Quick Takeaway
Your company may negotiate aggressively over health-insurance premiums while overlooking one of the most complicated parts of employee healthcare spending:
Prescription-drug money flowing through your PBM.
A Pharmacy Benefit Manager—or PBM—typically sits between health plans, drug manufacturers and pharmacies. Depending on the contract, money can move through rebates, administrative fees, pharmacy reimbursement, spread pricing and other financial arrangements.
Calling every payment a “kickback” would be inaccurate. Many rebates and fees are contractual and lawful.
The real employer question is:
Who is getting paid, how much are they receiving, and does your contract let you verify it?
That question has become even more important in 2026. The U.S. Department of Labor proposed enhanced PBM fee-disclosure requirements in January, and after Congress enacted additional PBM-related ERISA provisions in the Consolidated Appropriations Act, 2026, DOL extended the proposal’s comment period to address those statutory changes.
For employers sponsoring ERISA-covered health plans, vendor transparency isn’t merely a procurement issue.
It can also intersect with fiduciary responsibility.
First: What Does a PBM Actually Do?
PBMs administer prescription-drug benefits for health plans.
Their services may include:
Processing pharmacy claims
Creating formularies
Negotiating with drug manufacturers
Negotiating pharmacy reimbursement
Operating pharmacy networks
Administering prior authorization
Managing specialty medications
and:
Providing mail-order pharmacy services.
A PBM can therefore influence:
Which drugs employees receive.
Where prescriptions are filled.
What the plan pays.
What employees pay.
What manufacturers pay back through rebates.
That’s enormous influence over one of an employer health plan’s major cost categories.
Why PBM Transparency Is Such a Big Issue
Imagine your plan pays:
$500
for a prescription.
That doesn’t necessarily mean the pharmacy received $500.
Depending on the arrangement, the PBM may have:
Reimbursed the pharmacy a different amount
while:
Charging the plan another amount.
The PBM or an affiliate may also receive manufacturer compensation associated with the medication.
Employers therefore shouldn’t ask only:
“What’s our pharmacy spend?”
They should ask:
“Where did every dollar go?”
What Is Spread Pricing?
Spread pricing occurs when the amount the PBM charges the health plan for a prescription exceeds what the PBM reimburses the pharmacy, with the PBM retaining some or all of the difference according to the arrangement.
For example:
Employer plan pays PBM
$250
PBM pays pharmacy
$190
Difference
$60
This simplified example illustrates a:
$60 spread.
Whether this arrangement is permissible depends on the contract and applicable law.
But employers need to know whether it exists.
The FTC Found Significant Spread-Pricing Revenue
This isn’t merely theoretical.
In its January 2025 analysis of specialty generic drugs, Federal Trade Commission staff estimated that the three largest PBMs generated approximately:
$1.4 billion
in income from spread pricing on the specialty generic drugs analyzed during the study period.
That alone should give plan sponsors a reason to understand exactly how their PBM contract works.
The Bigger FTC Finding: Specialty Drug Markups
The FTC’s findings went considerably further.
Its analysis examined the three largest PBMs:
Caremark
Express Scripts
and:
OptumRx.
FTC staff found that the PBMs marked up numerous specialty generic drugs dispensed through affiliated pharmacies by hundreds or thousands of percent.
The affiliated pharmacies generated more than:
$7.3 billion
in dispensing revenue above estimated acquisition costs on the specialty generic drugs studied from 2017 through 2022.
That’s a striking number.
And it highlights another important audit issue:
Vertical integration.
Your PBM May Own the Pharmacy
A modern PBM isn’t necessarily an independent middleman.
The PBM may be part of a larger healthcare organization that also owns or is affiliated with:
Insurance operations
Specialty pharmacies
Mail-order pharmacies
Healthcare providers
or other healthcare businesses.
That creates potential economic incentives employers need to understand.
For example:
Who benefits when a prescription is routed to an affiliated specialty pharmacy?
