Prescription drug spend is one of the harder lines in an employer's benefits budget to understand clearly. Given that overall drug spend is projected to reach over $1 trillion in 2026, that lack of visibility is concerning. Most of the decisions behind it happen inside a pharmacy benefit manager (PBM). The PBM helps determine which drugs your plan covers through formularies, what the plan pays for them, and which pharmacies members can use.

As the supply chain has grown more complex, employers and members have absorbed more of the cost with limited visibility into how drug dollars move. Knowing what PBMs do, how they earn revenue, and where legacy PBM models create misaligned incentives is the starting point for evaluating your pharmacy benefit.

Pharmacy Benefit Managers Defined

A PBM is a third-party organization that administers prescription drug benefits on behalf of health insurers, employers, and other payers. It is a middleman that sits between drug manufacturers, pharmacies, and the plans that pay for prescriptions.

Core PBM services include creating and maintaining formularies, negotiating rebates with manufacturers, building pharmacy networks, and processing claims. PBMs also manage drug use through utilization management tools such as prior authorization and step therapy. Insurers and self-funded employers contract with PBMs to administer the pharmacy benefit, manage drug spend, and take on the administrative work that pharmacy claims require.

PBMs grew out of a legitimate need in the 1960s, when pharmacies struggled to work with health plans on what to charge for prescription medications. Pharmacies of that era simply weren't set up for that type and volume of collaboration. The original PBM was supposed to be an answer to this problem: a middleman designed to save the day by doing all the administrative work needed behind the scenes in order to help pharmacists charge appropriately.

Today's PBM market looks very different. Rather than maintaining a straightforward administrative role, legacy PBMs expanded their control through vertical integration, and the market has concentrated around a few large players that control roughly 80% of the market. With so much influence, they’ve been able to obscure the details of their negotiations. Employers, insurers, and pharmacies then struggle to grasp how much of a drug's rebates the PBM retains and how much (if any) reaches the plan.

Let’s explore the largest PBMs in more detail.

Who Are the 3 Big PBMs?

According to AMA's 2026 market analysis, the three largest pharmacy benefit managers are Optum Rx (owned by UnitedHealth), Express Scripts (owned by Cigna), and CVS Caremark. So how did they get so large?

Traditionally, PBMs operate with a discount-based price evaluation model. Under that model, the PBM that promises the biggest discounts tends to win the business. Negotiations then focus on the size of the rebate or discount rather than the drug's net cost to the plan.

Vertical integration reinforced that position. Caremark, Express Scripts, and Optum Rx (among others) consolidated with large insurers and healthcare companies, which strengthened their hand in negotiations. With PBMs, insurers, specialty pharmacies, and provider services under the same umbrella, the largest PBMs can favor formulary drugs that generate bigger rebates and profits.

For employers, the consequences of vertical integration show up in plan decisions. The same parent company may profit from the formulary, the pharmacy that fills the prescription, and the rebate attached to it.

How Do PBMs Make Money?

All PBMs earn revenue, typically including administrative fees, but in legacy PBM models, the main revenue streams can create complex incentives. Two primary profit sources shape how the PBM affects drug costs and access for your plan:

Rebates and Discounts

Rebates and discounts are financial incentives that PBMs negotiate with different parties in the pharmaceutical supply chain:

• Manufacturer Rebates: Drug manufacturers pay rebates to PBMs for including their drugs on formularies (preferred drug lists). These rebates are usually volume-based, so more prescriptions filled means a higher rebate. They typically apply to brand-name drugs.

• Pharmacy Discounts: PBMs negotiate discounts with pharmacies in their network, reducing the price they pay for dispensed drugs.

Both rebates and discounts can lower the net cost of drugs. However, legacy PBMs may not always pass the full value of these savings to plan sponsors or patients. The amount retained by the PBM becomes a source of profit.

Rebates and discounts:

• Are generated by manufacturers and pharmacies

• Can incentivize PBMs to prefer higher-priced drugs that carry larger rebates over lower-cost alternatives

• Often lack transparency; actual amounts may not be fully disclosed

Spread Pricing

Under spread pricing, a PBM charges the plan more for a prescription than it reimburses the pharmacy and keeps the difference (the "spread") as profit. This practice can lead to higher costs for health plans and patients.

For example, let’s say a PBM pays a pharmacy $50 for a prescription. The PBM then bills the plan sponsor $60 for the same prescription, keeping the extra $10 as spread.

Spread pricing is:

• Generated by the PBM itself, not manufacturers

• Occurs at the point of transaction

• Based on the difference between what the PBM pays and charges

• Results from a lack of transparency; plan sponsors often unaware of the actual cost paid to pharmacies

How Legacy PBMs Make Money Beyond Rebate Retention and Spread Pricing

Though rebate retention and spread pricing are some of the most common, and widely cited, ways for legacy PBMs to pad their margins, they are not the only ways they do so. As public awareness around these practices grows and reform chips away at these practices, the largest PBMs are finding new, hidden ways to extract value from their clients.

