A truly transparent PBM arrangement starts with full disclosure of direct and indirect compensation.
Employers have spent years trying to truly understand the pharmacy benefit manager (PBM) business model: how PBMs make money, negotiate discounts, set formularies and reimburse pharmacies. Rising pharmacy costs have created increasing pressure to gain clarity and that pressure is finally changing the conversation. Federal scrutiny, new reporting requirements, and proposed disclosure rules are creating more visibility into PBM compensation and business practices.
But transparency is not the same thing as accountability. It will not lower costs, improve clinical outcomes or satisfy fiduciary obligations on its own. At best, it gives employers a clearer view of a system that has long been difficult to understand. The real test is whether employers use that visibility to govern their pharmacy benefits with more discipline.
That distinction matters as more vendors market themselves as transparent PBMs. The term can mean very different things. A stronger model should do more than provide reports or promise 100% rebate pass-through. It should allow the employer to trace every dollar flowing through the pharmacy benefit, validate pricing and rebates, understand the clinical decision-making process and retain meaningful control over plan strategy.
A truly transparent PBM arrangement starts with full disclosure of direct and indirect compensation. Employers should know what they pay the PBM and what the PBM, its affiliates, subsidiaries, rebate aggregators, specialty pharmacies and related entities receive from manufacturers, pharmacies or other parties. That includes rebates, administrative fees, price-protection payments, data fees, service fees, spread amounts, specialty pharmacy economics and any other remuneration tied to the employer’s prescription drug program.
Contracts that say “pass-through” without defining the full universe of compensation can leave meaningful dollars outside the employer’s view. Employers should require compensation schedules that identify each payment category, who pays it, who receives it and whether it is retained, shared or passed through to the plan. Those definitions belong in the main agreement, not in PBM-controlled exhibits that can be interpreted or revised over time.
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Price transparency also must go beyond rebate accounting. Employers need claim-level visibility into dispensing fees, pricing benchmarks, fulfillment channel, pharmacy reimbursement and net cost. Drug reimbursement is not based on a single price. PBMs may use benchmarks such as average wholesale price, wholesale acquisition cost, national average drug acquisition cost, maximum allowable cost or proprietary formulas. Each can produce a different dollar amount for the same drug. If the contract does not specify the benchmark, how it is updated and who controls changes, the employer cannot reliably compare bids, verify pricing or manage total drug spend.
Auditability is the other half of transparency. Data has limited value if the employer cannot independently validate it. Audit rights should be annual and for cause, conducted by an independent auditor chosen by the employer, and should extend to all entities involved in administering the pharmacy benefit, including specialty pharmacies and rebate aggregators. Employers should avoid contract terms that restrict timing, sample size, methodology, location or access to records. When discrepancies are found, the agreement should include clear repayment, corrective action and enforcement provisions.
Clinical transparency is equally important. Too often, employers focus heavily on rebates, discounts and guarantees while paying less attention to the decisions that drive utilization and cost over time. Formularies, prior authorization, step therapy, appeals and exclusions, specialty pharmacy strategies and biosimilar adoption may appear clinically appropriate, but they are not always economically neutral. Employers should understand who makes formulary decisions, what evidence is reviewed, how conflicts are disclosed and whether affiliate relationships or rebate arrangements influence preferred products or channels.
This is where the conversation about transparent PBMs can get too narrow. Pass-through pricing, fixed administrative fees, stronger data access and less reliance on spread pricing or retained rebates can be meaningful improvements over traditional arrangements. But choosing a transparent (sometimes referred to as alternative) or mid-market PBM is not, by itself, a strategy. Pharmacy costs are driven by utilization, clinical management, specialty drug oversight, member behavior and contract enforcement. Changing platforms without upgrading governance simply relocates the problem. Still, employer case studies show the potential. Employers that moved beyond rebate-focused approaches and used transparent PBM models to pursue lowest-net-cost strategies, expand biosimilar use, carve out high-cost specialty drugs and strengthen vendor accountability have reported substantial savings while maintaining a strong member experience. The common denominator was not simply a different PBM, but a more active and disciplined approach to pharmacy benefit management.
Employers also should be cautious about “rebate-free” models. Rebate dollars do not simply disappear. If the model reclassifies revenue into administrative fees, data fees, service fees, spread pricing or other opaque charges, the employer may have less visibility rather than more. True transparency provides line of sight into acquisition cost, pharmacy reimbursement, dispensing fees, administrative charges and all retained revenue, regardless of label.
Employers are paying attention because the stakes are significant. In MBGH’s latest Pulse of the Purchaser survey, 86% of respondents supported PBM reform, and employers cited pharmacy benefit priorities including better pricing, more transparency, formulary control and fiduciary duty compliance. Many are considering PBM changes, but the most effective employers will not treat procurement as the finish line. They will retain approval rights over key benefit decisions, require access to claims-level and medical benefit drug data, preserve specialty pharmacy flexibility and establish ongoing governance that reviews pricing, rebates, utilization, guarantees and clinical performance throughout the contract term.
The days when employers could expect double-digit savings simply by changing PBMs or renegotiating guarantees are largely over. The next generation of value will come from active stewardship: validating reported results, optimizing drug selection, promoting clinically appropriate biosimilars, managing specialty utilization, protecting members from unnecessary disruption and holding PBM partners accountable for outcomes.
A transparent PBM matters because employers cannot manage what they cannot see. But visibility is only the starting point. Employers need contracts that define all compensation, data that can be validated, audit rights that can be enforced, clinical programs that can be evaluated and governance processes that keep pharmacy benefit decisions aligned with the best interests of the plan and its members.
Transparency has handed employers a flashlight. Now they must use it.
Cheryl Larson is president and CEO of the Midwest Business Group on Health.
