PBM stands for pharmacy benefit manager, a company that acts as a middleman between drug manufacturers, insurance plans, and pharmacies. PBMs decide which prescription drugs your insurance covers, how much your pharmacy gets paid, and what you’ll owe at the counter. Nearly every American with prescription drug coverage has their medications managed by a PBM, even if they’ve never heard the term.
What a PBM Actually Does
When your doctor writes a prescription, a PBM is working behind the scenes before you ever arrive at the pharmacy. These companies handle several core functions for health insurers and large employers: building the list of covered drugs (called a formulary), negotiating prices with drug manufacturers, processing pharmacy claims, managing mail-order pharmacy services, and running programs that encourage the use of generic drugs or lower-cost alternatives.
Think of a PBM as the purchasing department for your prescription drug benefits. Your employer or insurance company hires a PBM to manage the pharmacy side of your health plan. The PBM then uses the combined buying power of millions of members to negotiate discounts and rebates from drug manufacturers, similar to how a bulk buyer negotiates lower prices at a warehouse store.
How PBMs Make Money
PBMs earn revenue through several channels, and this is where the industry gets controversial. The three main sources are manufacturer rebates, spread pricing, and administrative fees.
Manufacturer rebates are payments drug companies make to PBMs in exchange for favorable placement on the formulary. If a drug maker wants its brand-name medication to be covered by an insurance plan, it pays the PBM a rebate. Total manufacturer rebates paid to PBMs reached $334 billion for brand-name drugs in 2023. PBMs pass roughly 91 percent of those rebates back to commercial insurers, keeping the rest.
Spread pricing works differently. A PBM charges the insurance plan one price for a drug and pays the pharmacy a lower price, pocketing the difference. For example, a PBM might bill an insurer $50 for a generic medication but reimburse the pharmacy only $15. The $35 “spread” is revenue for the PBM. A Federal Trade Commission investigation found that the three largest PBMs generated an estimated $1.4 billion from spread pricing on specialty generic drugs alone over a five-year study period.
Three Companies Dominate the Market
The PBM industry is heavily concentrated. CVS Caremark holds the largest market share at 21.3 percent, followed by OptumRx at 20.8 percent and Express Scripts at 17.1 percent. Together, these three companies manage prescription benefits for a significant majority of insured Americans.
What makes this concentration especially significant is vertical integration. Each of these PBMs is owned by a larger healthcare conglomerate that also operates health insurance plans and retail or specialty pharmacies. CVS Caremark is part of CVS Health (which owns Aetna insurance and CVS pharmacies). OptumRx belongs to UnitedHealth Group. Express Scripts is owned by Cigna. This means the same parent company can insure you, manage your drug benefits, and fill your prescriptions. In 2021, 37.1 percent of specialty pharmacy spending flowed through pharmacies owned by just four of these insurer-PBM firms, and each firm steered its own plan enrollees toward its own pharmacies.
How PBMs Affect Which Drugs You Can Get
The formulary is the PBM’s most powerful tool. This is the list of drugs your plan will cover, organized into tiers that determine your copay. Tier 1 might be cheap generics with a $10 copay. Tier 4 might be specialty drugs with a $200 copay or a percentage of the total cost. If your medication isn’t on the formulary at all, you could be paying full price.
Formularies were originally designed to steer patients toward cost-effective generics. Today, they’re also constructed to maximize the financial leverage PBMs have over drug manufacturers. Including a medication on a formulary gives PBMs bargaining power to negotiate higher rebates from the manufacturer. This dynamic can produce counterintuitive results: some formularies actually favor brand-name drugs over cheaper generics or biosimilars, because the brand-name drug comes with a larger rebate.
PBMs also use tools called step therapy and prior authorization. Step therapy requires you to try a cheaper drug first before your plan will cover the one your doctor originally prescribed. Prior authorization means your doctor must get approval from the PBM before certain medications will be covered. These programs can reduce unnecessary spending, but research shows they also increase treatment discontinuation and, in some cases, lead to more emergency department visits when patients can’t access the medications they need promptly.
The Rebate Problem
One of the most debated aspects of PBMs is whether their rebate negotiations actually raise drug prices overall. Research from the USC Schaeffer Center found a nearly dollar-for-dollar relationship: for every $1 increase in rebates, the drug’s list price rises by $1.17. In other words, as PBMs negotiate larger rebates, manufacturers raise their sticker prices to compensate, and the net price the insurer pays stays roughly the same.
This matters to patients in a very direct way. If you have a deductible or coinsurance (where you pay a percentage of a drug’s cost rather than a flat copay), your out-of-pocket expense is typically based on the list price, not the lower net price the insurer actually pays after rebates. So the rebate system can mean you’re paying more at the pharmacy counter even though your insurance plan is technically getting a discount. Reducing or eliminating rebates could lower list prices and decrease costs for uninsured patients and insured patients with deductibles or coinsurance.
Impact on Local Pharmacies
Independent pharmacies are under growing financial pressure from PBM practices. PBMs set the reimbursement rates pharmacies receive for filling prescriptions, and independent pharmacies often face a difficult choice: accept contracts with inadequate reimbursements and fees that eat into their margins, or opt out and lose the patients covered by that PBM’s plans.
A particularly contentious practice involves direct and indirect remuneration (DIR) fees. These are retroactive charges PBMs can claw back from pharmacies after a prescription has already been filled, often based on performance metrics the pharmacy may not fully understand in advance. Within Medicare Part D plans, these performance-based fees grew to become the second-largest category of DIR, after manufacturer rebates. Independent pharmacies are hit hardest because they have less access to information about DIR payment structures compared to pharmacies owned by PBM parent companies. Some states have pushed back: Arkansas, for example, requires PBMs to reimburse pharmacies at least their drug acquisition costs, preventing situations where a pharmacy loses money on every prescription it fills.
Federal Scrutiny and What’s Changing
The Federal Trade Commission has been investigating PBM business practices, with a particular focus on specialty generic drugs used to treat cancer, HIV, and other serious conditions. A January 2025 FTC report found that the three largest PBMs marked up numerous specialty generics by hundreds and sometimes thousands of percent when dispensing them through their own affiliated pharmacies. Those affiliated pharmacies generated more than $7.3 billion in revenue above their estimated drug acquisition costs between 2017 and 2022, with that excess revenue growing at a compound annual rate of 42 percent.
The FTC report also found evidence of steering: a disproportionate share of the most profitable specialty generic prescriptions were filled at PBM-owned pharmacies rather than independent ones, suggesting the companies may be routing lucrative prescriptions to their own operations. The investigation remains ongoing, and several legislative proposals at both the state and federal level aim to increase transparency in PBM pricing, restrict spread pricing, and limit the ability of PBMs to favor their own affiliated pharmacies.