There are two ways pharmacy benefit managers make money. In a pass-through model, the PBM passes 100% of negotiated drug discounts and manufacturer rebates through to the plan sponsor and is paid only a transparent administrative fee. In a traditional or spread model, the PBM keeps the difference between what it bills the plan and what it pays the pharmacy, and that difference is invisible by design.
Choosing between them is the single biggest financial decision most pharmacy benefit programs make. The wrong choice costs a 5,000-life employer somewhere between $300,000 and $1.5 million a year in unnecessary drug spend.
How pass-through pricing works
Pass-through means every dollar the PBM negotiates with a pharmacy or manufacturer flows back to the plan sponsor, minus a flat per-claim or per-member administrative fee that's spelled out in the contract.
When a plan member fills a prescription, the pharmacy submits a claim to the PBM containing the drug's acquisition cost plus a dispensing fee. The PBM adjudicates the claim and reimburses the pharmacy. In a pass-through model, the PBM bills the plan for exactly that pharmacy-paid amount plus the transparent admin fee, and nothing else.
Manufacturer rebates work the same way. When a brand drug is dispensed, the PBM collects a rebate from the manufacturer based on volume and formulary placement. In pass-through, 100% of that rebate flows to the plan sponsor (often net of a per-claim rebate admin fee that's also disclosed).
The plan's total cost equals:
(Drug acquisition cost + Dispensing fee + Admin fee) − Manufacturer rebates
The PBM's revenue is only the admin fee. Typical admin fees run $0.20–$1.50 per claim, plus a per-member-per-month (PMPM) charge of $0.50–$5.00.
How traditional (spread) pricing works
In a traditional or spread-pricing model, the PBM negotiates one discount with the pharmacy network and a different, worse, discount with the plan sponsor. The PBM keeps the difference.
Here's a concrete example. A 30-day supply of a generic statin costs the pharmacy $5 to acquire. The PBM has negotiated a pharmacy reimbursement of $7, so the pharmacy gets paid $7. The PBM bills the plan sponsor $22 for that same claim. The PBM's "spread" is $15. The plan pays. The PBM profits. Nobody tells anyone what just happened.
This spread is hidden by the contract's pricing methodology. Plan sponsors typically see a single discount guarantee (for example, AWP minus 87% on generics), but the underlying pharmacy reimbursement is set separately by the PBM's MAC list, a price list the PBM controls and updates at its own discretion.
Rebates work similarly. A traditional PBM may keep 5–50% of manufacturer rebates as "administrative fees" or under various pass-through-with-exclusions arrangements. Some traditional PBMs guarantee a per-claim rebate floor to the plan, but the PBM keeps any rebate dollars above that floor.
Side-by-side example: one brand drug claim
A plan member fills a 30-day prescription for a brand drug with an Average Wholesale Price of $1,000.
Pass-through:
- Pharmacy is reimbursed AWP minus 18%: $820
- PBM bills the plan: $820 + $0.85 admin fee + $0.50 rebate admin fee = $821.35
- Manufacturer rebate paid to the plan: $400
- Net plan cost: $421.35
- PBM revenue: $1.35 (admin + rebate admin)
Traditional / spread:
- Pharmacy is reimbursed AWP minus 18%: $820
- PBM bills the plan AWP minus 16%: $840
- Manufacturer rebate captured by the PBM: $400
- Rebate guaranteed back to plan (62.5% pass-through): $250
- Net plan cost: $590
- PBM revenue: $20 spread + $150 retained rebate = $170
The plan pays $168.65 more in the traditional model for that single claim. Multiply across 50,000 claims a year and the difference exceeds $8 million.
Pros and cons
Pass-through strengths:
- Total transparency on PBM revenue
- PBM incentives aligned with the plan sponsor (lower drug costs benefit both sides)
- Easier to audit
- Easier to switch PBMs at renewal without hidden cost shifts
Pass-through weaknesses:
- Stated admin fees are higher (because they have to cover the PBM's full cost)
- Smaller plans may not have the leverage to negotiate truly pass-through terms
- Requires a more sophisticated buyer to fully evaluate
Traditional / spread strengths:
- Lower stated admin fees (because the PBM makes money on spread)
- PBM bears more risk on drug-cost fluctuations
- Simpler to read (a single set of guarantees)
Traditional / spread weaknesses:
- Hidden cost, by design
- Misaligned incentives: the PBM makes more when drugs cost more
- Difficult to audit
- Spread varies wildly by drug class and is hard to predict
How to verify your PBM is actually pass-through
Real pass-through contracts have specific clauses. If you don't see these, you are probably not in a pass-through arrangement no matter what your account manager calls it:
- The contract defines "100% pass-through" explicitly, with no exclusions
- The MAC list is visible to the plan or reconciles to a published benchmark like NADAC
- Pharmacy reimbursement methodology matches plan billing methodology (same AWP percentage, same dispensing fee, same definitions of brand and generic)
- Rebate guarantees specify "100% of all manufacturer rebates and price concessions, net of disclosed rebate admin fee"
- Admin fees are line-item disclosed: per-claim, PMPM, prior-auth fee, clinical program fees, all separately stated
- The plan has unrestricted audit rights including pharmacy-paid amounts (not just plan-paid amounts)
- The contract names the rebate aggregator or names the PBM if rebate aggregation is internal, and discloses how rebate values are calculated
If your contract is silent on any of these, ask. If the answer is vague, you are not truly pass-through.
When traditional pricing can still make sense
Pass-through isn't always the right answer. There are three situations where traditional pricing remains defensible:
- Very small plans (under 500 lives) often can't get PBM attention for true pass-through terms; the admin fees would be prohibitive
- Plans with very low specialty drug spend may see less benefit from pass-through
- Plans transitioning from a heavily subsidized broker-of-record relationship may face short-term cost increases when switching
That said, for most plans 500 lives and up, pass-through saves 5–15% all-in versus traditional pricing, often more on specialty.
The bottom line
The PBM model you choose determines whether your pharmacy benefit is a transparent service or an opaque profit center for someone else. Pass-through pricing, when written and audited correctly, is the cleanest way to align everyone's incentives around what matters: getting plan members the right drug at the right price.