The FTC reported that pharmacies affiliated with the three largest PBMs received 68% of specialty-drug dispensing revenue in 2023, compared with 54% in 2016.
That doesn’t prove every affiliated-pharmacy arrangement is inappropriate.
But it absolutely makes:
affiliate economics
an important part of PBM due diligence.
The “Rebate” Problem
Drug manufacturers sometimes provide rebates or other payments connected with formulary placement and prescription utilization.
An employer might reasonably assume:
“The PBM negotiates rebates and gives them to us.”
Maybe.
But your contract determines the economics.
You need to determine whether your arrangement provides:
100% pass-through
or whether some compensation can be retained.
You also need to understand how your agreement defines:
“rebate.”
A narrow definition could potentially exclude other forms of manufacturer compensation from what gets passed through.
Don’t Ask Only “Do We Get 100% of Rebates?”
This is one of the biggest procurement mistakes.
A PBM salesperson says:
“We pass through 100% of rebates.”
Excellent.
Now ask:
“What exactly counts as a rebate?”
Then ask about:
Administrative fees
Data fees
Price-protection payments
Market-share payments
Formulary-related compensation
Service fees
and:
Other manufacturer remuneration.
The economic question isn’t:
“Do you pass through rebates?”
It’s:
“Do you pass through all compensation attributable to our plan, and can we audit it?”
Why 2026 Is Different
PBM disclosure has become a major federal policy issue.
In January 2026, the Department of Labor proposed rules intended to require PBMs serving employer-sponsored self-insured ERISA plans to disclose detailed information about their compensation and financial arrangements.
Among the proposed disclosures are:
Manufacturer rebates and other payments
Compensation related to spread pricing
and:
Payments recouped from pharmacies.
The proposal also contemplated audit rights allowing plan fiduciaries to verify PBM disclosures.
Then the Consolidated Appropriations Act, 2026 amended ERISA with additional provisions relating to pharmacy-benefit-management services. DOL subsequently extended its rulemaking comment period so it could consider how its proposed regulations should interact with the new statutory requirements.
For employers, the direction is unmistakable:
PBM compensation is moving toward greater scrutiny and transparency.
Your Fiduciary Responsibilities Matter
Private-sector employers sponsoring ERISA-covered group health plans need to understand their fiduciary responsibilities.
The Department of Labor says fiduciaries must generally:
Act solely in participants’ and beneficiaries’ interests
Act prudently
Follow governing plan documents
and:
Pay only reasonable plan expenses.
Hiring service providers can itself involve fiduciary responsibilities.
And your responsibility doesn’t necessarily stop once you’ve signed the contract.
“Our Broker Handles It” Isn’t Enough
Employers commonly delegate health-plan administration to:
Insurance brokers
benefits consultants
TPAs
PBMs
and:
other vendors.
That’s normal.
But delegation doesn’t mean employers should stop monitoring them.
DOL specifically recommends that employers establish a formal review process and periodically evaluate service-provider performance, reports and actual fees.
Your benefits committee should therefore know:
Who your vendors are.
What they’re paid.
Who else pays them.
What contractual obligations they have.
Whether they’re meeting those obligations.
Audit Your Broker Too
PBMs aren’t the only vendors worth examining.
Your broker or benefits consultant may potentially receive compensation through:
Direct employer fees
Carrier commissions
Bonuses
Revenue-sharing arrangements
or other compensation.
DOL specifically tells employers to ask prospective service providers whether they receive third-party compensation such as:
commissions, finder’s fees or revenue sharing.
That’s a powerful question.
“Please disclose every source of direct and indirect compensation related to our account.”
Put it in writing.
The Four-Layer Vendor Audit
A strong benefits audit should examine four different layers.
Layer 1 — Contract
What does the agreement actually promise?
Layer 2 — Money
What was actually paid?
Layer 3 — Claims
Do transaction-level claims match the contract?
