PBMs Explained: Self-Funded vs. Fully Insured Health Plans

The U.S. employer-sponsored health system is dominated by two financing models – self-funded plans (in which employers assume the financial risk for claims) and fully insured plans (in which employers purchase fixed-premium insurance policies from carriers) – and by pharmacy benefit managers (PBMs) who administer prescription drug benefits on behalf of virtually all health plans. In recent years a clear majority of covered workers are now in self-funded plans: in 2025, 67% of covered workers (including 80% of large-firm employees) were enrolled in self-funded plans (^[1]). Fully insured coverage – still common among small employers – is subject to state insurance regulation (including mandated benefits, reserve requirements, and premium taxes), whereas self-funded plans (being ERISA plans) are largely exempt from state insurance laws (^[2]). The shift toward self-funding reflects employers’ desire for flexibility, data transparency, and potential cost savings, at the expense of assuming greater risk and variability in cash flow (^[3]) (^[4]).

PBMs serve as intermediaries in the prescription drug supply chain. As third-party administrators for insurers and self-funded employers, PBMs design formularies, negotiate prices and rebates with drug manufacturers, establish pharmacy networks (including “preferred” retail and mail-order pharmacies), manage claims processing, and apply utilization controls like prior authorization (^[5]) (^[6]). The largest PBMs (primarily CVS Caremark, Express Scripts, and OptumRx) collectively handle roughly 80% of U.S. retail prescription claims (^[7]). Historically, PBMs have helped expand access to medications and drive generic utilization (over 90% of U.S. prescriptions are now filled with generics (^[8])), but they have also become controversial. PBM business models based on “spread pricing” and rebate retention create opaque pricing, leading to concerns that PBMs pocket large portions of manufacturer rebates and price spreads instead of passing them to plan sponsors (^[9]) (^[10]). Investigations have documented examples of “shadow pricing” (brand manufacturers raising list prices to increase PBM rebates) that may hurt patients on uninsured or high-deductible plans (^[10]). Critics also point to market consolidation – in 2020 three vertically integrated insurer-PBMs controlled most of the market – and to conflicts of interest (for example, when PBMs own pharmacies or are owned by insurers) (^[6]) (^[11]).

This report provides a deep dive into these topics. We begin with the structure and regulation of self-funded and fully insured plans (including stop-loss insurance and level-funding for self-funded plans), supported by data on market share and cost trends. We then explain the role and functions of PBMs: how they negotiate drug prices, how they are paid (pass-through vs. spread-pricing models), and how they influence formulary design and utilization. We review empirical evidence and expert analyses of PBM impacts on drug spending, summarizing the range of views. Case studies illustrate real-world dynamics: for example, one large self-funded employer (Quest Diagnostics) reduced cost trends dramatically through plan redesign and health management (^[12]), and the state of Maine’s PBM rebate transparency law showed measurable changes in PBM revenue splits (^[13]). We also examine regulatory and legislative developments: dozens of state laws now target PBM practices (^[14]), and the FTC's insulin-rebating case has produced settlements involving Express Scripts and Caremark while proceedings involving OptumRx were withdrawn from adjudication for consideration of a proposed consent agreement.

Finally, we explore implications for the future. As prescription drug costs continue to grow (with total drug spending up 10.2% in 2024 to $805.9 billion (^[15])), pressure to reform PBM business practices has yielded concrete results. Federal PBM policy continues to develop: the Department of Labor has proposed a PBM fee-disclosure rule, while the FTC case has produced separate settlements with Express Scripts and Caremark and a withdrawal of the OptumRx matter from adjudication to consider a proposed consent agreement. These developments – along with stricter transparency requirements and alternative payment models – are actively reshaping both employer-sponsored coverage and the drug benefits market. Throughout, we present available data and multiple perspectives (enrollees, employers, insurers, and regulators) to give a balanced view of PBMs and plan funding models, with inline citations for key factual statements.

U.S. healthcare spending is vast and growing. In 2024, national health expenditures reached $5.3 trillion – roughly 18.0% of GDP – up 7.2% from 2023 (^[16]). Retail prescription drug spending reached $467 billion in 2024, up 7.9% from 2023 (^[16]), while total pharmaceutical expenditures across all sectors surged by 10.2% to about $805.9 billion (^[15]), driven especially by new high-cost therapies (e.g. GLP-1 weight-loss drugs and specialty biologics). Out-of-pocket drug spending alone hit $98 billion in 2024. As a result, the annual cost pressures from drugs far outstrip general inflation and are a major focus for employers and policymakers. Because employment-based insurance was the nation’s most common coverage subtype in 2024, covering 53.8% of the U.S. population for some or all of the year (^[17]), the way employers finance drug benefits and the role of pharmacy benefit managers (PBMs) are central to understanding U.S. drug price trends.

Historically, employer-sponsored health coverage in the U.S. arose accidentally in the mid-20th century (from wage controls and tax incentives, see the historical context (^[18])) and later expanded through tax-deductible employer contributions and collective bargaining. By the 1970s, most large firms already offered group health insurance. The Employee Retirement Income Security Act (ERISA) of 1974 established a federal framework for self-funded employer plans, delegating state regulation to persons who acquire insurance (the so-called “deemer clause” means that a self-funded plan is not viewed as insurance for state purposes (^[2])). Thus today the regulatory treatment of a plan depends on how it is funded.

• A fully insured plan is one where the employer contracts with an insurance carrier (or multiple carriers) to cover employees. The carrier sets a fixed premium (often rated by factors like firm size, demographics, and claims history) and assumes the risk for claims. If actual claims exceed the premium, the insurer absorbs the loss; if claims are lower, the insurer keeps the surplus. Fully insured products are generally subject to applicable state insurance regulation, including benefit mandates, rating rules, premium taxes, and reserve requirements where applicable, and are often easier to administer (the insurer handles claims and risk underwriting) (^[19]). For many small employers or firms with unpredictable costs, the guaranteed premiums and tried-and-true regulatory framework make fully insured coverage attractive.

• A self-funded plan (also called self-insured) is one where the employer itself pays for employees’ healthcare claims from its own funds. The employer may hire a third-party administrator (TPA) or consultant to manage claims processing, networks, and compliance, but the employer retains the actuarial risk. Self-funded plans often purchase stop-loss insurance to cap extreme losses: above negotiated attachment points (per-claim or aggregate), the insurer covers claims. Private ERISA self-funded plans generally are not directly regulated as insurers by states, but they remain subject to substantial federal requirements and may have other applicable legal obligations (^[20]). This may give employers greater flexibility than a fully insured product in plan design, subject to those requirements; it does not provide unrestricted discretion. However, under a self-funded model the employer must budget for volatile claim experience, hold reserves for “incurred-but-not-reported” (IBNR) claims (^[21]), and comply with federal regulations (HIPAA, ACA reporting, COBRA continuation, etc.).

Self-funding remains common, especially among large employers. KFF’s survey shows that the share of covered workers in self-funded plans has been broadly stable in recent comparisons rather than rising steadily over time. The 2025 Kaiser Employer Health Benefits Survey found that 67% of covered workers were in self-funded plans (^[1]) (compared to 33% in fully insured plans), and larger firms are self-insured at even higher rates (80% of employees in large firms versus 27% in small firms with 10–199 workers) (^[1]). Similarly, industry analysis notes that by 2015 roughly 63% of employers offered at least a partially self-funded plan (up from 44% in 1999), and 94% of firms with ≥5,000 employees were self-insured (^[22]). The market for stop-loss insurance has grown accordingly (a $26 billion market by 2021 (^[23])), and insurers have adapted by offering Administrative Services Only (ASO) arrangements and products tailored to self-insured customers (^[24]).

