Section 24.1: Introduction to PBM Business Models

24.1.1 The “Why”: From Tactical Processor to Strategic Advisor

As a pharmacist navigating the world of prior authorizations, your daily reality is a tactical one. You receive a rejection, analyze the clinical criteria, gather documentation, and submit an appeal. It is a world of forms, phone calls, and patient-specific data. This tactical expertise is the foundation of your role. However, to ascend to the level of a true Certified Prior Authorization Pharmacist, you must add a strategic layer to your tactical foundation. You must learn to see beyond the immediate rejection and understand the immense, often opaque, economic forces that created that rejection in the first place.

Every prior authorization requirement, every formulary exclusion, and every step-therapy protocol is a direct consequence of a financial calculation made by a Pharmacy Benefit Manager (PBM). These entities, which sit at the nexus of drug manufacturers, insurance plans, and pharmacies, operate on business models that are profoundly complex and frequently misunderstood. Their goal is to manage the pharmacy benefit for their clients (employers, health plans) by controlling costs and utilization. The tools they use to achieve this—formularies, PAs, and network design—are the very obstacles you face every day.

This section is designed to pull back the curtain on the PBM industry. By understanding precisely how PBMs make money, you will unlock a new level of insight into your work. You will begin to understand why a particular branded drug is non-preferred despite being clinically effective, why a plan seems to favor a high-list-price medication over a lower-list-price alternative, and why the PA criteria are written in a specific way. This knowledge transforms you from a reactive processor of denials into a proactive, strategic advisor. You will be able to anticipate access barriers, craft more compelling arguments that speak the language of “net cost” and “value,” and explain the often-counterintuitive realities of drug pricing to providers and patients with confidence and authority. Mastering PBM economics is the single most important step in evolving from a technician of the PA process to a master strategist of medication access.

24.1.2 The Central Intermediary: Defining the PBM’s Role

Before dissecting their revenue streams, it is essential to establish a clear definition of what a Pharmacy Benefit Manager is and the role it occupies in the U.S. healthcare system. At its core, a PBM is a third-party administrator of prescription drug programs for health insurance plans, large employers, Medicare Part D plans, and other payers. They were originally created in the late 1960s and 1970s as simple claims processors, designed to efficiently handle the growing volume of prescription drug claims. However, their role has evolved dramatically over the past five decades.

Today, PBMs are not just passive processors; they are active managers of the pharmacy benefit. They sit in the middle of a complex web of stakeholders, and their primary function is to manage the cost and utilization of pharmaceuticals on behalf of their clients. The largest PBMs, such as CVS Caremark, Express Scripts (owned by Cigna), and OptumRx (owned by UnitedHealth Group), manage the pharmacy benefits for hundreds of millions of Americans and wield enormous influence over drug pricing, pharmacy reimbursement, and patient access.

Core Functions of a Modern PBM

To achieve their primary goal of cost containment, PBMs perform a wide array of interconnected functions:

Function	Description & Impact on PA Specialist
Formulary Management	Creating and managing the list of covered drugs (the formulary) for a health plan. This involves evaluating the clinical efficacy and cost-effectiveness of thousands of drugs and placing them on different tiers with varying patient cost-sharing. Impact: This is the primary driver of your work. A drug’s non-preferred or non-formulary status is the reason a PA is required. Understanding that this decision is based on net cost (after rebates) rather than list price is crucial.
Claims Adjudication	Operating the electronic system that processes prescription claims from pharmacies in real-time. The PBM’s system verifies patient eligibility, coverage, and cost-sharing at the moment the prescription is filled. Impact: You interact with the output of this system daily. A “PA Required” rejection is a real-time message from the PBM’s adjudication engine based on the formulary rules they have programmed.
Rebate Negotiation	Negotiating with pharmaceutical manufacturers to obtain discounts, or rebates, in exchange for placing their drugs on the formulary, often in a preferred position. This is a core driver of PBM profitability. Impact: This is the “secret sauce” behind formulary design. The existence of a large rebate on Drug A is often the reason it is preferred over the clinically similar Drug B, even if Drug B has a lower sticker price. Your PA for Drug B is an attempt to override this financial arrangement for clinical reasons.
Utilization Management (UM)	Implementing programs to ensure drugs are used appropriately and cost-effectively. This includes prior authorization, step therapy, quantity limits, and formulary exceptions. Impact: This is the functional area where your job resides. You are working within the framework of the PBM’s UM department. Understanding their goals helps you frame your requests more effectively.
Pharmacy Network Management	Creating and managing a network of retail, mail-order, and specialty pharmacies that agree to the PBM’s terms and reimbursement rates. PBMs can offer preferred networks with lower copays to steer patients to certain pharmacies. Impact: This explains why some PAs are for “non-preferred pharmacies” and why patients are often pushed towards the PBM’s own mail-order or specialty pharmacy. It’s a key channel control strategy.

24.1.3 The Three Pillars of PBM Revenue: A Deep Dive

While PBMs engage in many activities, their revenue is primarily derived from three core pillars. Understanding the mechanics of each pillar is essential to comprehending the “why” behind any formulary decision or PA requirement. We will now perform a masterclass-level deconstruction of each one.