Layer 4 — Affiliates
Did related companies receive additional economic benefit?
Many employers examine only Layer 1.
That’s not enough.
Audit Step 1: Obtain Every Contract
Collect:
PBM agreement
Insurance contract
TPA agreement
Broker agreement
Stop-loss agreement
Specialty-pharmacy agreement
and:
Vendor amendments.
Don’t rely on PowerPoint presentations.
Don’t rely on:
“That’s how we’ve always handled it.”
The contract controls the arrangement.
Audit Step 2: Identify Every Dollar of Compensation
Create a vendor-compensation map.
For each vendor, document:
| Compensation | Amount | Paid By | Recipient |
|---|---|---|---|
| Direct admin fee | $___ | Employer/plan | PBM |
| Manufacturer rebates | $___ | Manufacturer | PBM/plan |
| Pharmacy spread | $___ | Plan transaction | PBM |
| Broker commission | $___ | Carrier | Broker |
| Consulting fee | $___ | Employer | Consultant |
| Specialty-pharmacy margin | $___ | Plan/member | Affiliate |
| Other revenue sharing | $___ | Third party | Vendor |
The goal is simple:
No mystery money.
Audit Step 3: Check Your Rebate Guarantee
Suppose your PBM guarantees:
$1 million in annual rebates.
That sounds impressive.
But ask:
Is it based on actual rebates?
Is it a minimum guarantee?
Does the PBM keep amounts above the guarantee?
Which claims qualify?
Which drugs are excluded?
How are rebate adjustments handled?
When are rebates paid?
Can the employer verify manufacturer payments?
A large rebate guarantee doesn’t automatically mean:
lowest net drug cost.
High Rebates Can Sometimes Hide Expensive Drugs
Imagine:
Drug A
Gross price: $1,000
Rebate: $400
Net:
$600
Another therapeutically appropriate option might hypothetically cost:
$300
with little or no rebate.
If the plan focuses only on:
“How big is our rebate?”
Drug A looks attractive.
But from the employer’s perspective:
$600 > $300.
That’s why sophisticated pharmacy purchasing focuses on:
Net cost
rather than:
rebate size.
Audit Step 4: Calculate Net Drug Cost
For each major drug or drug category, try to understand:
Gross Plan Cost
minus:
Rebates
minus:
Other Contractual Credits
equals:
Net Plan Cost
Then compare that with alternatives.
This helps reveal whether a seemingly impressive rebate arrangement actually delivers good economics.
Audit Step 5: Look for Spread Pricing
Ask your PBM:
“For every claim, can we see what the plan paid and what the pharmacy received?”
If the answer is no:
Ask why.
Your audit should examine:
Ingredient cost billed to plan
versus:
Pharmacy reimbursement
plus:
Dispensing fee
and any:
Post-adjudication adjustments.
Large unexplained differences deserve investigation.
Audit Step 6: Examine Specialty Drugs Separately
Don’t bury specialty drugs inside total pharmacy spending.
They’re too important.
Create a separate report showing:
Drug
Number of prescriptions
Gross plan cost
Employee cost
Rebate
Net plan cost
Dispensing pharmacy
and:
Whether the pharmacy is PBM-affiliated.
The FTC’s findings demonstrate why this deserves particular scrutiny.
Audit Step 7: Identify Affiliated Pharmacies
For your largest pharmacy claims ask:
“Who owns the pharmacy?”
Then determine whether it’s affiliated with your:
PBM
health insurer
or:
parent healthcare organization.
Affiliation isn’t automatically problematic.
But it can create financial incentives.
Employers should understand whether the PBM:
requires
encourages
or:
financially incentivizes
members to use its own pharmacy.
Audit Step 8: Look for Steering
Suppose an employee tries to fill an expensive specialty prescription at an independent pharmacy.
They’re told:
“You must use our specialty pharmacy.”
Ask:
Why?
Is it:
clinical?
network-related?
contractual?
or:
financial?