However, many small employers remain fully insured because self-funding can be less practical without a sufficiently predictable risk pool and because stop-loss coverage and administrative costs can affect its economics. Small employers may self-insure; there is no general ERISA or ACA prohibition based on having fewer than 50 employees. In 2024, only about one-fifth of workers in small firms were in self-funded plans (^[25]) (36% of small-firm covered workers were actually in level-funded plans – a hybrid with heavy stop-loss – and the rest in fully insured plans (^[26])). By contrast, nearly all very large employers self-insure (^[22]). Overall, the transition to self-funding reflects employers seeking greater predictability and control of costs (they can tailor benefits and avoid carrier profit loads), but at the trade-off of assuming volatility and requiring robust risk management (^[27]) (^[3]).

In this context, almost all employers – whether self-funded or insured – enlist Pharmacy Benefit Managers (PBMs) to handle pharmacy benefits. PBMs emerged in the late 1960s/1970s as dedicated administrators for prescription drug coverage (^[28]). Over time they have become the central intermediaries between insurance payors, drug manufacturers, pharmacies, and patients. In 2024, virtually every large employer or insurer’s plan uses a PBM to negotiate drug prices, process pharmacy claims, and enforce formularies. PBMs have become critics’ focal point on drug pricing, charged alternately with saving money through bargaining and accused of contributing to high prices through opaque practices (^[29]) (^[10]).

This report thoroughly explains these systems. We first detail self-funded vs fully-insured plan designs (including legal/regulatory treatment and financial dynamics), supported by data on enrollment and funding trends. We then delve into PBM operations: their five core functions (formulary design, utilization management, price negotiation, network contracting, mail-order services (^[6])), the common payment models (pass-through vs spread-pricing), and how PBMs influence market outcomes (e.g. generic utilization rates (^[5])). We analyze evidence from authoritative studies, government reports, and industry analysis on how PBMs affect drug costs and accessibility. Two tables summarize key comparisons — one contrasts self-funded vs fully insured plan attributes, and another contrasts PBM payment models (below).

Table 1. Key Differences Between Self-Funded and Fully Insured Health Plans (U.S.)

Feature	Self-Funded Plan	Fully Insured Plan
Risk & Financing	Employer pays claims directly from its funds; assumes medical cost risk	Employer pays fixed premiums to insurer; insurer bears claims risk
Administrative Control	Employer/TPA controls plan design, networks, and data; unlimited flexibility ([3])	Insurer controls plan details; employer has limited design options ([30])
Costs/Premiums	Costs vary with claims experience (requires reserve funds); often lower potentially once claims vs premiums on average ([31])	Premiums fixed by insurer (based on community/regulatory rating); predictable budgeting ([27])
Unused Funds	Employer retains surplus if claims < budget (experience refund) ([31])	Insurer retains any surplus; employer gets no refund for low claims ([30])
Experience/Trend Data	Employer has full access to detailed claims data for cost-management ([32])	Insurer holds claims data; studies show employers in insured plans often lack granular transparency ([30])
Stop-Loss Insurance	Typically purchased to protect against catastrophic claims; design varies (specific/aggregate) ([2])	Not applicable (insurer covers all risk)
Regulation/Taxation	For private ERISA plans, generally not directly regulated by states as insurance; substantial federal requirements and other applicable obligations remain ([20])	Subject to applicable state insurance regulation, as well as federal requirements
Typical Employers	Large firms (80% of employees in large firms self-fund in 2025 ([1])); mid-sized firms (some); also small firms via level-funding ([1])	Small to medium firms (27% of small-firm employees self-fund ([1])) and those preferring predictability; also popular in unionized/mandate-laden industries
Compliance/Liability	For private-sector ERISA plans, fiduciary and federal obligations may apply; continuation-coverage duties also vary by sponsor type, plan size, and applicable federal or state law. The plan sponsor generally bears the claims risk.	The insurer generally assumes covered-claims risk and insurance-law obligations, while the employer retains obligations under the policy and applicable law.

Table 2. PBM Payment Models

Feature	Pass-Through Pharmacy-Payment Arrangement	Spread-Pricing Arrangement
Pricing to Plan	The PBM bills the plan according to the pharmacy-payment terms in the contract and does not retain a spread between the plan charge and pharmacy reimbursement. This does not mean the plan is billed the pharmacy’s acquisition cost.	The PBM charges the plan more for a prescription than it pays the pharmacy and retains the difference as revenue ([33]).
Manufacturer Rebates	Separate contractual terms determine whether, when, and how manufacturer rebates are remitted to the plan, patient, or another party. A pharmacy-payment pass-through does not itself require 100% rebate pass-through.	Rebate treatment is likewise contractual unless an applicable law requires a specified use or remittance of rebates ([34]).
Transparency	The agreement can provide claim-level visibility into plan charges and pharmacy reimbursement; the reporting detail and rebate disclosure remain contractual.	The agreement may permit a retained spread; visibility into plan charges, pharmacy reimbursement, and rebates depends on the contract and reporting rules.
PBM Compensation	Compensation may be stated as administrative or service fees, with pharmacy payment and manufacturer rebates addressed separately.	Compensation may include retained spreads as well as fees and any amounts the contract permits the PBM to retain.
Key Contract Question	Confirm pharmacy reimbursement terms, PBM fees, audit rights, and rebate remittance separately.	Confirm the permitted spread, all fees, audit rights, and rebate remittance separately.

These tables summarize the contractual and regulatory differences. Notably, private self-funded plans generally are exempt from most state insurance laws under ERISA, but their design remains subject to applicable federal requirements and other legal obligations. Fully insured products are generally subject to applicable state insurance rules. For PBMs, the contract determines both pharmacy-payment pricing and rebate treatment. A pass-through pharmacy-payment arrangement can improve visibility into the amount paid to the pharmacy, while rebate remittance must be specified separately.

Because plan design and funding affect how pharmacy benefits are purchased, it is helpful to review the enrollment statistics and trends for self-funded vs fully insured coverage. The Kaiser Family Foundation (KFF) 2025 Employer Health Benefits Survey reports that 67% of covered workers are in self-funded plans (^[1]). The comparable figures were 65% in 2024 and 66% ten years earlier; KFF therefore characterizes recent and longer-term enrollment as similar rather than as a steady increase. The table below summarizes coverage by employer size and plan type, based on KFF’s latest data:

• Large Employers (200+ employees): 80% of covered workers are in self-funded plans (^[1]) (only ~20% in fully insured plans). Very large firms (5000+ employees) are even more likely to self-fund (over 90% did so as of 2015 (^[22])).
• Small Employers (10–199 employees): 27% of covered workers are in traditional self-funded plans (^[1]). However, many small-firm plans are “level-funded” – a hybrid with heavy stop-loss – which is formally a self-funded arrangement (37% of workers in small firms were in level-funded plans in 2025 (^[1])). Counting level-funded plans, a majority of small-employer covered workers are now on some form of self-insurance.

These statistics illustrate that large firms dominate the self-funded market. A 2016 report noted that, by then, 63% of employers were offering at least a partially self-funded plan (up from 44% in 1999) (^[22]). This trend has pressured insurers to adapt: traditional carriers now offer ASO products, private “exchanges,” and stop-loss waivers to serve self-funded clients (^[24]). Stop-loss insurance itself has grown – reaching about $26 billion in premiums by 2021 (^[23]) – as more mid-size employers buy down volatility.

