PBM profits obscured by accounting and mergers, USC report finds

Pharmacy benefit managers (PBMs) have long defended themselves against criticism over high drug costs by pointing to profit margins in the single digits.

A new analysis from the University of Southern California’s Schaeffer Center for Health Policy & Economics says those numbers may be more about accounting and corporate structure than about genuinely lean profits.

The white paper, released this month, finds that the three largest PBMs — which together control about 80% of the prescription drug market — can use standard accounting choices and vertical integration with insurers and specialty pharmacies to present margins of 4% to 7%, even when the underlying business is far more lucrative.

“Accounting practices make it difficult to judge the health and efficiency of the PBM market, particularly as dominant firms have become part of larger, more complex companies,” lead author Karen Mulligan, Ph.D., a research scientist at the Schaeffer Center, said in a news release. “Greater financial disclosure requirements for PBMs are needed to develop a better picture of how PBMs make money and the extent to which these practices may raise costs for consumers.”

The paper, “Hidden Profits? How Accounting Conventions and Vertical Consolidation Can Obscure PBM Profitability,” lands as Congress, federal regulators and state legislators weigh how to rein in PBM business practices that affect which drugs patients can get and how much they pay.

How a $360 drug turns into a 10% — or 87% — margin

PBMs sit at the center of the pharmaceutical supply chain. They design and administer prescription benefits for insurers and employers, reimburse pharmacies and negotiate rebates with drug manufacturers. In that role, they handle large “pass-through” payments that move between manufacturers, health plans and pharmacies but are not retained by the PBM.

Those flows are crucial to how PBM margins are reported.

Under current accounting rules, PBMs have substantial discretion about whether to book pass-through dollars as both revenue and expense, or to leave them off the income statement altogether. The cash flows don’t change, but the apparent profitability does.

The USC team demonstrated a hypothetical situation built around a brand-name drug with a list price of $360, showing how the same underlying transaction can produce very different margins on paper:

1. When pass-through payments are included as revenue and expense, the PBM’s margin works out to about 10%.
2. If manufacturer rebates that are sent straight to the insurer are not reported, the margin ticks up to roughly 13%.
3. If pass-through payments are excluded entirely, the margin jumps to 87% on the same drug.

All three scenarios are consistent with professional accounting standards, according to the paper. Mulligan and co-author Darius Lakdawalla, Ph.D., argue that makes headline PBM margin figures a poor guide to how competitive or efficient the market really is.

Vertical integration and blurred lines

The authors say consolidation over the past decade has added another layer of confusion.

The “big three” PBMs are now owned by diversified health care corporations that also control insurers, specialty or mail-order pharmacies and group purchasing organizations. Within those parent companies, flows of money that once ran between separate firms are now internal transfers.

In another example built on the same $360 drug, the report shows a vertically integrated arrangement in which the insurer, PBM and specialty pharmacy all belong to the same corporate family. The PBM segment initially records much of the revenue. Then, through internal payments to the affiliated specialty pharmacy, dollars are shifted to a different business unit.

From the outside, consolidated financial statements often present that activity as a single segment that bundles PBM services with specialty pharmacy and rebate aggregation. Internal accounts, however, may show robust profits at the parent-company level that are not obvious in the PBM’s reported margin.

“True transparency requires greater visibility into profit flows hidden inside increasingly complex corporate structures,” said Lakdawalla, chief scientific officer at the Schaeffer Center and the Quintiles Chair of Pharmaceutical Development and Regulatory Innovation at the USC Mann School. “Building a more efficient and sustainable pharmaceutical supply chain starts with a better understanding of where dollars are flowing.”

The paper also points to revenue streams that are often buried in aggregate line items, including certain fees and post-sale price concessions in Medicare Part D, warning that those can further complicate efforts to understand how PBMs make money.

Oversight push

The findings join a growing push from states in recent years to increase PBM transparency.

The Federal Trade Commission (FTC) released an interim staff report in 2024 describing PBMs as powerful middlemen that can inflate drug costs and squeeze independent pharmacies, and noted that six major PBMs manage 94% of prescriptions filled in the United States.

A second FTC interim staff report in January 2025 found that the three largest PBMs imposed significant markups on a wide range of specialty generic drugs while paying high reimbursement rates to their affiliated pharmacies.

On Capitol Hill, lawmakers from both parties have debated proposals to delink PBM compensation from drug list prices, restrict spread pricing in Medicare and Medicaid and expand transparency requirements around rebates and fees. States have advanced their own laws to shine more light on PBM contracts in Medicaid and state-regulated plans and to limit practices that shift costs onto patients or community pharmacies.

In a January 2025 conversation with Medical Economics about PBM reform, Rep. Greg Murphy, M.D., (R-North Carolina), argued that the model has drifted from its original purpose.

“Just like Medicare Advantage started out with a good idea, the same thing with pharmacy benefit managers, where they would try to keep prices low,” Murphy said. “But what’s happened again [is] our insurance company executives have used profit as a motive, and so they are paid a percentage of what the pharmaceutical costs. So they really have an adverse incentive to try to keep costs down… It’s again turned into a perverse system where they’re siphoning off money in the middle, and it’s not going to the patients who should have it, or it’s not really going significantly to lowering drug costs.”

Murphy was speaking broadly about PBM incentives, but the concern echoes what the USC paper describes from an accounting perspective: the methods by which money is routed and recorded can make it difficult for policymakers, employers and patients to see how much money PBMs keep, how much they pass through and where exactly profits arise in the drug supply chain.

The white paper does not endorse specific legislation. It does, however, suggest that debates over PBM profits may be built on incomplete or misleading information if policymakers rely solely on reported margin figures.

What transparency looks like

Mulligan and Lakdawalla outline several steps they say could give regulators a clearer view of PBM profitability without dictating drug prices.

One option would be to require PBMs to exclude pass-through payments from revenue and expense lines in their financial reporting, similar to rules for intermediaries in other industries. That would remove the large, low-margin flows that can dilute margins and leave behind the fees and retained rebates that are closer to true earnings.

Another would be to tighten segment reporting requirements for vertically integrated health care corporations.

Instead of allowing companies to combine PBM services, specialty pharmacy and other functions into a single business line, regulators could insist on separate reporting for each.

The authors also suggest requiring disclosure of internal transfers and pass-through payments between affiliated business units. Those details would not prevent vertical integration, but they would make it easier for lawmakers and researchers to map how profits move through the drug supply chain.

For physicians, especially those in private practice, the inner workings of PBM accounting can feel remote from day-to-day work. But the same rebate contracts, fees and internal transfers that shape PBM profits are tied to prior authorization rules, step therapy and formularies that determine which medications patients can actually get.

The Schaeffer paper does not predict how any particular reform would change drug coverage, nor does it take a position on whether PBMs’ overall compensation is too high. Its core argument is narrower, though — before policymakers decide how to reshape the PBM business, they need a more accurate, transparent picture of how these companies earn their money.