Pass-Through PBM vs. Spread Pricing: What Your Pharmacy Benefit Is Hiding

Two Invoices, One Prescription

Here is the transaction most plan sponsors never see. A member fills a generic prescription. The pharmacy is reimbursed $12 for it. The PBM invoices the plan $38 for the same fill. The $26 difference — the "spread" — is PBM revenue, and it appears on no invoice, no report, and no disclosure the plan sponsor receives.

Multiply that across every fill, add retained rebates on brand drugs, and pharmacy becomes the least transparent line in a self-funded plan — which is remarkable, because it's also the line with the most transactions to hide the margin in.

Where Traditional PBM Money Comes From

A conventional PBM contract has three revenue streams the plan can't see clearly:

• Spread pricing. The PBM bills the plan more than it reimburses the pharmacy and keeps the difference. Spreads concentrate on generics, where the gap between acquisition cost and billed price is widest — and where "your generic fill rate is 90%!" sounds like good news.
• Retained rebates. Drug manufacturers pay rebates to secure formulary position. A traditional PBM passes some share to the plan and keeps the rest, along with adjacent payments labeled as administrative fees, data fees, or "price protection" — none of which usually count as "rebates" under the contract's definition of what gets shared.
• Formulary conflicts. When PBM revenue depends on rebate volume, the formulary drifts toward high-rebate brand drugs — which are frequently not the lowest-net-cost option for the plan. The plan pays more so the PBM can earn more.

None of this is illegal, and the contracts are written carefully. But if you can't answer "how does our PBM make money?" from your own contract, the answer is: from you, in ways you can't audit.

What Pass-Through Means

A pass-through PBM removes the hidden streams by construction:

• The plan pays what the pharmacy is paid. Claim by claim, the reimbursement to the pharmacy and the invoice to the plan are the same number.
• Revenue is a disclosed fee. The PBM earns a stated per-member or per-claim administrative fee. That's the business model, visible on every invoice.
• Rebates are reported, not absorbed. What the manufacturer paid and where it went is visible to the plan sponsor — so the formulary can be built on net cost instead of rebate volume.

The consequence that matters: a pass-through PBM has no financial reason to prefer an expensive drug over a cheap one. Cost-plus pharmacies, warehouse-club pricing, low-net-cost generics — a pass-through model can route to whatever is cheapest for the plan, because it doesn't lose margin by doing so.

The Operational Detail Everyone Forgets: Accumulators

Pharmacy claims adjudicate in real time at the counter, on separate rails from medical claims. If your plan has a combined medical + pharmacy deductible and the two systems don't sync accumulators reliably, members get overcharged at the pharmacy after meeting their deductible on the medical side — and then someone has to notice, and then someone has to fix it.

When you evaluate any TPA + PBM pairing, ask specifically: how do medical accumulators reach the pharmacy system, how often, and what's the correction process when a member is charged wrong? "We send a file" is the beginning of an answer, not the whole one.

Questions to Ask Any PBM (or the TPA Proposing One)

1. Do you retain any spread between what the plan pays and what the pharmacy receives? Show the two numbers on a sample claim.
2. Is 100% rebate pass-through written into the contract — and how does the contract define "rebate"?
3. What audit rights does the plan have, and who pays for the audit?
4. Is the formulary built on net cost or rebate value? Who owns the P&T decisions?
5. How do medical and pharmacy accumulators stay in sync, and at what cadence?
6. What exactly is your revenue on this contract? If the answer isn't one sentence, keep asking.

How SmartTPA Structures Pharmacy

We are not a PBM, and we don't want to be one — a TPA that owns the pharmacy margin has the same conflict a traditional PBM does. Instead, your pharmacy benefit runs through an independent PBM partner selected for its pass-through model: one disclosed fee, no spread, rebate transparency, and sourcing that includes cost-plus and warehouse pharmacies when they're cheapest for the plan.

Two structural details we insist on: the PBM bills your plan directly, so pharmacy dollars never route through our books — we hold no hidden pharmacy margin by design — and pharmacy accumulators sync with the medical plan so combined deductibles work the way the SPD says they do.

If you'd like to see what your pharmacy spend looks like without the spread in it, request a proposal — bring a recent PBM invoice and we'll walk through it line by line.