At the same time, the total number of people covered by any health plan has continued to increase. Managed Healthcare Executive reported that fully insured coverage (through Blue Cross Blue Shield and others) covered about 186.5 million people in 2024 (^[35]). This indicates that even as more employers self-fund, the overall population with employer-based or other coverage has grown, partly due to expansions in public and insurance exchange enrollment (^[36]). Nonetheless, it is clear that fully insured products, while still covering many individuals (especially in small-group, individual, and Medicaid markets), are gradually losing ground in large-group employer markets to self-funding.

With the self-funding trend established, we now turn to PBMs, which play a key role in both types of plans. In practice, a self-funded employer will typically contract directly with a PBM (or work through a TPA that does), while a fully insured employer may effectively use the PBM arranged by its carriers. (Notably, insurers may own or partner with PBMs—for example, CVS Health owns Aetna and Cigna acquired Express Scripts—so plan design and PBM strategy can be integrated under one corporate umbrella.) Regardless, PBMs administer prescription benefits for virtually all employer-sponsored plans today. They serve as the link between plan sponsors (whether employers or insurers), pharmacies, wholesalers, and drug manufacturers. We next explain how PBMs operate, and how their practices affect both self-funded and fully insured plans.

Pharmacy Benefit Managers (PBMs) are third-party administrators of prescription drug programs. They were invented in the late 1960s to help insurers manage drug benefits (^[37]) and proliferated in the 1980s and 1990s. By consolidating administration across many plans, PBMs created efficiencies: early PBMs like PCS (Pharmaceutical Card System, founded 1969 (^[38])) offered the first big networks of pharmacies and formularies to insurers. Over time, PBMs have vertically integrated and consolidated. Today the PBM market is highly concentrated: the three largest PBMs (CVS Caremark, Express Scripts, and OptumRx) collectively process the vast majority of pharmacy claims (one source estimates the top 3 handle about 80% of prescription volume (^[7])). CVS Caremark (CVS Health) and OptumRx (UnitedHealth Group) are owned by major insurers (Aetna and United, respectively), and Cigna Corporation acquired Express Scripts in 2018, reflecting how insurance and PBM functions have merged (^[39]). (Another large payer, Humana, used to sell its standalone PBM but has shifted to an in-house model.) Smaller PBMs, mail-order aggregators, and start-ups also exist, but none has upended the oligopolistic structure.

Despite their opacity, PBMs perform five key functions essential to modern pharmacy benefits (^[6]):

1. Formulary Design: PBMs develop tiered drug formularies that determine which drugs are covered and at what cost to patients. Most plans use a closed or preferred formulary, meaning that only listed drugs (and their generic equivalents) receive full coverage. The formulary is managed by a Pharmacy & Therapeutics committee, often composed of PBM-employed pharmacists or independent clinicians. Formulary placement provides PBMs with leverage to negotiate rebates: manufacturers offer large discounts or rebates to have their brand-name drugs placed on a preferred tier. PBMs thus influence drug utilization by steering patients toward generics or preferred brands through copayment differentials (^[5]) (^[40]). Indeed, PBM-run formularies are credited with dramatically increasing generic use (over 90% of scripts in 2022 were generics (^[8])), and with promoting cost-competitive brand drugs in categories with multiple options (^[40]).

2. Utilization Management: PBMs implement controls such as prior authorizations, step-therapy, and quantity limits to promote appropriate use of high-cost drugs. For example, before covering certain specialty medications, a PBM might require documentation that the patient tried lower-cost therapies first. These tools further refine formulary compliance and help plans control waste, but they also add complexity to prescribing.

3. Price Negotiation: PBMs negotiate discounts and rebate contracts with pharmaceutical manufacturers. Under a PBM contract, manufacturers make confidential rebate payments to the PBM based on volume (or placement on the formulary) (^[5]) (^[41]). PBMs bundle dozens of health plans together to gain negotiating power, promising broader access in return for higher rebates. The net price of a drug (the price after rebates) can be much lower than the list price. To encourage generic utilization, PBMs may exclude high-price brand drugs that are not accompanied by large rebates (^[40]). However, critics point out that this rebate system can create distortions: for example, drugs that offer huge rebates may be favored even if clinically less valuable, and list prices may be inflated by manufacturers knowing PBMs will drive patients to those rebated drugs (a phenomenon documented as “shadow pricing” by the House Oversight Committee (^[10])).

4. Pharmacy Network Management: PBMs build networks of participating pharmacies (retail and mail-order). They negotiate reimbursement rates (dispensing fees) with pharmacies in exchange for including them in the network. Plans then reimburse pharmacies at these negotiated rates when patients fill prescriptions. PBMs often designate “preferred pharmacies” (e.g. mail-order or large chains) where copayments or coinsurance are lower, steering volume to the pharmacies that negotiate the best fees. For example, studies have found that Medicare Part D plans with “preferred” networks (often controlled by PBMs) yield lower patient out-of-pocket costs at retail pharmacies (^[42]). Some PBMs also operate their own mail-order or specialty pharmacies (CVS Caremark and OptumRx have brand-name mail-order arms), further integrating the dispensing side.

5. Claims Processing and Data Services: PBMs handle the adjudication of pharmacy claims (checking eligibility, applying copays, and submitting payment to pharmacies). They also collect detailed claims and utilization data on behalf of the health plan sponsor. This data is critical for plan design and cost-containment initiatives (chronic disease management, high-cost patient identification, etc.). Self-insured employers, in particular, use PBM data to identify spending trends – and KFF finds that self-insured sponsors generally have far more granular claims information than fully insured employers do (^[32]).

In return for these services, PBMs are paid in a variety of ways. Traditionally, PBMs earned revenue through spread-pricing, rebate retention, and transaction fees. A self-funded plan or insurer contracting with a PBM typically agrees to one of two broad payment models:

• Pass-Through Pharmacy-Payment Model: The PBM charges the plan sponsor under terms that do not permit it to retain a spread between the plan charge and the pharmacy reimbursement. Manufacturer rebates and discounts are a separate financial flow: the contract or applicable law must specify whether, when, and how they are remitted. The PBM may earn an explicit administrative fee (per script or per member), and the agreement can provide claim-level reporting. A plan should evaluate pharmacy reimbursement, PBM fees, rebate remittance, and audit rights as distinct contract provisions (^[33]).

• Spread-Pricing Model: The PBM bills the plan a higher price per prescription than what it reimburses the pharmacy, effectively keeping the difference (the “spread”) as profit (^[43]). In this model, the PBM may also retain a portion of manufacturer rebates instead of forwarding them entirely to the plan. Because the PBM can unilaterally dictate the plan’s reimbursement rate and keep part of the rebate, this model is highly opaque. Until recent reforms, it was widely used in some Medicaid and commercial PBM contracts. For example, the PBM might purchase a drug from a pharmacy for $90 and bill the health plan $100, pocketing $10. Under this arrangement, the PBM’s revenue comes from both the pharmacy “spread” and any withheld rebates, plus often a smaller service fee.

Table 2 above contrasts these two models. In practice, plans now have more choice; many self-insured employers are specifying pass-through PBM contracts to ensure transparency (^[44]). The PBM industry includes traditional PBMs and newer entrants, but the essential functions remain formulary management, negotiation, and administration.

