What is a pharmacy benefit manager (PBM)?

A pharmacy benefit manager (PBM) is a company that negotiates drug prices, determines coverage, and processes prescription claims on behalf of employers. Their role is to manage prescription drug benefits to lower costs and improve drug access. By negotiating pricing and determining which drugs are covered, PBMs are deeply embedded in the healthcare system.

Since emerging in the 1960s as claims processors, PBMs have evolved into powerful middlemen controlling nearly every aspect of prescription drug pricing and access. Today, the largest 3 PBMs manage pharmacy benefits for over 270 million Americans, wielding enormous influence over the $4.5 billion United States prescription drug market.

However, legacy PBMs have increasingly exploited the system's complexity through practices that prioritize profit over client and member interests:

• Spread pricing manipulation: Charging employers more for drugs than they reimburse pharmacies.
• Rebate-driven incentives: Favoring higher-priced medications that generate larger manufacturer rebates while retaining those rebates as profit.
• Opaque contract structures: Using complex agreements with hidden fees that mask true costs from employers.

These practices have fueled rising drug costs and drawn intense scrutiny from regulators and policymakers. PBM reform has become a bipartisan priority, with transparent, aligned PBM models emerging to address these problems.

Key roles and responsibilities of PBMs.

PBMs manage negotiations, clinical programs, and administrative processes that influence medication availability, costs, and access.

Formulary management.

A drug formulary is a list of covered medications organized into cost tiers that determine what a member pays. PBMs design and maintain formularies by evaluating clinical efficacy, safety, and cost-effectiveness. However, formulary decisions can be influenced by manufacturer rebates rather than pure clinical value.

Drug price negotiation.

PBMs negotiate with pharmaceutical manufacturers to secure rebates and discounts in exchange for favorable formulary placement. These negotiations can generate substantial savings, but only if passed through to plan sponsors and members. Legacy PBMs often retain a portion of negotiated rebates, creating conflicts where higher list prices become more profitable.

Network design.

PBMs build and manage pharmacy networks by contracting with or owning retail, mail-order, and specialty pharmacies. They determine which pharmacies members can access at preferred pricing and may steer patients toward pharmacies they own or operate. Network design has a direct impact on member convenience, medication adherence, and employer costs.

Cost containment.

PBMs aim to prevent unnecessary spending through utilization management programs like prior authorization, step therapy, and quantity limits. These clinical programs can protect employers from wasteful spending, but aggressive policies can also create barriers that frustrate members and prevent them from accessing the medications they need.

Claims processing.

PBMs operate the technological infrastructure that adjudicates pharmacy claims in real time, verifying eligibility, applying formulary rules, and processing payments. This system processes billions of transactions annually.

How do pharmacy benefit managers work?

The role of PBMs puts them at the center of a complex web of relationships connecting everyone involved in prescription drug access and pricing.

Plan sponsors.

Employers contract with PBMs to administer pharmacy benefit programs to their employees, outsourcing negotiating prices, managing formularies, and processing claims. Without transparent contracts and pass-through pricing, plan sponsors often lack visibility into where their pharmacy dollars actually go.

Drug manufacturers.

Pharmaceutical companies negotiate rebate agreements with PBMs in exchange for favorable formulary placement. These rebates can be substantial—20-30% of a drug's list price—but create misaligned incentives. Legacy PBMs may favor higher-priced medications that generate larger rebates, driving up spending and contributing to skyrocketing drug prices.

Pharmacies.

Retail and specialty pharmacies contract with PBMs to fill prescriptions, accepting reimbursement rates negotiated by the PBM. These rates often include pricing formulas that can leave pharmacies operating at thin margins. PBM-owned pharmacies may receive preferential rates or steering mechanisms that disadvantage competitors.

How do PBMs make money? Revenue streams explained.

PBMs earn revenue through multiple streams—some transparent, others opaque and misaligned with client interests. Traditional PBMs inflate list prices, steer members into their own pharmacies, and manipulate rebate structures to make "savings" appear larger while costs keep rising.