Pillar 1: Manufacturer Rebates – The Engine of the Formulary

This is, without question, the most significant and influential revenue stream for large PBMs. A rebate is a retroactive payment made by a pharmaceutical manufacturer to a PBM. In exchange for this payment, the PBM agrees to provide a benefit to the manufacturer’s product, most commonly by placing it on a preferred formulary tier. This simple transaction is the engine that drives the entire formulary management industry.

The core concept revolves around the difference between a drug’s “list price” and its “net price.”

• Wholesale Acquisition Cost (WAC) or “List Price”: This is the official, publicly stated price for a drug before any discounts or rebates are applied. It is the price manufacturers use when selling to wholesalers.
• Net Price: This is the actual price the PBM’s client (the health plan) effectively pays for the drug after the rebate and any other discounts are accounted for.

The PBM’s primary value proposition to its clients is its ability to lower the net price of drugs through its negotiating power. By aggregating the purchasing volume of millions of patients, a PBM can go to a manufacturer and essentially say, “We control access to 50 million lives. If you provide us with a substantial rebate, we will make your drug the preferred option for our members. If you do not, we will make your competitor’s drug preferred and put your drug on a non-preferred tier with a high copay and a prior authorization requirement.” This ability to move market share is the PBM’s greatest leverage.

How Rebates are Shared (or Not Shared)

A critical point of contention in the PBM industry is the transparency and distribution of these rebates. The PBM negotiates the rebate with the manufacturer. At the end of a quarter or year, the manufacturer pays the PBM the total rebate amount based on the volume of the drug that was dispensed to the PBM’s members. The PBM then has a contractual obligation with its client (the health plan) that specifies how this rebate money is handled.

• Pass-Through Model: In this more transparent model, the PBM passes 100% (or a very high percentage, like 95-98%) of the rebate back to the health plan client. The PBM’s profit in this model comes primarily from its administrative fees. This model is becoming more common due to pressure from large employers and government entities for greater transparency.
• Traditional/Shared Model: In this opaque model, the PBM keeps a portion of the rebate as part of its profit. The contract might be worded vaguely, such as “PBM will share a portion of rebates with the client.” The client may not know the full rebate amount and therefore cannot know how much the PBM is retaining. This retained portion of the rebate becomes a major, often hidden, revenue stream for the PBM.

Pillar 2: Administrative Fees – The Cost of Management

This is the most straightforward and transparent of the PBM revenue streams. PBMs charge their clients fees for the services they provide. These are analogous to the fees you might pay a payroll company or an accounting firm to manage a part of your business. These fees are typically structured in a few common ways:

• Per Member Per Month (PMPM) or Per Employee Per Month (PEPM): The PBM charges the health plan a fixed dollar amount every month for each member covered under the plan. For example, a PBM might charge a self-insured employer $5.00 PMPM. If the employer has 10,000 employees and dependents on the plan, the PBM receives $50,000 per month ($600,000 per year) in administrative fees.
• Per Claim Fee: In addition to, or instead of, a PMPM fee, the PBM may charge a small fee for every single prescription claim it processes. For example, they might charge $0.50 per claim. If the plan members fill 1 million prescriptions in a year, this generates $500,000 in revenue.
• Fees for Clinical Programs: PBMs often offer a suite of optional clinical management programs, each with its own fee. These can include Medication Therapy Management (MTM), adherence programs for chronic diseases like diabetes, or fraud, waste, and abuse monitoring.

While these fees are a significant source of revenue, they are generally well-understood and contractually defined. They represent the payment for the PBM’s operational infrastructure—its computer systems, call centers, clinical pharmacists, and account managers. From a PA specialist’s perspective, these fees are less directly influential on day-to-day work than rebates, but they form the baseline profitability that allows the PBM to operate.

Pillar 3: Spread Pricing – The Hidden Margin

Spread pricing is perhaps the most controversial and least understood PBM revenue stream. It is a practice where a PBM earns a profit on the transaction between the pharmacy and the health plan. In essence, the PBM charges the health plan client more for a prescription than it reimburses the pharmacy that dispensed the drug, and keeps the difference or “spread.”

This practice is most common with generic drugs and in certain markets, particularly Medicaid Managed Care and self-funded employer plans. Unlike rebates, which are based on negotiations with manufacturers, spread pricing is a margin extracted directly from the claim transaction itself. The practice is often hidden because neither the pharmacy nor the health plan has visibility into both sides of the transaction. The pharmacy only sees what it was paid; the health plan only sees what it was charged.

24.1.4 Ancillary Revenue & Vertical Integration: Owning the Supply Chain

Beyond the three main pillars, the largest PBMs have developed sophisticated ancillary revenue streams by vertically integrating—that is, by buying or creating companies that operate at different points in the pharmaceutical supply chain. This allows them to capture profits at multiple stages of a drug’s journey from the manufacturer to the patient.