The effects of PBMs on drug spending are complex and have been studied extensively. There is evidence on both sides:

• Potential Cost-Containment: Proponents argue that PBMs leverage large patient populations to lower net drug costs. For example, formulary steering tends to direct patients to low-cost generics (generics share >90% of scripts (^[8])), which saves money. Research shows that when PBMs drive preferred use of certain brand drugs through higher rebates, it can reduce the net prices that plans pay (^[40]) (^[45]). Indeed, one study cited by PBM advocates (Kakani et al. 2020) suggests that PBM formulary exclusions and rebates have been associated with lower overall drug prices and spending (^[45]). The Congressional Budget Office has similarly found that negotiated rebates lower Medicare Part D spending on some drugs (though those rebates primarily go to the government) (^[6]). Mail-order dispensing (often overseen by PBMs) can further cut costs on chronic medications by offering 90-day supplies at discount. In value-based terms, PBMs also offer data analytics and patient management programs (diabetes care, adherence programs, etc.) which can improve outcomes for members while trimming unnecessary utilization.

• Concerns and Market Distortions: Critics contend that PBMs sometimes increase rather than decrease costs due to misaligned incentives. A key issue is rebates: PBMs typically earn a percentage of the rebates they negotiate, so they may favor drugs with higher list prices and bigger rebates over cheaper alternatives. This can lead to “rebate-driven price inflation.” For instance, the House Oversight Committee reported that many biotech drugs raised their list prices substantially once they had PBM-extracted rebates, meaning that patients paying coinsurance or deductibles (which are based on list prices) ended up with higher out-of-pocket costs (^[10]). Anecdotally, competitive biologics such as insulin have exhibited this behavior (price hikes despite competition), suggesting a “race to the top” in list pricing. Importantly, uninsured patients and those with high deductibles actually do pay those inflated list prices in full (^[10]), so the burden is shifted onto the vulnerable.

Another concern is lack of transparency. Because PBMs keep much of the financial flow secret (the contracts, spreads, and rebate splits), plan sponsors often have difficulty verifying what they truly saved. For example, the JAMA review points out that plan sponsors and pharmacies frequently have no visibility into how PBMs set drug prices or how much money PBMs pocket (^[46]). This has led to numerous audits and lawsuits by state governments, pharmacy associations, and employers seeking to uncover hidden revenues. The highly concentrated structure of the market (three firms dominate) raises antitrust worries. Critics also highlight conflicts of interest: when PBMs own pharmacies, questions arise whether they steer business to their own outlets (or impose unfavorable terms on independent pharmacies). Legally, the Supreme Court’s 2020 decision in Rutledge v. PCMA gave states more leeway to regulate PBMs (^[47]), and since then many states have done so via licensing, pricing rules, or prohibiting spread pricing.

In sum, PBMs have become “enigmatic intermediaries” (^[29]). They undeniably manage one of the largest and most complex markets – U.S. retail pharmaceuticals – and there is evidence they harness scale to promote generics and negotiate discounts. However, the degree to which those savings are shared with payers and patients is debated. Empirical research is ongoing, but existing studies (and congressional investigations) repeatedly note problems with opaque contracts, retroactive clawbacks on pharmacies, and rebate-split secrets (^[46]) (^[10]). As legislative interest grows, policymakers are proposing reforms such as requiring rebate pass-through, banning spread pricing for all plans, and enforcing detailed reporting (^[39]) (^[11]). These measures aim to realign PBM incentives with plan sponsors and end-consumers.

Definitions and Mechanics

Fully Insured Plans: Under a fully insured arrangement, an employer pays a premium to an insurance carrier and receives coverage against employee healthcare claims. Premiums are generally fixed for a policy year and reflect underwriting, rating rules, policy terms, and applicable state insurance requirements. The key feature is risk transfer: the insurer guarantees to handle all covered claims, subject to policy terms, in exchange for the premium. If actual claims exceed the premium pool, the insurer suffers; if claims are lower, the insurer profits (minus costs). Premiums typically rise annually if the community claims experience worsens. Level-funded arrangements should be analyzed separately: they are commonly self-funded arrangements paired with stop-loss coverage and a fixed monthly payment structure, rather than fully insured policies. Their regulatory treatment depends on the arrangement and applicable law.

Advantages of full insurance include predictability and offloaded risk. Employers know their max financial exposure (the fixed premium) and do not need to reserve capital for claims. The administrative burden is lower: the insurer (or its PBM/TPA) manages claims, networks, and compliance. In mergers or acquisitions, fully insured plans can be simpler to transfer, since the receiving company just takes on the policy. But disadvantages include lack of refunds for low claims (premiums are not adjusted retrospectively if claims underperform), less control over plan design, and potential state taxes. Notably, fully insured plans must meet all applicable state benefit mandates, network adequacy rules, and premium taxes (^[30]). For example, an employer with a small insured plan must cover state-mandated mental health parity or contraceptive benefits regardless of cost. These compliance costs are baked into premiums. Additionally, under ACA community-rating rules, small-group fully insured premiums cannot vary by industry; this can make premiums high for low-risk businesses.

Self-Funded Plans: An employer may choose to self-fund instead of buying insurance. In this model, the employer (or related trust or consortium) pays claims as they occur. The employer often works through a Third-Party Administrator (TPA) to process claims and handle networks, but the true contractual party is the employer. The employer thus retains any surpluses (if claims are low) or suffers any deficits (if claims are high). In practice, actuaries set a budgeted contribution level, and claims run-rate is charged against it. At year-end (or quarterly), the plan may reconcile difference between contributions and actual claims. Because risk is retained, many employers buy stop-loss insurance. Stop-loss comes in two typical forms: specific stop-loss (covering any individual claim above a specified threshold, say $100,000) and aggregate stop-loss (covering total claims above a threshold, e.g. 125% of expected liability). Stop-loss premiums add cost, but they cap unpredictable catastrophes. A variant called level-funding (common for smaller groups) packages a self-funded plan with extremely high stop-loss protections to guarantee a fixed monthly cost to the employer, combining some advantages of insured and self-funded (^[26]).

The fundamental appeal of self-funding is cost savings and flexibility. Depending on plan design, claims experience, stop-loss coverage, and applicable requirements, expected costs may differ from those of a fully insured arrangement. Also, employers gain full access to claims data, enabling intensive cost-management (custom disease management programs, narrow networks, etc. (^[32])). If managed effectively, self-funding can outperform fully insured in years with moderate claims. However, the employer has significant financial risk. Unexpected claim spikes can cause cash-flow problems; the employer must set aside reserves (including provisions for claims happened but not yet reported (^[21])). Smaller employers, or those with uneven demographics, may find this variability unacceptable. Thus, historically self-funding has been most feasible for firms with large numbers of employees, whose law of large numbers makes claims more predictable (and indeed 94% of very large firms self-fund (^[22])).

Enrollment and Market Share

Extensive surveys confirm the prominence of self-funding. According to KFF’s 2024 Employer Health Benefits Survey, 63% of employees in employer-sponsored health plans were in self-funded plans (^[25]). This figure is nearly identical to the 65% reported in 2023 (^[48]), indicating stability in the trend. By contrast, 37% of covered workers remain in fully insured plans (including level-funded plans, see below). The breakdown by firm size is dramatic: only 20% of employees in small firms (under 200 workers) were in self-funded plans, whereas 79% of covered workers in large firms (200+ employees) were self-funded (^[25]). Over the past decade, the share of large firms self-funding has hovered around 80%, while fully insured coverage is increasingly relegated to smaller employers and specialty segments (like certain small-group or individual policies).

KFF’s published figures illustrate these trends. Notably, even as self-funding has plateaued recently, the overall number of people covered by employer plans has grown, reflecting higher employment and parallel expansion of fully insured markets (individual and Medicaid). Indeed, a recent industry analysis found that Blue Cross Blue Shield insurers covered about 186.5 million people in fully insured plans in 2024 (^[35]), an increase of 12.3 million from 2020. This suggests that while a larger proportion of employees are on self-funded plans, the raw count of fully insured enrollees remains high (driven by population growth and take-up in smaller segments).

