Most self-funded employers can tell you what they pay in premium equivalents and administrative fees. Far fewer can tell you what their pharmacy benefit manager (PBM) actually earns on their plan, because that number is rarely in the contract in plain language. Two mechanics do most of the work: PBM spread pricing and rebate retention. Understanding them is the first step toward negotiating a PBM arrangement that works for the plan sponsor instead of around it.
The PBM business model was never built for transparency
PBMs were created to process pharmacy claims and negotiate on behalf of health plans, standing between the employer, the pharmacy and the drug manufacturer. Over time that middle position became the business model itself. A PBM that controls formulary placement, claims adjudication and rebate negotiation has multiple, overlapping ways to generate margin, and most employer contracts were never written to require full disclosure of any of them.
That is not necessarily evidence of bad faith on the part of any single PBM. It is a structural incentive problem. When the party managing your drug spend also profits from the spread between what it charges and what it pays, and from rebates it may or may not fully pass through, cost containment and PBM profitability can quietly pull in opposite directions.
What PBM spread pricing really costs your plan
PBM spread pricing is the difference between what a PBM charges the employer for a prescription and what it reimburses the pharmacy that filled it. The PBM keeps the difference. On its own, a spread is not unusual in any distribution business. The issue for employers is visibility: in a traditional PBM spread pricing model, the plan sponsor typically has no contractual right to see the pharmacy’s actual reimbursement, only the price it was billed.
Because that spread is set claim by claim and drug by drug, it is difficult to audit without granular claims-level data and the contractual right to request it. Employers who have never asked to see per-claim reimbursement detail are frequently the same employers who discover the widest spreads once they finally do.
This is not a fringe concern. Federal proposals such as the C-THRU Act have specifically targeted PBM spread pricing and rebate opacity, requiring PBMs to publicly disclose these figures so employers and consumers can evaluate whether savings are reaching the plan.
Rebates: Who negotiates them and who keeps the difference
Manufacturer rebates are negotiated in exchange for favorable formulary placement, and they can represent a meaningful share of total drug spend on a plan with significant specialty or brand utilization. The open question for most employers is not whether rebates exist but how much of that value reaches the plan.
Some contracts define rebates narrowly, excluding categories of manufacturer payments from the pass-through calculation entirely. Others pass through a percentage of rebates rather than the full amount, or apply administrative fees against rebate dollars before they reach the plan. None of this is inherently improper, but all of it needs to be visible in the contract language, not summarized after the fact in an annual reconciliation report.
What a transparent PBM arrangement looks like instead
A transparent, or pass-through, PBM model addresses both mechanics directly. Pricing is passed through at the pharmacy’s actual acquisition or reimbursement cost, with the PBM compensated through a disclosed administrative fee rather than an undisclosed spread. Rebates are defined broadly, passed through in full or at a clearly stated percentage, and reported at the claim level rather than in aggregate.
For employers already working through a reference-based pricing approach on the medical side, extending that same transparency standard to pharmacy is a natural next step. The goal in both cases is the same: a plan sponsor that can see what it is actually paying for, rather than trusting an aggregate number at renewal.
Transparent pricing does not automatically mean a lower headline rate. It means the employer, not the PBM, controls the tradeoff between price and disclosure, and can hold the arrangement accountable through audit rights that traditional contracts rarely grant.
Why the TPA relationship matters here
This is where the party administering the rest of the plan earns its keep. A TPA with no ownership stake in a PBM has no financial reason to protect PBM margin, and every reason to read the contract on the employer’s behalf. That neutrality is what allows a TPA to push for full rebate disclosure, claim-level pricing detail and audit rights during negotiation rather than after a problem has already shown up in claims data. It is the same posture that shapes how medical management and pharmacy oversight work together: coordinated, not siloed, with one team accountable for the full picture of plan spend.
Frequently asked questions
Can employers audit their Pharmacy Benefit Manager contract mid-term, or only at renewal?
It depends entirely on the audit rights written into the contract. Some agreements restrict audits to a narrow window at renewal, while others allow claims-level review at any point during the plan year. Employers negotiating a new PBM contract should push for ongoing audit rights rather than accepting a once-a-year look.
What is the difference between pass-through and traditional Pharmacy Benefit Manager pricing?
In a pass-through model, the PBM charges the plan the same price it pays the pharmacy and is compensated through a separate, disclosed administrative fee. In a traditional model, the PBM’s compensation is built into the spread between those two numbers, which is harder to isolate and audit.
How much of Pharmacy Benefit Manager revenue typically comes from spread pricing versus rebate retention?
The split varies widely by PBM and by book of business, and most PBMs do not publicly disclose it. This is precisely why claims-level audit rights matter more than any industry-wide estimate. The only reliable number is the one specific to a given plan’s own contract and utilization.
What contract language should employers look for to prevent rebate aggregation practices?
Look for a broad, specific definition of what counts as a rebate, a stated pass-through percentage or dollar amount, and a requirement that rebate reporting be provided at the claim or drug level rather than as a single aggregate figure at year end.
Does moving to a transparent Pharmacy Benefit Manager model always cost more upfront?
Not necessarily. Administrative fees under a pass-through model are sometimes higher than the implied fee in a spread pricing arrangement, but the comparison only makes sense when weighed against the visibility and audit rights gained. For plans with meaningful specialty drug utilization, the tradeoff frequently favors transparency once total cost of ownership is considered.
Bring PBM oversight into your broader cost strategy
Pharmacy spend does not sit in isolation from the rest of a self-funded plan’s risk profile. The same discipline that goes into employee benefits management oversight generally, and into efforts to mitigate financial risk across a plan, should extend to the PBM contract itself. A spread pricing arrangement that goes unquestioned for several renewal cycles can quietly become one of the larger sources of unmanaged cost on the plan.
BHPS is a third-party administrator and neutral benefits consultant, not a PBM, a carrier or a pharmacy owner. That structure is what allows us to review a client’s PBM contract with no competing incentive of our own, and to bring the same scrutiny to pharmacy spend that we bring to medical claims and network strategy.
BHPS reviews PBM contracts as part of a broader plan strategy, not as a standalone project. If you suspect your current arrangement is not passing through what it should, or you simply want a second set of eyes on the contract before your next renewal, connect with the BHPS team to walk through it.