clinical execution, and member support in each arrangement.