What Is a Transparent PBM? A Plain-Language Guide for Plan Sponsors

What Is a Transparent PBM? A Plain-Language Guide for Plan Sponsors

Pharmacy costs are one of the largest and least understood parts of an employer health plan. Most plan sponsors know what they pay. Far fewer can explain how that price was built, who earns money along the way, or whether a better arrangement exists.

That gap is why "transparent PBM" has become one of the most-discussed terms in employee benefits. This guide explains what it means, how it differs from the traditional model, and what plan sponsors should ask before their next review.

What a PBM Does

A pharmacy benefit manager, or PBM, runs the prescription drug side of a health plan. It processes claims, builds the network of pharmacies employees can use, negotiates with drug manufacturers, and manages the formulary — the list of drugs the plan covers and how each is priced for members.

The market is highly concentrated. According to Drug Channels Institute, three companies — CVS Caremark, Express Scripts, and Optum Rx — processed about 80% of U.S. prescription claims in 2025. Many smaller PBMs also rely on those larger companies for parts of their operations.

How Traditional PBM Pricing Works

In a traditional arrangement, the PBM can earn money in several places, and not all of them are easy for the plan sponsor to see.

• Spread pricing. The PBM charges the plan one price for a drug and pays the pharmacy a lower price. It keeps the difference.

• Rebates. Drug manufacturers pay rebates to PBMs, often in exchange for favorable placement on the formulary. How much of that money reaches the plan depends on how the contract defines "rebate" — and what it leaves out.

• Other payments. PBMs may also pay or receive administrative fees, per-member monthly fees, or other incentives, including payments to the brokers, consultants, or coalitions involved in the arrangement.

None of this is automatically improper. The problem is visibility. When revenue is spread across several layers, it becomes very difficult for a plan sponsor to know what the arrangement actually costs.

What Makes a PBM "Transparent"

"Transparent" is a marketing word as much as a technical one, so it's worth being precise. In general, a transparent (or pass-through) PBM arrangement has three features:

• Every fee is disclosed. The plan knows what the PBM earns and how.

• Rebates pass through to the plan. Manufacturer rebates go back to the plan, not to the PBM's bottom line.

• The PBM earns a set administrative fee. It is paid for its service, not for the gap between what the plan pays and what the pharmacy receives.

The practical effect is alignment. When the PBM's income doesn't rise with drug prices or rebate volume, its incentives line up more closely with the plan's.

One caution: a PBM calling itself transparent doesn't make it so. The contract language — how "rebate" is defined, what audit rights the plan has, who can change terms — is where transparency is proven or lost.

A Third Option: Modular Arrangements

Some employers are going further and unbundling the pharmacy benefit entirely. In a modular arrangement, the plan sponsor hires separate vendors for separate functions — for example, one for claims, another for specialty pharmacy, another for formulary management.

This approach can improve pricing and visibility at each step. It also takes more coordination, so it tends to suit plan sponsors with the internal capacity or outside support to manage several vendor relationships.

Why the Benchmark Matters

Many employers buy pharmacy benefits through a coalition — a group purchasing arrangement that pools the volume of many employers to negotiate better rates.

Coalitions often show strong savings compared with a stand-alone contract with one of the three largest PBMs. That comparison can be accurate. Pooled volume produces real leverage.

But it may be the wrong benchmark. Comparing a coalition to a traditional Big Three contract compares two arrangements that can both be hard to see into. The more useful comparison is how the current arrangement performs against a transparent model, where every fee and every rebate can be accounted for.

A price is only meaningful next to the right alternative.

Why Plan Sponsors Are Paying Closer Attention

For self-funded employer plans, choosing and monitoring a PBM is a fiduciary decision. Fiduciaries are expected to act in the interest of plan participants, understand what the plan is paying, and make sure fees are reasonable for the services provided.

Disclosure rules have tightened as well. The Consolidated Appropriations Act, 2021 requires brokers and consultants serving group health plans to disclose the direct and indirect compensation they expect to receive. That makes it easier — and more expected — for plan sponsors to ask who is being paid, and by whom.

The pattern is familiar to anyone who watched retirement plans over the last fifteen years: more disclosure, more scrutiny of fees, and a growing expectation that decisions are backed by a documented process.

Questions to Ask Before Your Next PBM Review

Whether you stay with your current PBM or go to market, these questions give you a clear starting point:

• What does every party in the arrangement earn from our plan — the PBM, and any broker, consultant, or coalition?

• How does our contract define "rebate," and what percentage of rebates reaches the plan?

• Does the PBM earn money on the difference between what we pay and what the pharmacy receives?

• Can anyone change the contract terms without our approval?

• What audit rights do we have, and when did we last use them?

• Are any fees — including fees PBMs pay to take part in an RFP — built into our pricing?

If these questions are hard to answer, that is useful information in itself.

Settle the Formulary Before You Bid

One of the most common and costly mistakes in a PBM evaluation is running the bid before deciding on the formulary.

If each PBM prices its bid on a different drug list, you aren't comparing like with like. The winning bid may look lower on paper, then cost more once the real formulary is in place.

The better approach is to decide on formulary design first, then have every bidder price against that formulary and your plan's actual usage data. The result is a true side-by-side comparison — and a decision you can explain later.

Transparency Is a Standard, Not a Label

A transparent PBM isn't a product you buy once. It's a standard you hold your arrangement to — through clear contract terms, full disclosure of compensation, and periodic evaluation against the market.

For many plan sponsors, the first step isn't switching vendors. It's getting a clear, independent view of what the current arrangement really costs and how it compares.

Culpepper RFP conducts independent PBM and health benefit evaluations with no financial ties to PBMs, coalitions, or broker networks. If your pharmacy benefit is due for a closer look, it may be a good time to start the conversation.