“If you don’t know how your PBM gets paid, you’re probably overpaying.” That’s not scare tactics, it’s a fiduciary truth. For CFOs, CHROs, benefits consultants, and self-funded employers, understanding how a pharmacy benefit manager (PBM) earns revenue is the difference between managing costs and subsidizing someone else’s margin.

PBM Profits Often Come From Plan Overspending

Most PBMs profit through spread pricing and other opaque tactics. They earn revenue from the gap between what your plan pays and what the pharmacy receives, along with a mix of back-end cash flows like rebates, DIR fees, and clawbacks. These streams are often subsidized by inefficient benefit design and weak clinical oversight. The issue? These profits are usually hidden, buried in complex financial models and disguised as standard industry practice.

Here’s how you should be modeling PBM earnings:

Earnings After Cash Disbursement Formula

EACD = AF + DF + IC + MR – CD

Where:

• MR = Manufacturer Revenue
• IC = Ingredient Cost Reimbursement
• DF = Dispensing Fees *(includes traditional dispensing fees and DIR fees)
• AF = Administrative Fees
• CD = Cash Disbursement to pharmacies and rebate payouts to plan sponsors

Note: In this formula, DF (Dispensing Fees) is a composite of:

• Dispensing Fees paid or retained
• DIR Fees (Direct and Indirect Remuneration) collected from pharmacies

DIR and DF Are Your Plan’s Money

When PBMs withhold or clawback fees from pharmacies (whether labeled as DIR, performance penalties, or admin charges) they’re using your plan’s volume and activity to generate income. If these funds aren’t transparently passed back or accounted for, they become undisclosed profit. In fiduciary terms, that’s plan leakage.

Why PBM Earnings Matter

If your PBM’s compensation is opaque, you’re at risk for:

• Overpaying for drugs, even when rates look competitive
• Losing plan assets to undisclosed spread, clawbacks, or retained fees
• Incentive misalignment that drives up utilization or keeps higher-cost drugs on formulary

In contrast, when a PBM provides clear, formula-based earnings disclosures, you can:

• Benchmark fees against fiduciary standards
• Demand rebate and DIR transparency
• Eliminate conflicts of interest

Fiduciary Oversight Starts with Financial Clarity

If your PBM resists disclosing their earnings using a formula like the one above, that’s a red flag. You can’t control what you can’t see, and in pharmacy benefits, visibility is leverage. Bottom line, you’re not just managing a benefit, you’re managing a financial asset. Know how your PBM earns their money, and you’ll protect more of yours.

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