A Look at the PBMs: An Analysis of How the Largest Healthcare Companies in the World Make Money

6 min readJan 20, 2022


The largest companies in American healthcare are multi-billion-dollar enterprises covering hundreds of millions of patient lives — yet despite interacting with them regularly, most people have never heard of them and may not even be aware of their existence. These companies are called Pharmacy Benefit Managers, or PBMs, and they enter the picture whenever one is dealing with pharmacy benefits for insured patients. PBMs are third-party administrators designed to manage prescription drug programs for large companies, such as employers, health insurance companies, and the government. Any time you fill a prescription at the pharmacy, a PBM adjudicates the claim behind the scenes, telling the pharmacy how much they will pay to reimburse for a specific medication, and even how much to collect from you as a copay.

As a vivid example of how lucrative this relatively niche industry can be, Oracle purchased Cerner Corporation, a medical records specialist, for close to $30 billion. Despite being an enormous player in the space, Cerner is not a household name for patients — indeed, the process of becoming a household name in healthcare is extremely difficult and time consuming. But for top PBMs, staying power trumps name recognition, and their staying power has been handsomely rewarded.

In the last year alone, the top three PBMs in the United States grossed a collective $28 billion dollars in profit and achieved a combined market capital of $276 billion based on revenues earned by facilitating the healthcare ecosystem.

This revenue translates to a massive grip on the pharmacy market. In fact, a full 75% of prescription claims are adjudicated by one of the three largest PBMs, and about 95% of all claims are handled by one of the six largest pharmacy benefit managers. Despite a growing awareness of the problems and pitfalls created by the PBMs, their consolidation over the last couple years is only compounding their market dominance.

To figure out how we got here, let’s rewind. In 1988, United Healthcare, one of the largest national insurers at the time, established Diversified Prescription Delivery, a new type of healthcare entity designed to negotiate with pharmaceutical companies on their behalf. This newly-founded PBM collected massive data on patient prescription usage and developed the first ever pharmacy drug formulary. Until this time, it was largely up to patients to deal directly with either the drug makers or pharmacies to negotiate the price of prescription drugs.

There was no protection in place to prevent a drug maker from overpricing their medication and, as a result, price reliability became an issue for every patient. This gave rise to organic demand for Diversified Prescription Delivery services to provide price stability and optimized billing processes by unifying a large number of pharmacies all over the country. In 1994, for example, drugstore chain CVS established PharmaCare, a second PBM (renamed CVS-Caremark in 2007). The third dominant PBM, Express Scripts, grew out of SmithKline Beecham’s PBM and a Merck-Medco merger in 2012. Since that time, PBMs have adopted a larger role by expanding their list of services and shifting their focus to streamlining pharmaceutical cost management.

Many healthcare analysts argue that PBMs have since hijacked the prescription drug market, a detriment to providers, patients, and pharmacies alike.

A PBM generates revenue from facilitating pharmacy-related transactions with independent pharmacies, as well as by engaging in strategic partnerships with chain pharmacies like CVS and Walgreens. The PBMs oversee an entire ecosystem (both producers and sellers) of prescription medication; they capture a large percentage of the $358 billion of drug expenditures on the 300 million prescriptions that American citizens received in the year 2020. What’s not obvious are the lesser-known practices that PBMs have implemented to help them maximize their profits:

PBMs analyze the balance sheet of local mom and pop pharmacies so that they can optimize for high-profit generating medications, and force patients to fill these medications through a PBM-affiliated pharmacy, instead of the local retail pharmacy.

In essence, PBMs are picking and choosing which drugs they will and will not reimburse on the local pharmacy level. PBMs also pay independent pharmacies much less than they pay their own pharmacies to dispense medications. These medications are generally expensive and highly profitable for the pharmacy that dispenses them. By operating mail order pharmacies, PBMs can specialize and gain an economy of scale on the prescription dispensation market.

PBMs and their affiliates are increasingly investing in an array of services and capital projects.

Some of these creative investments remain in the pharmacy business while others branch out. Optum, for example, is responsible for a recent $142 million investment in Truepill, a digital pharmacy, in 2021, as well as the acquisition of Diplomat Pharmacy for over $300 million in 2019. Centene has expanded its PBM business by establishing a new PBM, Envolve Pharmacy Solutions, investing millions in RxAdvance (another PBM), and purchasing a specialty pharmacy, PantherRx, for an undisclosed amount. In 2020, United Healthcare made a $500 million investment in public housing and has been doubling down on its in-home care services.

United Healthcare is not alone. Many of the big-name insurers are expanding service into the provider space, whether it’s virtual care/primary care services, hospice care, or home infusion. This reflects a movement into the healthcare services sector which is not as regulated.

Where does all this money come from?

PBMs generate revenue from five main channels:

  1. Rebate sharing: Insurance companies pay PBMs a fixed fee to manage drug costs and negotiate rebates from drug manufacturers. When PBMs negotiate these rebates, they retain a portion. Further, the manufacturer will pay the PBM for preferred placement on the PBM’s formulary. Instead of selecting the most medically-effective medications, PBMs are encouraged to select medications that yield higher rebates.
  2. Administrative fees: Charged to pharmacies for the electronic processing of each pharmacy claim. The fees typically range from a dollar to five dollars per script, in addition to a fee of $0.10 to $0.15 per claim.
  3. Pharmacy spread: This is a spread between the price a PBM bills a health plan or public payor and the price the PBM reimburses to the pharmacy. It is generally all kept as profit for the PBM.
  4. Direct and Indirect Remuneration (DIR) fees charged to dispensing pharmacies: These DIR fees include pay-to-play fees for participation in the PBMs network, fees for non-compliance with quality measures, and fees for periodic reimburse-reconciliations.
  5. PBM-owned pharmacies: As a recent trend, PBMs have amassed a large number of retail and mail-order pharmacies and they profit when patients are forced to use mail-order and purchase exclusively from them.

The so-called “quality measures” are generally unknown, unpredictable, and out of a pharmacy’s control, so it’s unclear they improve quality — but the use of DIR fees has exploded more than 90,000% in the last decade and has generated notable PBM revenue. In reality, periodic reimburse-reconciliations refers to the practice of “clawing back” profit from a pharmacy when the consumer copay is higher than the full cost of the drug, and this is kept as sole profit for the PBM rather than returned to consumers. To make matters worse, it’s not uncommon for PBMs to add “gag clauses” into their pharmacy contracts that are intended to prevent a pharmacist from telling a patient when it is cheaper to purchase a specific medication in cash and not utilize their insurance plan. Practices like this are not only predatory to mom-and-pop pharmacies, but also cause harm to patients.

Stay tuned for Part 2 (coming soon) to find out why this arguably hurts American consumers!

Follow JC Telemedicine on Twitter, LinkedIn, and Facebook, and visit us online. For more information about telemedicine, PBMS, or how we can help scale your practice for the digital age, feel free to send us a message. You can book time with JC Telemedicine here: https://calendly.com/jctelemedicine