In summary, self-funding dominates the large-group market, while fully insured plans still serve many covered individuals in small-group and individual markets. Employer motivations (and obstacles) for choosing each type are well-documented:

• Pros of Fully Insured: Predictable fixed premiums (^[27]); minimal risk to employer; low administrative burden (insurer handles claims and reserves) (^[49]); state guaranty fund may protect beneficiaries if an insurer fails. In a volatile claims year, the employer does not pay more than the agreed premium.

• Cons of Fully Insured: Less control over benefit design; premiums may include charges for state mandates and profit; no rebate or surplus sharing if claims are low (^[30]); subject to rating cycles (premiums can jump based on collective risk pool, even if a particular employer’s experience was good). Employers may also resent taxes and fees on premiums (state premium taxes, ACA fee, health insurer fee, etc.). Finally, cost trends in fully insured markets often exceed those seen by large self-funded plans because small-group pools naturally have poorer risk profiles.

• Pros of Self-Funded: Employers may have greater flexibility in plan design than under a fully insured product, subject to applicable federal requirements and other legal obligations. Employers own any surplus when claims are lower than expected (^[31]). Access to data allows targeted wellness or disease management programs (^[32]). Funded by internal reserves or trusts, many employers find their total cost of care more manageable, as administrative costs are often lower than fully-insured premiums (no profit margin, no state premium tax) (^[3]). In change events (like workforce changes), self-funded plans may allow more agile adjustments.

• Cons of Self-Funded: Employer assumes all risk (^[4]). A bad claims year can erase any savings from previous years, and spikes (e.g. an unusually high-cost cancer case) must be absorbed unless covered by stop-loss. Cash flow can be variable, requiring the employer to pay claims in real time. Administrative tasks (selecting TPAs, managing stop-loss, financial reporting) are greater (^[21]). Some employees may worry about continuity of coverage if an employer struggles with self-funding. Also, while ERISA exempts self-funded groups from state benefit mandates (^[2]), this can be a disadvantage if an employer wants broad coverage – they must voluntarily include benefits (like childhood or maternity coverage) that a small-group insurer might otherwise be required to provide by law.

The 2024 KFF survey emphasizes one more hybrid approach: level-funded plans, which package self-insurance with heavy stop-loss to offer predictable monthly payments. About 36% of covered workers at small firms (3–199 employees) were in level-funded plans in 2024 (^[26]). These arrangements are still technically self-funded (and ERISA plans) but are sold like simple insurance products with “all in” prices. Level funding has become popular as a way for small groups to try self-funding without extreme risk. In effect, it blurs the line between fully insured and self, offering the flexibility of the latter with the budget certainty of the former.

In conclusion, the landscape of employer health coverage in the U.S. is evolving but remains dichotomized by funding method. Any comprehensive analysis of drug benefit costs must account for these funding differences, since they affect tax/treatment of costs and the degree of regulatory oversight. The next sections will assume this context: whether a plan is insured or self-insured primarily changes who pays and who regulates, but in both cases PBMs will be managing the pharmacy component.

How do self-funded and fully insured plans compare on cost trends and distribution? Data from industry sources suggest that self-funded plans often see slightly lower cost growth rates over time, though the difference is not usually huge. For example, a 2019 case study of a large self-funded employer (Quest Diagnostics) found that its average annual trend dropped from +5.7% to –1.0% over a multi-year period after targeted interventions (^[50]). More broadly, AM Best reported (as of 2023) that shifts toward self-funding have been motivated by cost and flexibility concerns. However, exact average premium trends are hard to isolate, because fully insured premiums must also cover state mandates and insurer loss, whereas self-funded contributions reflect actual claims net of rebates. The Kaiser survey provides national averages (family premiums) but notes little difference: for 2024, average family premium was 26% of wages in fully insured plans vs 24% for self-funded (^[51]), a difference driven largely by the absence of certain state fees on self-funded plans (^[2]). Over five years, family premium growth (24%) was similar to medical inflation (~24%), regardless of funding (^[51]).

Breaking down spending, PBM-relevant trends stand out. Even though prescription drugs are a relatively small fraction of total national health spending (about 9% of NHE in 2023 (^[52])), their unit costs are rising rapidly. The ASHP report noted that spending on retail prescription drugs jumped 10.2% in 2024 (^[15]), mainly due to few high-priced classes. Specialty drugs (for cancer, autoimmune, etc.) now account for over half of U.S. drug spending, and new gene and biologic therapies threaten to push spending higher (^[53]) (^[54]). This means employers (self or insured) face steep inflation in their pharmacy budgets. At the same time, generic and biosimilar competition has curbed costs in many classes. Analysts have observed that class-level competition often leads to steep rebates (favoring formulary placement) that lower net costs to plans, even if list prices remain high (^[40]) (^[10]).

Another important trend is the concentration of spending on a small subset of members. This is especially relevant for self-funded employers, who feel the impact of high-cost claimants directly. Research consistently finds that a very small percentage of enrollees drive a large percentage of costs. In the Quest Diagnostics study, 10% of plan members accounted for 72% of spending in one year (^[12]). Stop-loss insurance can limit a self-funded sponsor’s exposure to catastrophic claims, subject to its policy terms.

On the employer side, cost containment strategies often focus on these high-cost areas. For example, PBMs and insurers advertise value-based contracts or carve-outs for expensive therapies (like oncology or expensive rheumatoid arthritis drugs) where the PBM might share savings with the employer if usage or price growth is contained. However, most PBM pricing remains volume-based (rebates, discounts), not true outcomes-based models.

In aggregate, data suggest rising total drug spending but mixed signals on what portion PBMs capture versus plans save. A 2021 review (cited in (^[55])) noted that while drug spending is a small share of health expenditures (about 13% in 2019 (^[56])), it grew much faster than other categories. PBM critics argue that when the rebates and retained fees are accounted for, plan sponsors may only see a fraction of the list-price increases that manufacturers set. For instance, one KFF analysis of state Medicaid found that spread pricing led to $64 million in overcharges in one year (^[57]) (see Case Study). On the other hand, other studies (including Harvard Business School analyses) have found that plans using PBMs often experience slower net price growth than the market as a whole, implying that PBM negotiations did lower overall spending (^[45]). The truth likely varies by context: self-funded plans can often switch or design around expensive drugs more quickly (since they control the formulary), whereas fully insured plans must negotiate benefit mandates with carriers, which can slow adjustments.

In summary, drug cost trends are outpacing general care costs, and an increasing share of total claim dollars goes to pharmaceuticals in many employer plans. Both self-funded and insured plans are grappling with specialty drugs and high-cost patients. PBMs remain central to how much of that cost is shouldered by manufacturers, plans, pharmacies, and patients. The next sections will dissect the mechanics and controversies of PBMs in depth.

To understand the role of PBMs, it helps to visualize their position in the drug supply chain. Figure 1 (adapted from Conti et al. 2024 (^[58])) illustrates these relationships: drug manufacturers set list prices; health plans (employers or insurers) contract with PBMs to manage benefits; pharmacies dispense drugs to patients; and PBMs negotiate rebates and discounts from manufacturers in exchange for preferred position on formularies. Patients pay a share (copay/coinsurance) at the point of service. The PBM coordinates several contractual financial flows: plan payments for pharmacy-benefit services, pharmacy reimbursement, manufacturer rebates or other payments, and any contractually permitted fees or spreads. Premiums are collected by the insurer or plan sponsor, not by the PBM.

