A pharmacy benefit manager, usually called a PBM, is a third-party administrator that runs the prescription drug benefit for an employer, health plan, union, or government program. PBMs sit between drug manufacturers, pharmacies, and the plans paying the bills. They process claims, negotiate prices, decide which drugs are covered, and in many cases own the mail-order and specialty pharmacies that fill those prescriptions.
The three largest PBMs, CVS Caremark, Express Scripts, and OptumRx, collectively process more than 80% of all U.S. prescription claims. Their parent companies (CVS Health, Cigna, and UnitedHealth Group) also own retail pharmacies, mail-order operations, specialty pharmacies, and health insurance companies. That vertical integration is why PBMs draw so much regulatory attention.
What PBMs actually do
A PBM performs five core functions for a plan sponsor:
1. Claims processing. When a member fills a prescription, the pharmacy submits the claim to the PBM in real time. The PBM verifies eligibility, applies the formulary rules, calculates member cost-share, and reimburses the pharmacy.
2. Formulary management. The PBM maintains the list of covered drugs (the formulary), assigns each drug to a tier with different cost-share rules, and decides which drugs require prior authorization, step therapy, or quantity limits.
3. Rebate negotiation. PBMs negotiate rebates from drug manufacturers in exchange for placing brand drugs on the formulary at preferred tiers. Rebate dollars are large, they can exceed 50% of the wholesale price for some brand drugs.
4. Pharmacy network management. The PBM contracts with retail pharmacies (chains and independents), sets their reimbursement rates, and decides which pharmacies are in the network.
5. Mail-order and specialty pharmacy operations. Most large PBMs own their own mail-order pharmacy and specialty pharmacy. They steer member prescriptions to these owned pharmacies through formulary and benefit design, which generates margin for the PBM but is often opaque to the plan.
How PBMs make money
PBMs have multiple revenue streams, only one of which is the administrative fee the plan sees directly:
- Administrative fees paid by the plan sponsor (per-claim or PMPM)
- Spread, the difference between what the PBM charges the plan and what the PBM pays the pharmacy
- Retained rebates, manufacturer rebates that the PBM keeps rather than passing through to the plan
- Manufacturer fees, formulary placement fees, data fees, administrative fees paid by drug manufacturers
- Owned-pharmacy margins, margin earned when claims flow through the PBM's own mail-order or specialty pharmacy
- Group purchasing fees, rebate-aggregator fees that the PBM (or its affiliated rebate aggregator) earns from manufacturers
For an opaque "traditional" PBM contract, the administrative fee is often a small fraction of total PBM revenue. For a transparent "pass-through" contract, the administrative fee is the only revenue stream.
The Big 3 PBMs
The three dominant PBMs are all part of larger vertically integrated health care companies:
| PBM | Parent Company | Affiliated Pharmacies | 2024 Pharmacy Market Share |
|---|---|---|---|
| CVS Caremark | CVS Health | CVS retail, CVS specialty, CVS mail | ~33% |
| Express Scripts | Cigna (Evernorth) | Accredo specialty, Express Scripts mail | ~24% |
| OptumRx | UnitedHealth Group | Optum specialty, Optum mail, owned medical groups | ~23% |
These three PBMs together cover roughly 80% of all U.S. prescription claims. Their scale gives them leverage in manufacturer rebate negotiations, but it also creates the conflicts of interest that have drawn FTC scrutiny since 2022.
Independent and transparent PBMs
A smaller set of PBMs operate as transparent or pass-through alternatives. They tend to be independent (not owned by an insurance company or retail pharmacy chain) and tend to default to pass-through contract structures. Examples include Navitus Health Solutions, Capital Rx, RxBenefits, MaxorPlus, Smith Health (SmithRx), and Costco's pharmacy benefit program for employers.
These transparent PBMs typically save plan sponsors 5–15% all-in versus a Big 3 PBM contract, sometimes more on specialty. The tradeoff is that they may have smaller pharmacy networks or fewer ancillary services. For most plans 500 lives and up, the savings are worth the tradeoff.
Why PBM contracts are notoriously opaque
PBM opacity is structural, not accidental. The contracts use definitions that are interpreted by the PBM, pricing benchmarks (AWP, MAC) that are set or controlled by the PBM, and reconciliation methodologies that net underperformance against overperformance in ways that always favor the PBM. The plan sponsor often cannot verify what they were charged versus what the pharmacy was paid, because the underlying claim-level reimbursement data is not part of the standard contract deliverable.
This is the gap that fiduciary consulting exists to fill.
How a fiduciary consultant fits in
A fiduciary pharmacy benefit consultant, like TeliosRx, sits on the plan sponsor's side of the table. The consultant doesn't process claims or operate pharmacies. The consultant's job is to:
- Review the PBM contract for the red-flag clauses that quietly transfer cost from the PBM to the plan
- Reconcile actual claim-level data against contracted guarantees
- Manage RFPs when the plan considers switching PBMs
- Provide ongoing oversight so the plan catches drift in PBM performance year over year
Unlike many traditional brokers, a fiduciary consultant accepts no compensation from the PBM, the manufacturers, or any other vendor, only from the plan sponsor. That's what makes the advice unconflicted.
The takeaway
PBMs are a necessary piece of the pharmacy benefit puzzle, but their economics are structured around opacity. The Big 3 PBMs aren't evil, they're rational actors responding to a contract structure that rewards complexity. Plan sponsors who understand what PBMs do, how they make money, and where the opacity lives can negotiate better contracts, choose better PBMs, and recover real dollars at every annual reconciliation.