Rebates & manufacturer fees.

Pharmaceutical manufacturers pay PBMs rebates and fees to secure favorable formulary placement. These payments create powerful incentives to favor high-rebate medications over lower-cost alternatives. In traditional PBM contracts, a significant portion of rebates may be retained rather than passed through to the plan sponsor.

Spread pricing.

Spread pricing occurs when a PBM charges the plan sponsor more for a medication than it reimburses the pharmacy, pocketing the difference as profit. Studies showed that the big 3 PBMs generated an estimated $1.4 billion of income from spread pricing between 2017 and 2021.

Administrative fees.

PBMs charge administrative fees for services like claims processing and formulary management. Percentage-based fees tied to drug spend create hidden costs and conflicts similar to spread pricing, while fixed fees (per-member-per-month) are predictable.

Mail order & specialty margins.

Many traditional PBMs own mail-order and specialty pharmacies, creating opportunities to profit from both PBM services and pharmacy dispensing. They may steer patients toward their own pharmacies, prioritizing profits over member choice.

PBM pricing models.

The way a PBM drug pricing model is structured determines whether its incentives align with yours or work against you.

Traditional PBM model.

Traditional PBM models, like the Big 3, have long been the standard in pharmacy benefit management. However, their opaque practices, hidden fees, and profit-driven incentives have come under scrutiny for inflating drug costs.

Traditional PBMs prioritize their profits by inflating drug prices, favoring high rebate medications, controlling pharmacy networks for additional revenue, and manipulating drug classifications—all at the expense of plan sponsors and members.

Transparent PBM model.

Transparent PBMs emerged as a response to widespread criticism of the traditional PBM model, which has been opaque about pricing, rebates, and fees. This lack of transparency created mistrust, leading to the demand for a model that allowed clients to see the full financial picture of their pharmacy benefit plans. Transparent PBMs address these concerns by offering more visibility into how money flows through the pharmacy benefit process.

Transparent PBMs improve visibility into drug pricing and fees, giving employers more insight, but they may not pass through rebates and savings. Potential conflicts prevent them from fully aligning with employer goals, limiting the overall savings impact.

Pass-through PBM model.

Pass-through PBMs ensure that all cost savings, rebates, and negotiated discounts flow directly to the client without being retained by the PBM. This model was created in response to practices that inflate pharmacy spend, like spread pricing in traditional PBMs.

While pass-through PBMs aim to provide transparency and improve value by returning all savings to employers, many operate as hybrids, limiting their actual transparency and cost savings. Their focus on price alone and potential channel steering reduce their effectiveness in truly lowering overall healthcare costs for employers.

Aligned PBM model.

Aligned PBMs go beyond transparent and pass-through models and align their operations with the employer’s goals. To be fully aligned, every initiative of the PBM must serve the employer’s needs, which are usually to lower costs, give their teams high-quality benefits, and improve health outcomes for their populations. These PBMs provide transparent contracts and avoid conflicts of interest, like owning pharmacies or manufacturing their own costly biosimilars.

Aligned PBMs are the most effective choice for employers, offering total cost transparency and a commitment to health outcomes. With no conflicts from pharmacy ownership, they deliver real cost savings and improved care for employees.

The bottom line.

For employers, PBM performance directly impacts the bottom line through total pharmacy spend. The difference between a traditional PBM and an aligned alternative can represent millions in annual savings—without compromising access or outcomes.

Pros and cons of PBMs for employers.

PBMs promise to simplify administration and control pharmacy spending. When operating transparently with aligned incentives, they can deliver significant value. However, many plan sponsors are dissatisfied with their PBM contracts, highlighting significant drawbacks to certain models.

Benefits of PBMs.

When aligned with employer and member needs, PBMs provide substantial value through:

• Cost management through scale: Leveraging purchasing power to negotiate lower prices and rebates.
• Administrative work: Handling complex pharmacy operations, including claims processing and network management.
• Clinical oversight: Promoting cost-effective medication use through formulary management and utilization programs.
• Network optimization: Building pharmacy networks that balance access, convenience, and cost.
• Data analytics: Providing reporting tools that help identify cost drivers and optimize benefit design.