Owning the Pharmacies: Mail-Order and Specialty

The most significant form of vertical integration is PBM ownership of their own pharmacies.

• Mail-Order Pharmacies: PBMs operate enormous, highly automated mail-order pharmacies. They use their plan design to heavily incentivize or even mandate that patients use their mail-order pharmacy for 90-day supplies of maintenance medications. This allows them to capture the pharmacy dispensing revenue that would have otherwise gone to a community pharmacy like Walgreens or a local independent.
• Specialty Pharmacies: This is an even more lucrative area. PBMs own the largest specialty pharmacies in the country (e.g., CVS Specialty, Accredo by Express Scripts, Optum Specialty). They can then designate these pharmacies as the exclusive dispensers for high-cost specialty drugs (for oncology, rheumatology, MS, etc.). If a patient needs a specialty drug, the PBM can require that it be filled only at their own specialty pharmacy. This gives them complete control over the dispensing of the most expensive drugs on the market, allowing them to capture the full margin on these products.

Impact on Your Work: This is why you frequently encounter rejections that are not clinical, but logistical. A claim might reject with a message like “Prescriber must send Rx to Accredo Specialty” or “90-day supply only available via CVS Mail Order.” This is the PBM enforcing its channel control strategy to direct prescriptions to its own internal, profit-generating pharmacies.

Other Revenue Streams

PBMs also generate revenue through several other, more niche avenues:

Revenue Stream	Description
Data Sales	PBMs process billions of prescription claims per year. This generates an incredibly valuable trove of de-identified patient data. They can aggregate and sell this data to pharmaceutical manufacturers for marketing and research purposes, to data analytics companies, and to Wall Street analysts.
Pharmacy DIR Fees	In the Medicare Part D space, PBMs charge pharmacies “Direct and Indirect Remuneration” (DIR) fees. These are retroactive fees, often based on complex and opaque “performance” metrics, that are clawed back from pharmacies months after a prescription has been dispensed. This has been a source of extreme financial pressure on pharmacies and is a complex topic we will cover in a later module.
Group Purchasing Organizations (GPOs)	Some PBMs operate or are affiliated with GPOs, which are entities that negotiate prices for a variety of healthcare products and services, not just drugs. This allows them to leverage their negotiating power in other areas of healthcare.

24.1.5 Synthesis: Connecting PBM Economics to Your Daily PA Workflow

We have deconstructed the complex and often opaque business models that power the PBM industry. Now, we must synthesize this knowledge and apply it directly to your role as a CPAP specialist. Every economic driver we have discussed manifests as a specific type of challenge or rejection on your desk. Understanding the financial motivation behind the rejection is the key to overcoming it.

Common PA Rejection / Hurdle	Underlying PBM Economic Driver	Your Strategic Response
“Non-Formulary / PA Required for Brand X”	Rebates. The PBM has a contract with the manufacturer of a competing drug (Brand Y) that provides a larger rebate, resulting in a lower net cost. The PA is a barrier to prevent the use of the higher-net-cost drug.	Acknowledge the formulary alternative in your appeal. Your clinical argument must focus on why the preferred agent is clinically inappropriate for this specific patient (e.g., “Patient failed a 90-day trial of preferred agent Brand Y,” or “Patient has a documented contraindication to Brand Y due to…”).
“Step Therapy Required”	Rebates and Generic Preference. The required “step 1” drug is either a generic (which has no rebate but a very low cost) or a brand with a large rebate. The PBM wants to ensure the cheapest options are tried first before moving to a more expensive agent.	Your appeal must be a forensic review of the patient’s medication history. You must provide clear evidence (pharmacy fill records, chart notes) that the patient has already tried and failed the required step agent(s). Frame it as preventing a duplicative and clinically unnecessary trial.
“Must be filled at ABC Specialty Pharmacy”	Vertical Integration / Owned Pharmacies. The PBM owns ABC Specialty Pharmacy. By mandating its use, the PBM captures the pharmacy dispensing revenue and profit margin on the most expensive drugs.	This is typically a hard rule that cannot be bypassed with a clinical argument. Your role shifts to logistics. You must facilitate the transfer of the prescription to the mandated pharmacy, ensuring no lapse in therapy for the patient. Counsel the provider’s office on the required workflow.
High patient cost-share for a covered generic.	Possible Spread Pricing. The PBM may be paying the pharmacy a low amount for the generic but billing the health plan a much higher amount. The patient’s coinsurance or deductible may be based on this higher, inflated price, not the true acquisition cost.	This is difficult to fight directly. Your strategy becomes patient assistance. Research manufacturer copay cards (if it’s a brand), patient assistance programs, or cash discount programs (like GoodRx) that may offer a price lower than the patient’s insurance cost-share. You are working around the system, not through it.

By internalizing these connections, you elevate your practice. You are no longer just reacting to a denial; you are diagnosing the financial rationale behind it. This allows you to focus your efforts, manage expectations for providers and patients, and craft appeals that are not only clinically sound but also strategically aware of the economic landscape in which you operate. This is the hallmark of a Certified Prior Authorization Pharmacist.