The FTC’s 2025 report said dispensing patterns suggested PBMs may steer highly profitable specialty generic prescriptions toward affiliated pharmacies.
That makes steering an important audit question.
Audit Step 9: Review Generic Drug Pricing
Generic doesn’t automatically mean:
cheap.
The FTC found markups of hundreds and even thousands of percent on certain specialty generic drugs in its study.
Your audit should therefore examine:
Plan price vs. benchmark/acquisition-related pricing.
Don’t assume:
generic = no pricing problem.
Audit Step 10: Check the Definition of “Pass-Through”
A PBM may market itself as:
pass-through.
But that term can mean different things depending on the contract.
Does it mean:
Actual pharmacy cost passed through?
All rebates passed through?
All manufacturer compensation passed through?
No spread pricing?
Transparent administrative fee?
Don’t accept the label.
Read the economics.
Audit Step 11: Examine the Formulary
Your formulary determines which medications receive:
preferred placement
non-preferred placement
or:
restrictions.
Ask:
“What financial arrangements influence formulary placement?”
You want to know whether decisions are based primarily on:
clinical value
net cost
or:
manufacturer economics.
The cheapest gross-price drug isn’t always the best choice.
But neither is the drug generating the biggest rebate.
Audit Step 12: Examine Prior Authorization
Prior authorization can help control inappropriate use.
But it also affects:
employees
physicians
and:
treatment delays.
Audit:
Approval rates
Denial rates
Appeals
Turnaround times
and:
Major drug categories requiring authorization.
Cost control should not become:
administrative obstruction.
Audit Step 13: Review Pharmacy Clawbacks and Adjustments
PBM economics can include post-transaction adjustments involving pharmacies.
DOL’s 2026 proposed disclosure framework specifically identifies payments recouped from pharmacies as information PBMs would need to disclose under the proposal.
Employers should therefore understand whether:
post-adjudication fees
or:
other pharmacy recoupments
create revenue related to their plan.
Audit Step 14: Demand Audit Rights
One of the most important clauses in your PBM contract may simply be:
Your right to audit.
Strong audit provisions should address issues such as:
Claims data
Rebate calculations
Manufacturer compensation
Pharmacy reimbursement
Guarantees
and:
Contract performance.
Also examine:
How often audits are permitted
Who can conduct them
How far back they can look
What data can be examined
and:
What happens when errors are discovered.
A transparency promise you cannot verify has limited value.
Watch for Audit Restrictions
A contract may technically say:
“Client has audit rights.”
Then the next paragraphs impose:
Narrow auditor qualifications
Short audit windows
Limited data access
Restrictions on manufacturer contracts
or:
Confidentiality provisions limiting verification.
Don’t evaluate:
whether an audit clause exists.
Evaluate:
whether the audit clause is actually useful.
Audit Step 15: Reconcile Guarantees
PBM contracts often contain performance guarantees involving:
Discounts
Rebates
Generic dispensing rates
or:
Service performance.
At year-end:
Recalculate them.
Don’t simply accept the PBM’s statement:
“All guarantees were achieved.”
Verify the methodology.
Audit Step 16: Benchmark Your Contract
Your PBM arrangement shouldn’t exist in a vacuum.
Compare:
Administrative fees
Discount guarantees
Rebate guarantees
Specialty pricing
Audit rights
and:
Contract terms
with competitive alternatives.
DOL’s fiduciary guidance specifically recommends getting information from more than one provider and comparing firms on consistent information.
Competition can be one of your strongest audit tools.
Audit Step 17: Put the PBM Out to Bid Periodically
You don’t necessarily need to switch vendors.
But periodically conducting an:
RFP — Request for Proposal
can reveal whether your current economics remain competitive.
Give competing PBMs identical claims data and specifications.
Then compare:
Net cost
not simply:
largest discount
or:
largest rebate.
The “Big Discount” Trap
PBM A says:
“We offer an 87% generic discount.”