Drawbacks of PBMs.

Traditional, misaligned PBM models have significant pain points for employers:

• Opaque pricing: Spread pricing, retained rebates, and hidden fees make it impossible to understand or control true costs.
• Conflicts of interest: When PBMs profit from higher drug costs or owned pharmacies they steer members toward, their incentives oppose employer goals
• Limited visibility: Lack of transparency prevents accountability
• Market concentration: The three largest PBMs control over 80% of the market, reducing competition
• Misaligned incentives: When PBM revenue grows as drug costs rise, they have no reason to contain spending

Choosing a trusted PBM partner.

Selecting the right PBM partner is one of the most important decisions employers make about their healthcare benefits strategy. Employers should look for:

Transparent, aligned pricing.

A truly transparent PBM operates with 0% supply chain ownership, 100% pass-through pricing, and one flat admin fee. There are no games—no spread pricing, retained rebates, or hidden incentives. Every dollar saved flows directly back to clients and members. Look for PBMs that provide fully auditable reporting, are fiduciary-aligned, and tie their success to your outcomes through a total spend guarantee.

Embedded pharmacy navigation.

The best member experience comes from having expert guidance at every step. Pharmacy navigation delivered by licensed pharmacists and pharmacy technicians provides real-time support, guiding members to high-value medications while handling complex tasks. Members should be able to track prescriptions, compare prices, manage mail order, and connect with pharmacy experts through an intuitive app.

Proven results.

Demand evidence of performance. Look for PBMs that demonstrate measurable cost savings through total PMPM spend guarantees backed by dollar-for-dollar accountability, improved clinical outcomes including medication adherence and biosimilar adoption, high member satisfaction, and seamless implementation. Leading employers have transformed their pharmacy benefits by partnering with transparent PBMs that align incentives and deliver exceptional member experiences.

Don't compromise on employee health, happiness, or your company's results. Learn how Rightway's transparent PBM solution delivers fully aligned pricing, pharmacist-led navigation, and a total spend guarantee that puts accountability first.

Explore Rightway's PBM solution.

PBM FAQs.

Who are the largest PBMs?

The pharmacy benefits industry is a complex and opaque system dominated by the big 3 PBMs —CVS Caremark, OptumRx, and Express Scripts. Together, the Big 3 PBMs manage 80% of the nation’s prescriptions. When combined with Humana, Prime Therapeutics, and MedImpact, these 6 control 94% of the market, solidifying their role as the primary gatekeepers in prescription drug pricing and access.

Their market dominance raises concerns about pricing power, conflicts of interest from vertical integration, and reduced competition.

How does a PBM reduce drug costs?

PBMs reduce costs through negotiating manufacturer rebates, managing pharmacy networks, implementing utilization management programs, and providing clinical programs. However, the actual savings employers realize depend entirely on the contract structure—traditional PBMs may retain much of these savings, while aligned PBMs with transparent, pass-through pricing ensure that all savings reach plan sponsors and members.

Why are PBMs controversial?

PBMs have become controversial due to business practices that prioritize profit over affordability, including spread pricing, retained rebates, pharmacy ownership creating steering conflicts, lack of transparency, and market concentration. These practices have drawn scrutiny from Congress and regulators.

What does PBM transparency mean?

PBM transparency means full disclosure of all costs, fees, rebates, and financial arrangements. A transparent PBM provides auditable reporting showing exactly what the plan sponsor pays, what pharmacies receive, and how the PBM is compensated.

How is Rightway different from legacy PBMs?

Rightway is the only PBM with pharmacy navigation delivered by licensed pharmacists and pharmacy technicians. Our team guides members to high-value medications and provides real-time support through our trusted app.

We operate with complete alignment—no supply chain ownership, hidden incentives, spread pricing, or rebate games. Instead, we deliver fully aligned pricing, 100% transparency, and a total spend guarantee.