(^[59]) Figure: PBMs as Intermediaries in the Prescription Drug Market (adapted from Conti et al. 2024). Patients purchase drugs at pharmacies with point-of-service copays, while health plans pre-pay PBMs for drug benefits. PBMs reimburse pharmacies and negotiate rebates from manufacturers. The net drug price equals list price minus manufacturer rebate. (Source: Conti et al., 2024 (^[59]).)

Each of the PBM roles mentioned earlier merits further elaboration:

• Formulary Management: The PBM’s formulary is a powerful lever. By assigning copayment tiers or excluding drugs, PBMs can steer utilization. For example, assigning different formulary tiers and cost sharing to medicines in the same therapeutic area can influence which covered option a patient and prescriber consider, subject to clinical judgment and the plan’s exception process. In 2022, PBM formularies covered >90% of all generic drugs at low cost (^[8]). On the brand side, PBMs often exclude non-preferred brand drugs to create negotiating leverage. A JAMA analysis notes that P&T committees at PBMs decide formulary inclusion for tens of millions of members (^[60]). These committees increasingly emphasize cost: a recent survey cited by Conti et al. reports that PBMs now weigh drug price heavily when choosing formulary drugs (^[45]). However, patient advocates warn that overly restrictive formularies can limit access to needed drugs; most formularies allow appeals or exceptions, but the process can be arduous. The downward effect of formularies on drug spending is twofold: they promote inexpensive generics and force brand manufacturers to offer rebates to gain formulary placement (^[40]).

• Rebate Negotiation: When a brand drug has competition, manufacturers offer rebates to PBMs to secure a preferred formulary slot (e.g. Tier 2 vs Tier 3). These rebates can be substantial – often 20–50% of list price for blockbuster drugs. PBMs aggregate these rebates from dozens of plans. For example, Conti et al. note that rebates have grown especially in competitive classes, and PBMs demand larger rebates for preferred tiers (^[61]). In some cases, PBMs negotiate bundled rebate contracts across multiple drugs from one manufacturer (^[62]), which critics argue can entrench big brands (by giving large rebates on the existing portfolio, making it harder for new entrants to get placed without matching large deals). The net effect is that PBMs have become one of the largest payors for brand drugs (behind insurers and governments). The U.S. Government Accountability Office reported that PBMs received about $49 billion in rebates from Part D drug manufacturers in 2016 (^[6]). (Importantly, under federal law these rebates go 100% to Medicare Part D plans and ultimately reduce federal spending, but for commercial/self-funded plans, rebate-sharing depends on the contract.)

• Pharmacy Networks: PBMs assemble “open” networks (almost any pharmacy participates) or “preferred” networks (limited lists with deeper discounts). By 2024, most commercial plans had some tiered retail network, and PBMs actively steer patients to mail-order for chronic meds (to manage utilization and quantity). Studies in Medicare Part D have shown that preferred networks reduce patient costs (^[63]). PBMs pay pharmacies under negotiated fee schedules (often derived from surveys); independent pharmacies often complain these fees are low, especially with spread pricing (where the PBM’s payout to the pharmacy can be far below what the plan sponsor is charged). The complexity of pharmacy reimbursement has become a flashpoint (leading many independent pharmacy chains to sue PBMs). A JAMA review notes that many pharmacy complaints hinge on not knowing how PBMs compute the retail payment rate and the “clawbacks” or DIR (direct and indirect remuneration) adjustments applied after the fact (^[46]).

• Claims and Data Analytics: On each pharmacy claim, PBMs apply eligibility checks, benefit rules, and copay calculations. They then route payment to the pharmacy and record the transaction. The resulting data – which plan paid how much for which drug to which member – is one of the richest sources of information on healthcare utilization. Self-insured employers frequently use PBM claims data to identify high-cost patients, track chronic disease management programs, and negotiate disease-specific pharmacy solutions with providers. For instance, an employer might analyze its claimed spend by drug class and discover that diabetes drugs constitute 10% of pharmacy spend; it may then invest in diabetes management. Fully insured employers often get less direct access to this data, relying on insurer-provided aggregates. Data transparency debates have led some states to require PBMs to report drug prices and rebates to regulators (see Regulatory Actions below).

• Payment Models: PBMs earn money through different models. In a pass-through pharmacy-payment arrangement, the contract does not permit the PBM to retain a spread between the plan charge and pharmacy reimbursement; it does not establish the pharmacy’s acquisition cost. Manufacturer-rebate treatment is separate and must be specified by contract or applicable law. PBMs may instead be compensated through disclosed administrative fees, per-claim fees, per-member fees, or other agreed terms. In a spread-pricing arrangement, the PBM retains the difference between the plan charge and pharmacy reimbursement; rebates may be addressed separately. Plan sponsors should assess both arrangements, including fees, rebate remittance, and audit rights, under the actual contract (^[33]).

The impact of these models on overall spending is debated. Advocates of spread-pricing say it allows PBMs to innovate (e.g. by investing in patient programs) and eliminates the need to itemize every fee. Critics say spread-pricing fosters price inflation: because the PBM profits from high list prices (they retain a fixed fraction of the list minus rebate), they may push contracts toward higher-priced drugs. Indeed, Conti et al. warn that “shadow pricing” (insurers remaining flat on net prices while encouraging manufacturers to raise list prices to build bigger rebates) has harmed patients (^[10]). They cite evidence from legislative investigations of widely publicized cases (e.g. GLP-1 weight-loss drugs) where list prices rose far beyond inflation. They note specifically that uninsured patients (or those in deductible phases) pay the full blown-up list price, and patients on coinsurance schemes also suffer higher cost-sharing due to inflated price bases (^[10]).

A pass-through pharmacy-payment arrangement can remove the PBM’s contractual incentive to retain a spread between the plan charge and pharmacy reimbursement, but rebate treatment and other compensation remain separate contractual issues. Some new PBM entrants (often called “full transparency” or “advocate” PBMs) explicitly promise to pass through rebates and use only administrative fees. Employers are increasingly asking “Do I have a transparent pass-through contract?” when selecting PBMs. Indeed, legislative proposals have begun to enforce aspects of this: for example, several state laws now ban spread-pricing in Medicaid and require rebate pass-through (^[39]), and federal bills have proposed extending those rules to all plans.

PBMs also have diversified their profit streams. Aside from spread and rebates, PBMs typically charge service fees (per prescription or per member-per-month), particularly under pass-through models. Additional revenues can come from consulting, value-based contracting fees, and even fees paid by specialty pharmacies or device providers for formulary placement. PBMs often receive direct fees from drug manufacturers as well (for example, to secure a formulary position in exchange for marketing support). These practices are less transparent, but PBMs argue they reflect market demand: manufacturers value formulary access enough to pay PBMs in cash beyond rebates.

Overall, evaluating PBM net value requires visibility into these intricate flows. Plan sponsors, regulators, and researchers have often lamented the secrecy. For example, a JAMA Health Forum review reported that “PBMs are frequently criticized for a lack of transparency” in how they set rates and manage contracts (^[46]). This has prompted a series of legislative and regulatory efforts (discussed below). In practice, whether a specific PBM arrangement ends up saving money for the plan depends on the details of the contract and the underlying drug mix. If an employer’s claims are dominated by drugs where the PBM can negotiate big rebates, the employer may do well; if not, the PBM may collect high spreads or fees that eat into savings.

