How Do PBMs Make Money? Rebates, Spreads and Fees Explained

PBMs make money from five main sources: manufacturer rebates and fees they keep rather than pass to the health plan, spread pricing (charging the plan more than they pay the pharmacy), margins at their own mail-order and specialty pharmacies, fees from rebate-aggregating subsidiaries, and administrative fees charged to plans. The visible admin fee is often the smallest piece. Much of the rest is tied to drug list prices, which is why PBMs became the most investigated intermediaries in American healthcare between 2022 and 2026.

The scale is concentrated. Three PBMs, Express Scripts, CVS Caremark and Optum Rx, handled about 80% of US prescription claims in 2025 (Drug Channels Institute). Each is owned by a group that also owns a major health insurer. And the money they sit on is enormous: IQVIA estimated US medicine spending at about $1.363 trillion at list prices in 2025, against about $606 billion after rebates and discounts.

What does a pharmacy benefit manager do?

PBMs began in the late 1960s and 1970s as claims processors that let insurers offer drug cards. They became powerful by doing four jobs at scale:

1. Claims adjudication: checking eligibility, benefits and drug interactions in real time at the pharmacy counter.
2. Pharmacy networks: contracting with pharmacies on reimbursement and steering volume to preferred or owned pharmacies.
3. Formulary management and rebate negotiation: deciding which drugs are covered and on which tier, and extracting rebates from manufacturers in exchange for preferred placement or for excluding rivals.
4. Utilization management: prior authorization, step therapy and quantity limits.

The customers are plan sponsors: self-insured employers, health plans, Medicare Part D plans and state Medicaid programs. The industry study on pharmacy, drug distribution and PBMs maps every party in the chain.

Why does the drug money flow in two directions?

The product moves in a straight line: manufacturer to wholesaler to pharmacy to patient. The money does not. The pharmacy is paid by the PBM, which is paid by the plan sponsor. Separately, and often months later, the manufacturer pays rebates to the PBM in return for formulary placement, and the PBM passes some or all of them to the plan.

The patient's coinsurance or deductible payment is usually calculated on the pharmacy price, before rebates. That single design choice explains much of the political anger at PBMs, as the worked example below shows.

How do PBMs make money? The revenue streams

The owned-pharmacy stream has become large. The FTC's January 2025 interim report said the Big Three's affiliated pharmacies marked up specialty generic drugs by large multiples, generating about $7.3 billion of revenue above estimated acquisition cost from 2017 to 2022 (reported).

How does a PBM make money on one prescription?

The book's Appendix A follows one 30-day brand prescription through the chain. It is stylized, not any real drug or contract. The list price (wholesale acquisition cost) is $500. The pharmacy is paid $505, based on the average wholesale price less 16% plus a $1 dispensing fee. The patient pays 25% coinsurance on that price. The manufacturer pays a 40% rebate and a 3% "administrative fee."

Two contracts are compared. Under a pass-through contract the PBM passes all rebates and fees to the plan and charges an $8 fee per claim. Under a traditional contract it passes 85% of the rebate, keeps all of the admin fee and charges $1.

Three things stand out. The manufacturer keeps only $285 of a $500 list price. The pharmacy and wholesaler together earn $5. And the patient pays $126.25, about 42% of everything the system spends on the prescription, even though the coinsurance is nominally 25%. The rebate lowers the plan's cost, not the patient's.

Under the traditional contract the PBM earns $46 instead of $8, and the plan pays about $380,000 more for every 10,000 prescriptions. Nothing about the drug changed; only the contract did.

How does spread pricing work on generics?

The same appendix follows a generic that costs the pharmacy $4.00. The PBM pays the pharmacy $6.00 and the patient pays a $5.00 copay. Under spread pricing the PBM bills the plan $18.00 and keeps $12.00, three times the drug's acquisition cost. Under pass-through pricing it bills $6.00 plus a $1.50 fee, and total spend falls from $18.00 to $7.50.

Spread pricing is real, not hypothetical. Ohio's state auditor found that PBMs in Ohio's Medicaid managed care kept about $224.8 million of spread over one year, April 2017 to March 2018, and the state moved to a single pass-through PBM.

