How PBMs Make Money in the Medicare Part D Market – A GAO Report Analysis

By Ann VanBoxtel
Thu, Sep, 19, 2019

The U.S. Government Accountability Office (GAO) examined 20 service agreements between pharmacy benefit managers (PBMs) and part D plan sponsors (Dicken et al). The main objective of the review was to take a close look at the role of the PBM in Part D plans. This included examining services the PBM provides, tracing rebates and price concession trends, and how PBMs earn money through serving Part D plans. Data was examined from 2014 to 2016 (when the data was most recently available). Importantly, the GAO’s report did not include a review of the actual pharmaceutical manufacturer rebate contracts to verify that they were correctly managed. (We will come back to that point later.)

The GAO report found that the primary source of revenue for PBMs was volume-based service fees paid by plan sponsors for claims processing. The second highest source of revenue was a flat per-member, per-month fee, and third was a combination of the two above. In short, PBMs make the most revenue from service fees paid directly by plan sponsors.

When it comes to rebates, GAO found that PBMs passed nearly all reported rebates (99.6%) through to plan sponsors in 2016. That year, plan sponsors reported to CMS that PBMs retained $74.3 million (0.4%) in rebates of the $18 billion that were passed through. Rebates and other price concessions increased from 14% to 20% of gross expenditures from 2014 to 2016. As a result, net Part D expenditures increased 13% from $103.2 billion to $116.1 billion from 2014 to 2016.

To calculate rebates and other price concessions charged by PBMs, they used Medicare prescription drug event (PDE) data to calculate gross expenditure. Rebates were calculated using direct and indirect renumeration (DIR) fees reported by plan sponsors to CMS, then they were subtracted from the gross expenditure to achieve the net expenditure. 

They found even smaller revenue earnings when looking at spread pricing (the difference between the PBM’s payment to the pharmacy and the amount the PBM charged the plan for a drug). PBMs earned approximately $300,000 from spread pricing in 2016. Data also shows that PBMs earned a negligible amount of revenue from spread pricing in 2014 and 2015. Generally, spread pricing revenue and rebate retention are both higher in commercial plans compared to Part D plans, according to officials from 3 different PBMs.

The GAO report found that the highest utilized brands sold in retail pharmacies received median net discounts of 41% off the manufacturer list prices (as a final cost to the plan sponsor). Of the specialty drugs that were included in the analysis, they found fewer discounts—net prices were only 16% off the manufacturer list prices. To summarize, drugs sold in retail pharmacies received 2.5 times more discounts than drugs sold in specialty pharmacies.

Finally, the GAO looked at utilization management (UM) tools for their effectiveness in saving money and increasing health outcomes for beneficiaries. Through an analysis of 52 peer-reviewed studies, they found that financial savings are, in fact, associated with UM practices. They also found that UM practices increased beneficiary health outcomes through a reduction in adverse drug events. Mixed results were found when examining medication adherence.

Burchfield commentary:

While the report highlights aggregated data gleaned from all Part D sponsors, PBM service agreements (from the largest sponsors by enrollment), and other data points, some of the information could be useful in benchmarking your own contract with your PBM (especially around rebate retention rates by PBMs). There are also gems within the report that can be used to help understand how your plan compares to other plans with regard to how you structure your business, like page 14 which reads “Seventy-four percent of the drug benefit management services … were performed by a PBM alone or in conjunction with a Part D plan sponsor in 2016. We found that plan sponsors performed the remaining 26 percent of services themselves.”

A limitation to keep in mind - the report commentary about PBM contracts is drawn from the GAO’s review of the top 20 service agreements between sponsors and PBMs, based on enrollment. In other words, contracts from the biggest sponsors in Part D. So not all observations from their review may be pertinent to your organization.

Another key item – while the GAO found that approx. 99% of rebates were passed through to plan sponsors, keep in mind that the GAO did not conduct an in-depth review of whether those rebate dollars were correct. Meaning, the GAO did not independently review the contracts held between the PBM and drug manufacturers to determine if the rebates received by plan sponsors were the correct dollar amounts – they simply validated whether PBMs were keeping the rebate payments they received from drug manufacturers vs. passing those amounts back to the plan sponsor. So, the GAO did not review whether the rebate amounts were the correct rebate amounts that should have been paid. And, in our experience, we find that rebate amounts were not accurately invoiced and paid to Part D sponsors in about 60% of all engagements we conduct.

Similarly, while the GAO report examined the discounts on branded medications, the GAO was not independently verifying whether the branded medications actually achieved the rates stated in the contract between the sponsor and the PBM.

A few other key points:

  • Page 40 has greater detail of the services PBMs perform for all Part D sponsors.
  • Page 43 has an excellent breakdown of services each PBM performs for services to Part D sponsors. The functions that sponsors outsource to PBMs, and those they do not, may surprise you.
  • Page 55 has some breakdown of the brand discounts (from AWP) the GAO observed for high cost drugs, high expenditure drugs, and high cost per utilization drugs. Page 60 has the similar chart for generic drugs.


1. Dicken, John E., et al “Use of Pharmacy Benefit Managers and Efforts to Manage Drug Expenditures and Utilization.” GAO Highlights , 15 July 2019, pp. 1–85.,