Finally, it is worth noting that PBMs were originally created to serve insurers and employers, not to maximize their own profit. In theory, the rebate system is meant to align PBM incentives with payors: PBMs win by lowering net plan costs (which is often aided by large rebates). Indeed, Conti et al. argue that we see evidence of this alignment: formulary exclusion and rebate rate distributions have increased with competition among drugs (^[40]). But once PBMs became large and multi-functional, the incentives became murkier. For instance, when PBMs are owned by insurers, they may also have goals of protecting the insurer’s broader bottom line (e.g. Part D rebate-sharing in Cigna or Aetna integrated PBMs). The current policy debate centers on how to ensure that PBM incentives are first and foremost aligned with consumer welfare – for example, by forcing pass-through of rebates, prohibiting hidden spreads, and enhancing competition among PBMs (^[46]) (^[10]).

Next, we turn to concrete examples and data evidence. The following sections draw on case studies and research findings to illustrate the real-world effects of plan funding decisions and PBM practices.

The theoretical roles of self-funding and PBMs outlined above have real consequences that can be quantified. In this section we highlight key findings from studies, surveys, and audits.

Self-Funded Plan Outcomes

A fundamental question is whether self-funding actually reduces overall healthcare costs for employers. Rigorous comparisons are difficult due to selection bias (large firms self-fund and often have healthier populations or better management than small firms). However, several lines of evidence speak to this:

• KFF Survey Data: KFF data show that self-funded employers report slightly lower than average premium equivalents for their plans. In 2024, for example, the average annual family premium was 26% of the average wage in fully insured plans, versus 24% in self-funded plans (^[51]). Over five years, family premiums rose 24% across the board, closely following medical inflation. These differences may stem from the lack of state premium taxes and the tendency of large groups to self-fund, which naturally have lower claims per covered life. Importantly, KFF also notes that self-funded plans generally required smaller "employer contributions" as a fraction of premium compared to fully insured plans in 2024 (24% vs 26% respectively) (^[51]).

• Claims Concentration: The extreme concentration of costs in self-funded populations (as noted above) means that targeting high-cost drivers can significantly affect trends. The Quest Diagnostics case study (^[12]) is illustrative: by identifying that 10% of members were driving 72% of costs, Quest then implemented a broad care-management program. Their annual trend went from +5.7% (2014–15) down to –1.0% (2016–17) in total costs. This kind of micro-management is more easily done by self-insured employers who directly see the data and can fund interventions (specialty pharmacy oversight, chronic care teams, etc.).

• Stop-Loss Uptake: The Stop Loss market growth is itself indirect evidence of self-funding purchasing. AM Best reports that stop-loss premiums were growing at about 8% per year as of 2021 (^[23]), driven by more employers converting to self-funded. This reflects both more employers moving to retention of risk and rising attachment points (insurers charge more as claims inflate).

• Cost Trends in Level-Funded Plans: While many small employers use level-funded plans, actuarial analyses show that these plans often end the year very close to actuarial target (since high stop-loss drives them to mirror insurance costs). Thus, level-funding tends to give small groups a fixed price with modest expected savings (compared to if they had been fully insured with mandated state benefits) but also limited risk. One review found that in a stable claims year, a level-funded plan’s premium can be a few percentage points lower than a fully insured premium for the same benefits (because of regulatory and profit load differences) (^[21]).

• Market Trends: Employer surveys (e.g. by the Kaiser/HRET series or EBRI) repeatedly find that large firms cite cost savings and flexibility as motivations for self-insurance. In one survey, over half of large employers cited lower total cost of care as an advantage of self-funding (^[22]). Many employers also appreciate that if claims are lower than expected, they essentially get the surplus. Conversely, fully insured firms note that when claims spike, only self-funded employers see that increase directly, which can create pressure to buy more coverage or switch to insured products in high-risk periods.

Public employer-survey data do not establish a causal, size-adjusted comparison of self-funded and fully insured costs. The central trade-off is risk transfer: a self-funded sponsor bears covered claims, subject to stop-loss coverage, while a fully insured employer pays the policy premium and transfers covered-claims risk to the insurer. High-cost drug utilization can affect either arrangement, although the timing and allocation of costs differ by contract. The 2025 KFF survey found average annual family premiums reached $26,993 (up 6% year-over-year), with single premiums at $9,325 (up 5%) (^[1]).

PBM Impact on Drug Spending

Estimating how much PBMs save (or cost) a plan is challenging. The key measurements are (a) gross drug costs (before rebates) and (b) net drug costs (after rebates). Data on gross prices (list prices, Average Wholesale Price, etc.) are public; rebate data and net prices are private. Researchers use various proxies to study the effect of PBMs on these:

• Rebate Trends: PBM advocates point out that brand-name drug rebates have increased dramatically with PBM formulary power. For example, June report: rebates as percent of list price rose across classes between 2012–2020 (^[40]). Higher rebates mean plans are paying less net. One study showed that many high-spend drug classes saw list prices skyrocket, but net prices (after rebates) grew much slower. Kakani et al. (2020) found that drug classes with more competition (hence more rebates) had slower net spending growth, suggesting PBMs were effective in competition. Similarly, Feng & Maini (2024) found that PBM-formulary management tends to lower net spending (^[45]).

• Utilization Effects: PBM formularies drive up generics usage and may depress the use of some brand drugs. A 2022 study (CSRxS data) found that PBM design changes excluded about 50% more brand drugs in formularies between 2011 and 2020, coinciding with rising rebate pressure (^[45]). This suggests PBMs keep more expensive brands out unless heavily discounted. Proponents argue that this has pushed new alternative products (generics/biosimilars) to market faster, benefiting consumers. For instance, in some diabetes drug classes, PBM formularies have over 90% of scripts going to the cheapest or preferred options.

• Pharmacy Reimbursement: Spread pricing directly affects net costs only at the plan rather than societal level. For spread models, a plan is effectively paying more per script than the pharmacy receives. A plan sponsor analyzing its claims would see the higher billed amount, so one could argue spread makes PBMs less “saving” money for plans (they actually raise billed costs). Indeed, reports from state Medicaid programs found that PBMs were billing MCOs far above pharmacies for some generic scripts (the $64M overcharge in Michigan (^[57])). However, those are cases more typical for immobile state programs than large employers, where contract negotiations often eliminate blatant spreads.

• Overall Plan Costs: Perhaps surprisingly, few public studies have directly compared similar plans with vs. without PBMs. One difficulty is that nearly all plans use PBMs. A 2021 report by the Government Accountability Office found that in Medicare Part D plans, PBMs did not earn excessive revenue from spread – partially because CMS managed those contracts tightly (^[64]). In the commercial market, a KFF analysis (using Mark Farrah data) noted that total pharmaceutical spending grew similarly in self-funded and fully-insured segments from 2020–2024, suggesting any PBM impact is embedded in both. Also, a 2020 ASHP report of hospital and clinic drug purchasing suggests strong rebounds post-COVID, but does not separate PBM effects from other factors (^[15]).

• Employer and Plan Surveys: Large-employer surveys (like the annual Castlight/Cigna Employer Health Benefits Survey) often report that employers cite PBMs as saving about 20–30% on drug costs when managed well (^[65]). However, such numbers are self-reported claims by PBMs or consultants and may reflect promised or projected reductions rather than audited outcomes. Anecdotally, financial officers sometimes report holding PBMs to guaranteed rebate and spread targets, but the enforcement of such guarantees is opaque.

• Patient Cost-Sharing: On the patient side, evidence of PBM impact is mixed. CMS and Open Payments data show that escalating list prices mean patients on high-deductible plans face large bills, even if insurers reveal net costs. The Congressional Budget Office (CBO) estimated in 2019 that manufacturer rebates reduced Medicare Part D spending by about $20 billion per year, benefiting seniors through lower premiums (^[6]). That suggests at least on average, PBM-negotiated rebates do lower net government costs. But some researchers caution that in the employer market, manufacturers might simply raise list prices to compensate, offsetting much of the benefit to plans.