PBM B says:
“We offer 82%.”
PBM A appears better.
But:
Discount from what benchmark?
If the underlying benchmark differs or pricing mechanics produce different net costs, the headline percentage may tell you surprisingly little.
Always translate guarantees into:
actual dollars.
The “Big Rebate” Trap
Same problem.
PBM A:
$1.5 million rebate guarantee.
PBM B:
$1.2 million.
PBM A looks better.
But if PBM A’s gross drug costs are:
$2 million higher,
the larger rebate isn’t saving you money.
Evaluate:
Total net pharmacy spend.
Audit Your Insurance Carrier Too
Vendor accountability shouldn’t stop at pharmacy benefits.
For your medical carrier or TPA examine:
Administrative fees
Network access fees
Claims-processing accuracy
Out-of-network pricing
Care-management fees
Stop-loss coordination
and:
Other vendor compensation.
Ask whether your carrier receives money from vendors connected to your plan.
Audit Your Benefits Consultant
Your consultant may recommend:
PBM A
Carrier B
Wellness Vendor C
and:
Navigation Platform D.
Ask:
“Do you receive any compensation from any vendor you’re recommending?”
Then ask for the answer:
in writing.
DOL’s guidance expressly encourages employers to investigate third-party compensation when selecting service providers.
Create a Conflict-of-Interest Register
For every benefits vendor record:
Vendor
Service
Direct compensation
Indirect compensation
Affiliates
Referral arrangements
Revenue sharing
Ownership relationships
and:
Potential conflicts.
Review it annually.
This doesn’t mean every conflict requires terminating the vendor.
It means:
You know the conflict exists.
Your Annual Vendor Accountability Meeting
Once per year, bring together:
HR
Finance
Legal/compliance
Benefits consultant
and relevant:
Plan fiduciaries.
Review:
What did we pay?
What did employees pay?
What did vendors receive?
What did affiliates receive?
What rebates came back?
What guarantees were achieved?
What changed?
Are the fees still reasonable?
Should we competitively bid any service?
Document the meeting.
Documentation Matters
DOL specifically recommends documenting service-provider selection and monitoring processes.
Keep records of:
RFPs
Contracts
Fee disclosures
Audit reports
Meeting minutes
Benchmarking analyses
Vendor responses
and:
Corrective actions.
You want to be able to demonstrate:
“We actively managed this plan.”
Not:
“We renewed whatever our broker recommended.”
15 Questions Every PBM Should Answer
Before signing or renewing a PBM contract, ask:
- Do you use spread pricing?
- What percentage of manufacturer compensation is returned to our plan?
- How do you define “rebate”?
- What other manufacturer payments do you receive?
- Do affiliates receive compensation related to our claims?
- Which pharmacies are affiliated with your organization?
- Are members required or encouraged to use affiliated pharmacies?
- What do you earn from specialty prescriptions?
- What post-adjudication pharmacy fees do you receive?
- Can we see plan-paid versus pharmacy-paid amounts?
- Can we audit manufacturer compensation?
- Who can conduct our audit?
- What restrictions apply to audits?
- What happens when an audit identifies an underpayment?
- Will you disclose all direct and indirect compensation attributable to our plan?
If a vendor refuses to answer basic financial questions, that refusal is itself useful information.
A Simple PBM Audit Example
Imagine an employer spends:
$5 million annually
on pharmacy benefits.
PBM reports:
Gross pharmacy claims: $5,000,000
Rebates returned: $900,000
Employer assumes net cost:
$4,100,000
An audit then identifies:
$120,000 spread pricing
$90,000 additional manufacturer-related compensation
$75,000 affiliate economics requiring further contract analysis
and:
$50,000 guarantee-calculation discrepancy.
That doesn’t automatically mean the employer is legally entitled to recover every dollar.
The contract determines that.
But without an audit:
the employer may never even know those economic flows exist.
Don’t Automatically Assume Fraud
This point is important.
