Pharmacy benefit managers, or PBMs, exist because health insurers and employers needed someone to handle the increasingly complex job of managing prescription drug benefits. They emerged in the late 1950s as specialized middlemen between drug manufacturers, pharmacies, and the health plans that pay for medications. What started as a straightforward administrative role has grown into a massive, controversial industry that touches nearly every prescription filled in the United States.
The Problem PBMs Were Built to Solve
Before PBMs, health plans had to manage pharmacy benefits themselves. That meant processing every prescription claim on paper, deciding which drugs to cover, negotiating prices with pharmacies, and trying to keep costs under control, all while handling medical claims too. As prescription drug use grew through the 1960s and 1970s, this became unmanageable. PBMs stepped in to electronically process (or “adjudicate”) drug claims, which was their first and most basic function.
Think of it this way: your employer or insurer wants to offer you prescription drug coverage but doesn’t have the infrastructure or expertise to run a pharmacy program. A PBM takes that job off their hands. It builds a network of pharmacies you can use, creates a list of covered drugs (the formulary), processes your claims in real time at the pharmacy counter, and negotiates prices with drug manufacturers. Without a PBM, your health plan would need to build all of that from scratch.
How PBMs Negotiate Lower Drug Prices
The core economic argument for PBMs is volume leverage. A single employer with 500 workers has almost no bargaining power when negotiating with a pharmaceutical company. But a PBM that manages drug benefits for millions of people across hundreds of health plans can demand significant discounts.
These discounts come primarily through rebates. Drug manufacturers pay money back to PBMs based on how much of their product gets dispensed to the PBM’s covered members. This is essentially a delayed discount: the manufacturer sets a list price, and then returns a portion of it after the sale. The rebate grows larger when a PBM agrees to give a drug preferred placement on its formulary, steering more patients toward that medication over a competitor. PBMs charge a fee or take a percentage of the rebate for administering this process, then pass the remainder to the health plan sponsor. On the surface, this system reduces drug costs for the employers and insurers footing the bill.
Clinical Safety Checks
PBMs also perform a layer of clinical oversight that happens invisibly every time you fill a prescription. When a pharmacist processes your prescription through the PBM’s system, it runs through automated screening that checks for drug-drug interactions, duplicate therapies, allergies on file, incorrect dosages, and even whether a medication is appropriate during pregnancy. If the system flags a problem, the pharmacist sees an alert before handing you the medication.
This prospective drug review catches errors that might otherwise slip through, especially when patients see multiple doctors who may not know about each other’s prescriptions. PBMs also run retrospective reviews, analyzing prescribing patterns over time to identify overuse, underuse, or potential abuse of certain medications.
How PBMs Make Money
PBMs generate revenue in several ways, and this is where the controversy begins. One major source is the rebate system itself. PBMs keep a portion of every rebate they negotiate with manufacturers. Critics argue this creates a perverse incentive: PBMs may prefer to place a higher-priced drug on the formulary if it comes with a bigger rebate, even when a cheaper alternative exists.
Another revenue source is spread pricing. Under this model, a PBM charges the health plan one price for a prescription and reimburses the pharmacy a lower price, pocketing the difference. The industry frames this as a risk-management tool: if a pharmacy charges more than what the health plan agreed to pay, the PBM absorbs the loss. But if the pharmacy charges less, the PBM keeps the margin. The health plan gets cost predictability either way, but has limited visibility into how much the PBM is actually paying pharmacies.
The Consolidation Problem
Three PBMs now control roughly 80% of the market, and all three are owned by larger healthcare conglomerates that also run health insurance companies and pharmacy chains. This vertical integration is the source of the sharpest criticism. When a PBM owns the pharmacy dispensing the drug and the insurer paying for it, all the money flows within the same corporate parent. Financial transfers between the PBM, pharmacy, and insurer become internal accounting moves rather than transparent market transactions.
Research from the USC Schaeffer Center has found that current financial reporting rules let these conglomerates bundle their PBM operations together with specialty pharmacies and other divisions, making it nearly impossible for outsiders to determine how profitable the PBM piece actually is. The concern is that PBMs can shift profits around within the corporate family, for example by steering prescriptions to their own affiliated pharmacies where markups are higher.
What Federal Investigators Found
A 2024 Federal Trade Commission investigation put numbers to these concerns. The FTC examined specialty generic drugs, which are generics for complex conditions like cancer, HIV, and multiple sclerosis. Among their findings: 63% of specialty generics dispensed through the three largest PBMs’ affiliated pharmacies were marked up by more than 100% over estimated acquisition cost. Twenty-two percent were marked up by more than 1,000%.
The investigation also found evidence of prescription steering. While PBM-affiliated pharmacies dispensed 44% of specialty generic prescriptions overall, they dispensed 72% of prescriptions for drugs marked up by more than $1,000 per fill. The FTC reported that plan sponsor spending and patient cost sharing on these drugs grew at compound annual rates of 21% for commercial plans and 14 to 15% for Medicare Part D during the study period.
These findings undercut the original promise of PBMs. The entities created to reduce drug costs for health plans appear, in at least some cases, to be inflating costs for the plans and patients they serve while directing profits to their own pharmacies.
Why They Still Persist
Despite the criticism, PBMs remain embedded in the prescription drug system because the alternative is daunting. Employers and insurers would need to build or contract for the infrastructure to process millions of pharmacy claims, negotiate directly with hundreds of drug manufacturers, maintain formularies, run clinical safety screening, and manage pharmacy networks. Most don’t have the expertise or scale to do this cost-effectively.
PBMs also provide genuine value in specific areas. The real-time claims processing and clinical screening they run at the pharmacy counter is infrastructure that didn’t exist before they built it. Their ability to aggregate purchasing volume across many health plans remains a legitimate negotiating advantage over individual employers. The debate isn’t really about whether pharmacy benefits need managing. It’s about whether the current PBM model, dominated by three vertically integrated giants with limited transparency requirements, is the right way to do it.