Pharmacy benefit managers are under scrutiny: What PBM reform means for your plan

A pharmacy benefit manager, or PBM, is the company that manages prescription drug coverage on behalf of your health plan, negotiating prices with drug manufacturers, processing claims, and deciding which drugs are covered at what cost. For most employers, the PBM is a black box. You see the bill, but not how it was calculated.

That's starting to change. Specialty drug costs have risen sharply over the past several years, and a growing body of regulatory and legislative pressure is forcing PBMs to disclose more about how they're actually paid. For self-funded employers who bear pharmacy costs directly, this shift matters. Understanding PBM transparency, and knowing what to ask for, can be one of the most effective cost containment levers available at renewal.

This guide covers what PBMs do, why transparency has become such a flashpoint, and what to ask your PBM or broker before your next renewal.

What does a pharmacy benefit manager do?

A PBM sits between your health plan, the pharmacies your employees use, and the drug manufacturers who make the medications they need. Three functions sit at the core of what a PBM does:

• Formulary management: deciding which drugs are covered, at what tier, and under what conditions
• Claims processing: handling the transaction every time an employee fills a prescription
• Rebate negotiation: negotiating discounts and rebates from drug manufacturers in exchange for favorable formulary placement

In theory, PBMs exist to lower drug costs by using their scale to negotiate better pricing than any single employer could get alone. In practice, the way PBMs are compensated can create incentives that don't always align with what's cheapest for your plan.

Why is PBM transparency suddenly a big deal?

The core issue is how PBMs make money. Traditional PBM contracts often rely on spread pricing: the PBM charges your plan one price for a drug, reimburses the pharmacy a lower amount, and keeps the difference. The size of that spread is rarely disclosed, which makes it difficult to know whether you're getting a competitive rate or simply absorbing a hidden markup.

Rebates complicate the picture further. PBMs negotiate rebates from manufacturers in exchange for formulary placement, but those rebates don't always flow back to the employer in full. Some contracts pass rebates through directly. Others let the PBM retain a portion or use rebate dollars as a negotiating chip rather than a transparent pass-through credit.

This has become more urgent as specialty drugs, which can cost tens of thousands of dollars per course of treatment, make up a growing share of total pharmacy spend. A few percentage points of undisclosed spread or retained rebate on a specialty drug claim can represent real money, multiplied across every high-cost claimant in your plan.

Regulators have taken notice. Two significant federal actions in early 2026 have changed the landscape. The Consolidated Appropriations Act of 2026, signed into law on February 3, 2026, immediately designated PBMs as "covered service providers" under ERISA, requiring them to disclose direct and indirect compensation to plan fiduciaries before contracts are signed or renewed. Separately, the Department of Labor proposed a rule in January 2026 that would require detailed drug-level disclosures from PBMs serving self-insured plans, including spread compensation and rebate pass-through amounts. That rule is still being finalized. Together, they signal a meaningful shift toward PBM accountability, though the full scope of what's legally required is still taking shape, which means proactively asking the right questions remains essential.

Pass-through vs. traditional PBM models

Not all PBM contracts work the same way, and the model your plan uses has a direct effect on how much you actually pay.

Traditional PBM contracts

Traditional PBM contracts typically involve two practices worth understanding: spread pricing and rebate retention.

Spread pricing is when the PBM charges your health plan more for a drug than it actually pays the pharmacy to dispense it, and keeps the difference. For example, your plan might be billed $50 for a generic medication while the pharmacy is reimbursed $30. The $20 gap is the spread, and in a traditional contract, you won't see it.

Rebate retention is when the PBM negotiates discounts from drug manufacturers in exchange for favorable formulary placement, then keeps a portion of those rebates rather than passing them back to your plan in full. The rebate exists because of your employees' drug spend, but you may only see a fraction of it.

In exchange for these arrangements, employers often get a lower stated administrative fee, which can make a traditional contract look cheaper on paper than it actually is. The tradeoff is reduced visibility into the true cost of each claim.

Pass-through PBM contracts

Pass-through PBM contracts pass the negotiated price directly to the employer, with no spread, and pass rebates through in full or near-full. The PBM typically charges a flat administrative fee instead. This model offers more transparency and often results in lower total costs, particularly for employers with high specialty drug utilization, though the administrative fee itself may be higher than a traditional contract's stated fee.

Neither model is automatically right for every employer. A pass-through arrangement is usually more favorable for self-funded employers who want full visibility into claims data and the ability to audit performance. A traditional model might make sense for a smaller plan where the administrative simplicity outweighs the value of granular cost visibility. The right call depends on your plan size, your claims experience, and how much internal bandwidth you have to manage PBM oversight.

What should you ask your PBM or broker about transparency?

Going into your next renewal, a few specific questions can tell you a lot about how transparent your current PBM arrangement actually is:

• Is this a pass-through or traditional contract? And if traditional, what is the estimated spread on your highest-volume drug classes?
• What percentage of negotiated rebates does the employer receive? Get this in writing, not as a verbal estimate.
• Do you have audit rights? A transparent PBM relationship should allow you, or a third party on your behalf, to audit claims data and verify pricing.
• How and when will you be notified of formulary changes? Mid-year formulary shifts can affect employee access and plan costs without warning.
• What specialty drug management programs are in place? Specialty drugs are where cost exposure is highest, so it's worth understanding how the PBM manages utilization and site-of-care steering for these claims.

If your broker or PBM can't answer these clearly, or answers in a way that feels evasive, that's worth treating as a signal, not a formality to check off.

How PBM transparency affects your renewal

Renewal season is the natural moment to revisit your PBM arrangement, the same way it's the right time to revisit your broker's compensation and overall plan design. Pharmacy spend is one of the fastest-growing components of total health plan cost, which makes PBM terms an increasingly important lever in any cost containment conversation.

If you're self-funded, you carry pharmacy risk more directly than a fully insured employer does, which makes PBM transparency even more consequential. Reviewing your contract terms, asking for claims-level data, and benchmarking your current arrangement against a pass-through alternative are all reasonable steps to take before you sign another year with the same terms.

Frequently asked questions

What does a pharmacy benefit manager do?

A PBM manages prescription drug benefits for a health plan. It negotiates pricing and rebates with drug manufacturers, builds and maintains the drug formulary, and processes prescription claims on behalf of the plan.

How do pharmacy benefit managers work?

PBMs act as intermediaries between health plans, pharmacies, and drug manufacturers. They negotiate discounts and rebates in exchange for formulary placement, then bill the health plan and reimburse pharmacies, often retaining a portion of the difference depending on the contract structure.

Why do pharmacy benefit managers exist?

PBMs were created to use aggregated purchasing power to negotiate better drug pricing than individual employers or health plans could achieve alone. Whether that scale consistently translates into savings for the employer depends heavily on contract transparency.

What is PBM reform?

PBM reform refers to legislative and regulatory efforts to increase transparency into how PBMs are compensated, including disclosure of spread pricing, rebate retention, and the relationships between PBMs and the pharmacies or insurers they're affiliated with.

What's the difference between a transparent and traditional PBM?

A transparent, or pass-through, PBM passes negotiated drug costs and rebates directly to the employer and charges a flat administrative fee. A traditional PBM may retain a spread on drug pricing and a portion of negotiated rebates, often in exchange for a lower stated administrative fee.

Pharmacy costs aren't going to stop climbing, but how much of that increase lands on your plan depends heavily on the transparency of your PBM arrangement. Asking the right questions now, before your next renewal, is one of the most direct ways to find out whether your current setup is actually working in your favor.