These other, sometimes hidden, fees and opaque practices can include:

It's important to note that this list isn't entirely exhaustive and that these may be called by a number of different names that are constantly re-branded. Before signing any PBM contract, it's important to look in the fine print for practices like these.

How PBMs Work With Insurers and Employers

Insurers and self-funded employers choose PBMs to negotiate agreements with drug manufacturers on their behalf. The PBM determines which drugs make it onto a plan's drug lists, then collects rebates from manufacturers, some of which it may keep as profit.

The PBM then reimburses pharmacies a certain amount while charging the insurer or employer plan for the drug. With spread pricing, those two amounts may not match.

Each of those touch points is a place where PBM revenue can grow without the plan sponsor seeing it. That makes contract terms and data access as important as the discount on paper.

What Is the Problem With PBMs?

These revenue streams benefit the PBM, while the costs land on plan sponsors and members. Spread pricing adds cost to each affected prescription, and retained rebates mean the plan doesn't receive the full value of the savings the PBM negotiated. When a PBM's revenue grows with drug spend and rebate volume, its incentives can diverge from the plan's goal of the lowest net cost.

Additionally, PBMs have also been criticized for a lack of transparency. This problem is compounded by the vertical consolidation among the largest PBMs, where they can make contracts more convoluted and hide all the fees they pocket. A major contributor to this is the use of discount-based pricing. PBMs can manipulate the numbers to make it seem like the large discount they provide is a deal when in reality they’re keeping a larger percentage.

How Is PBM Regulation Changing for Employer Plans?

On October 29, 2026, the U.S. Department of Labor finalized a rule requiring PBMs and their affiliated brokers and consultants to disclose fees and compensation to fiduciaries of large employers’ self-insured group health plans. The disclosures include manufacturer rebates and other payments, compensation from spread pricing, and payments recouped from pharmacies. The rule also allows plan fiduciaries to audit the accuracy of PBM disclosures.

Congress also acted through the Consolidated Appropriations Act, 2026, signed on February 3, 2026. The law also adds PBM reporting and rebate pass-through requirements for group health plans, starting with plan years that begin 30 months after enactment.

The disclosures can help fiduciaries assess whether PBM compensation is reasonable and fulfill their duties under the Employee Retirement Income Security Act (ERISA). Plan sponsors can use this information to evaluate and negotiate their PBM contracts. Our breakdown of what the new federal PBM law means for employers covers the provisions in more detail.

Finding a New Path Forward With PBMs

Something needs to change with PBMs, but what can be done? You’ll want to look for PBMs that operate on transparency. In particular, PBMs that use cost-based evaluation will always look for the lowest price (instead of the best “deal”). Ideally, PBMs will use streamlined pricing, like a per member, per month (PMPM) model, to make it easier to understand the value you’re getting in the healthcare process.

• Cost-based Evaluation: A cost-based PBM evaluates drugs and pharmacies on net cost to the plan rather than the size of a discount off list price.

• Compensation Structure: A predictable fee, such as a per member, per month (PMPM) admin fee, makes clear what you pay the PBM and why.

With a simple fee structure, PBMs can also pass through more (if not all) of the rebates they get from drug manufacturers, ensuring employers can reduce the overall costs for their business and for their members.

How SmithRx Approaches Pharmacy Benefit Management

Employers that come to us from legacy PBM arrangements typically want a clear view of where their drug dollars go and aligned incentives. SmithRx combines transparent economics with a fixed PMPM administrative fee and 100% pass-through of manufacturer rebates, with no spread pricing. Simply put, our compensation does not increase when medication costs rise.

A PBM shapes what your plan covers, what it pays, and how much of the negotiated value reaches the plan. Employers that evaluate PBM contracts on net cost, compensation, and verified pass-through are in a stronger position to control pharmacy spend.

If you’re ready to stop paying more for drugs, learn how SmithRx is bringing transparency to the pharmacy industry.

Frequently Asked Questions

Is a PBM the same as a health insurer?

No, a PBM administers the pharmacy benefit, while a health insurer manages broader medical coverage and may contract with or own a PBM. Self-funded employers often contract with a PBM directly, separate from their medical plan administrator.

What is the difference between a legacy PBM and a modern PBM?

Legacy PBM models may rely on spread pricing, retained rebates, or owned-channel incentives, while modern PBMs use transparent models and client-aligned incentives to deliver the lowest net cost to plans.

What is involved in switching PBMs?

Switching PBMs typically follows a phased PBM transition that covers contracting, plan setup, data and file transfers, and member communication before go-live. Many employers time the change to a plan renewal to keep the member experience consistent.