Why can a high list price be worth more to a PBM?

When a PBM keeps a share of rebates, or is paid as a percentage of list price, a drug with a high list price and a high rebate can be worth more to it than a cheaper drug with a similar net cost.

The industry study's stylized insulin example shows it. A $300-list insulin with a 70% rebate and a $100-list version with a 10% rebate cost the plan almost the same on net. A PBM keeping 15% of the rebate earns $31.50 on the first and $1.50 on the second. A patient in the deductible pays $296.20 for the first and $99.40 for the second. Every party is acting rationally on its own numbers, which is why the outcome persisted. Insulin list prices rose for years while net prices fell, until Lilly, Novo Nordisk and Sanofi cut list prices by roughly 65–78% in 2023 and capped many patients' costs at $35 a month (reported).

Humira shows the same force from the other side. Even after biosimilars launched in the US on 31 January 2023, they gained little share in their first year, because high-list, high-rebate Humira remained attractive to PBMs. That changed in April 2024 when CVS Caremark removed Humira from its major formularies in favor of biosimilars, including one sold through its own subsidiary, Cordavis. AbbVie's drug was decided as much at the PBM as at the patent office.

How does vertical integration change PBM economics?

Each of the largest PBMs sits inside a group that also owns a health insurer and specialty pharmacies.

Integration lets a group move margin to the least regulated entity. A health plan must spend at least 80–85% of premium on care under the Affordable Care Act's medical loss ratio rule. Payments to its own PBM and specialty pharmacy count as cost, while the profit those affiliates earn sits outside the cap. Critics say this inflates costs; the groups say integration coordinates care and lowers total cost. Drug Channels Institute's analysis of 2025 claims put Express Scripts at about 31%, CVS Caremark at about 26% and Optum Rx at about 23%. Our guide on how to analyze a health insurance company shows how to find this profit in segment reporting.

What changed for PBMs in 2026?

The fight intensified after 2018. The FTC opened a study in 2022 and in September 2024 sued the Big Three and their rebate aggregators over insulin. Then 2026 brought the biggest changes in decades.

Delinking removes the PBM's incentive to favor high-list drugs in Part D. It does not by itself lower list prices or reduce concentration, and the employer provisions are years away. Chapter 21 of the book covers how these reforms fit the wider push on prices.

What are the alternatives to traditional PBMs?

New models attack the old chain from outside. Mark Cuban Cost Plus Drug Company, launched on 19 January 2022, sells mostly generics at acquisition cost plus 15% plus a pharmacy fee and shipping. Transparent PBMs charge a disclosed fee and pass through all manufacturer payments. Blue Shield of California announced in 2023 that it would unbundle its pharmacy benefit across several vendors. And manufacturers began selling directly for cash through LillyDirect (2024), NovoCare Pharmacy (2025) and the federal TrumpRx site, which made GLP-1 drugs the first large US market where a cash channel set the visible price.

These chip away at the old model rather than replace it. The Big Three remain the network for most US prescriptions.

Which factor of the Care Equation does the PBM business turn on?

The Care Equation names four factors a healthcare business needs: care that works, a payer with a renewing budget, an affordable route to that payer, and proof that survives contracting and regulation. PBMs built their position on the second and third factors: they control the route between manufacturers and the plans that pay. Their core value, generic substitution and formulary competition, is broadly accepted. What came under attack was the fourth factor, the ability to show plan sponsors and regulators what they were paying for. Opaque rebates and spreads were tolerated until audits, an FTC study and patients paying on list price made them a political liability.

The takeaway

PBMs make money mostly from the gap between what drugs list for and what they finally cost, through retained rebates and fees, spreads on generics and margins at their own pharmacies. Because much of that income rises with list prices, the system rewarded high-list, high-rebate drugs while patients paying coinsurance bore the list price. The 2026 law and FTC settlements push PBMs toward flat fees, but the concentration remains. To see how the drug dollar fits into the rest of the system, read Chapter 9, Drugs: Pharma, PBMs and Pharmacies, and our guide to how the healthcare industry makes money.