Not every:
rebate
spread
commission
or:
affiliate payment
is illegal.
And not every vendor receiving indirect compensation is acting improperly.
The appropriate questions are:
Was it disclosed?
Does the contract permit it?
Is it reasonable?
Was the employer aware of it?
Was the arrangement prudently evaluated?
Does the plan receive the economic value it was promised?
That is a much more useful framework than labeling every payment a “kickback.”
The Employer’s 2026 PBM Audit Checklist
- Obtain the complete PBM contract.
- Obtain all amendments.
- Identify every PBM affiliate.
- Request all direct compensation.
- Request all indirect compensation.
- Review manufacturer rebates.
- Review other manufacturer payments.
- Check rebate definitions.
- Calculate net pharmacy cost.
- Test spread pricing.
- Compare plan-paid and pharmacy-paid amounts.
- Review specialty-drug claims separately.
- Identify affiliated-pharmacy utilization.
- Review potential prescription steering.
- Audit formulary economics.
- Review generic pricing.
- Review prior-authorization performance.
- Examine pharmacy recoupments.
- Recalculate contractual guarantees.
- Review audit-right limitations.
- Benchmark the PBM contract.
- Compare competing vendors periodically.
- Audit broker/consultant compensation.
- Document fiduciary review.
- Track corrective actions.
- Review the arrangement again before renewal.
Frequently Asked Questions
What is a PBM?
A Pharmacy Benefit Manager administers prescription-drug benefits for health plans and can perform functions involving pharmacy networks, claims processing, formularies, manufacturer negotiations and specialty-pharmacy services.
Are PBM rebates illegal kickbacks?
Not necessarily. Rebates and other contractual payments can be lawful. Employers should focus on understanding what compensation exists, who receives it, whether it is disclosed and whether contract terms are being followed.
What is PBM spread pricing?
Spread pricing generally refers to an arrangement where the PBM charges the health plan more for a prescription than it reimburses the pharmacy, retaining the difference according to the applicable arrangement.
How much did the FTC identify from spread pricing?
FTC staff estimated the three largest PBMs generated approximately $1.4 billion in spread-pricing income from the specialty generic drugs examined over the study period.
What did the FTC find about specialty generic drugs?
FTC staff reported that affiliated pharmacies of the three largest PBMs generated more than $7.3 billion in dispensing revenue above estimated acquisition costs for the specialty generic drugs analyzed from 2017 through 2022.
Should employers audit their PBMs?
Employers sponsoring ERISA-covered plans should take their service-provider selection and monitoring obligations seriously. DOL recommends reviewing performance, reports and actual fees and maintaining a formal monitoring process.
Should employers audit their insurance brokers?
They should understand broker compensation. DOL specifically advises employers to ask service providers about third-party compensation such as commissions, finder’s fees and revenue sharing.
Are new PBM transparency rules coming in 2026?
The landscape is changing. DOL proposed detailed PBM fee-disclosure requirements in January 2026, while the Consolidated Appropriations Act, 2026 subsequently amended ERISA with PBM-related provisions. DOL extended its proposed-rule comment period to consider those statutory changes.
Final Thoughts
For years, employers could treat pharmacy benefits as:
“The PBM handles it.”
That mindset is increasingly difficult to defend.
PBM economics can involve:
manufacturer rebates
spread pricing
specialty-pharmacy margins
affiliate relationships
pharmacy recoupments
and:
other direct and indirect compensation.
FTC findings have demonstrated how substantial some of these financial flows can become. Meanwhile, federal policy in 2026 is pushing PBM compensation further into the transparency spotlight.
The answer isn’t to assume every insurance partner is doing something improper.
It’s to stop relying on assumptions.
Ask.
Document.
Benchmark.
Audit.
Verify.
The most important vendor-accountability question for 2026 may be remarkably simple:
“Show us exactly how you make money from our health plan.”
A partner providing good value should be able to explain its economics clearly.