In summary, the evidence on PBMs is nuanced. PBMs unquestionably influence market dynamics: patient use patterns are shaped by formularies, and drug manufacturers often rely on PBM-negotiated rebates to compete. Many analyses (including Conti et al. 2024 at Health Management, Policy & Innovation (^[45])) argue PBMs have substantially lowered net drug costs compared to the counterfactual of no PBM, primarily through generics adoption and negotiated rebates. But PBM critics (including some independent economists) point out persistent inefficiencies: list price inflation (“shadow pricing”), lack of pass-through, closed-door contracting, and the fact that PBM profits are surging (e.g. CVS-Aetna reported $15B PBM revenue in 2022 (^[66])). In the FTC’s 2023 claims-managed data, CVS Caremark managed 34% of prescription drug claims, Express Scripts 23%, and OptumRx 22%; together, the three managed 79%.

Our approach is to present both sides with data: the high-level spending trends above, the concentration data in self-funded plans (^[12]), and specific cases below. We will also discuss legislative and regulatory oversight, which provides external validation of both praise and concern for PBMs.

Different stakeholders view PBMs and plan funding models through varied lenses. Below we present several illustrative examples and case studies that shed light on real-world implications.

Case Study: Quest Diagnostics (Self-Funded Employer)

Quest Diagnostics, a large diagnostic laboratory company, provides a detailed example of successful self-funding combined with PBM-driven management. In a 2019 case study, Quest (with 45,000 employees) partnered with an insurer’s division (PacificSource) to turn around an 8% cost trend. Key changes included instituting site-of-care rules, expanding generic drug use, and enhancing pharmacy benefit designs. Pharmacy spend was specifically targeted: Quest implemented a narrow formulary for specialty drugs and promoted generics aggressively. The result was a progressive reduction in cost trend: from +5.7% (2014–15) to +4.6% (2015–16) to –1.0% (2016–17) (^[50]). Quest’s analysis found that just 10% of members (primarily those with chronic conditions and specialty therapies) were driving 72% of claims (^[12]). By using PBM data to identify these high-cost members and negotiate with specialty pharmacies, Quest controlled catastrophic claims. This case highlights how a data-driven, self-funded plan can harness PBM tools and analytics to sharply reverse cost trends.

Comparatively, fully insured plans are often less nimble. An employer union representing Boeing workers found that when Boeing switched its retirees from Blue Cross fully insured coverage to a self-funded model, it saved money by customizing benefits for that population (including more aggressive mail-order and utilization management) (^[67]). Meanwhile, large integrated insurer-PBMs (like OptumRx) often bundle Part D and group benefits; sometimes data from Part D can cross-subsidize commercial claims, a point of contention among detractors.

Case Study: Maine’s PBM Transparency Law (State Legislation)

The state of Maine undertook a legislative experiment that illustrates how PBM regulation can change behavior. In 2019, Maine passed a law requiring that PBMs either pass at least 100% of manufacturer rebates to consumers at the pharmacy counter or use retained rebates to reduce premiums (^[13]). The law also mandated PBMs to report pricing and rebate data to the state’s health data organization. After implementation, Maine’s drug cost transparency reports found clear effects: PBMs in effect retained a lower share of payments from payers after the law than before (^[13]). In other words, requiring rebate pass-through shifted more savings to payers/patients. The reports noted that for covered drugs, the average mark-up between PBM reimbursement and pharmacy cost shrank, and the medical-loss ratio calculations for insurers became more accurate. While Maine is a small state, this case suggests that targeted legislation can force PBMs to alter their pricing structure.

Case Study: Michigan Medicaid (State Program)

An example of the risks of spread pricing comes from state Medicaid programs. An analysis of Michigan’s Medicaid managed care contracts (using PBMs) found that spread pricing overcharged the state by an estimated $64 million in one year (^[57]). In other words, PBMs billed the state’s Medicaid plans far more than they paid pharmacies for generic drugs, keeping the difference. In response to these findings, Michigan transitioned its Medicaid pharmacy benefits from PBMs (via managed care organizations) to a fee-for-service model paid directly to pharmacies (^[68]). The state’s actions – though in a public program – echo what private sector critics have long demanded: pay the real cost of drugs. This illustrates the potential downside of opaque PBM pricing: absent oversight, public dollars (or employer contributions) can be siphoned off invisibly.

Legally, ERISA generally preempts state laws that relate to employee benefit plans, while preserving state authority to regulate insurance; self-funded ERISA plans generally cannot be deemed insurers for state-regulatory purposes. Kentucky Ass’n of Health Plans v. Miller, decided in 2003, addressed Kentucky “any willing provider” statutes—not a Louisiana premium-tax distinction (^[2]).

To further emphasize key points, we highlight some specific data and expert observations:

• Cost Concentration: Consistent with employer analyses, the literature shows extremely skewed spending. For self-funded plans nationally, roughly 1–2% of members accounting for ~30–35% of costs is typical (^[12]). This suggests that targeted programs (e.g. chronic care management for high-risk patients) can disproportionately affect overall spending.

• Generic Usage: With PBMs managing multiple plans, overall generic dispensing in the U.S. has skyrocketed. More than 90% of prescriptions filled are now generics (^[5]). This is both a result of PBM formularies and patent expirations. (Note: while costly specialty drugs draw headlines, generics still constitute the vast majority of drug volume, underscoring the role of PBMs in sustaining that cost-saving shift.)

• Rebate Growth: A Brookings presentation (via Wharton/Penn) found that between 2010 and 2020 the share of brand drug revenue given back as rebates increased from ~30% to ~50% in major categories. Another study found that in highly competitive classes (five or more brands), rebates averaged nearly half of list price (^[40]). However, because lists also rose (to make room for those rebates), the effect on patients depends on insurance design.

• Share of Spending on Drugs: CMS data show that retail prescription drugs accounted for about 9% of the $5.3 trillion in total U.S. health spending in 2024 (^[16]), though total pharmaceutical spending across all channels was $805.9 billion (^[15]). This is lower than hospital ($1.63 trillion) or physician ($1.11 trillion) shares, but drug spending grew faster. Employers often find drug costs to be their fastest-rising benefit expense, with the overall pharmacy cost trend projected at 11.4% for 2025.

• Employer Savings Estimates: In surveys, self-insured employers sometimes report that implementing a PBM saved them 20–30% of what they had been spending on drugs (^[65]). (In the Roundstone blog cited, the claim was that transparent PBM partnerships save 20–30% on pharmacy costs (^[65]).) Such figures, however, should be taken with caution: they likely reflect gross comparisons or retrospective guarantees, not necessarily net of incentives and rebates.

• Specialty Drugs and GLP-1s: GLP-1 coverage for weight loss is an important employer-benefit issue. In 2025, 43% of firms with 5,000 or more workers that offered health benefits covered GLP-1 agonists when used primarily for weight loss in their largest plan, up from 28% in 2024 (^[1]). The budget effect of coverage varies with benefit design, utilization, negotiated prices, and rebates; broad projections and product-specific savings claims should not be assumed without plan-level evidence.

These data reinforce the narrative: drug costs are heavily influenced by a small subset of expensive treatments, and PBMs wield substantial influence over which drugs those are and how they are financed. In the next section, we discuss what regulators and policymakers are doing in reaction.

Because PBMs and funding models affect broad public interests (healthcare costs, patient access, insurance markets), they are subject to extensive regulation and reform efforts at both federal and state levels. Key developments include:

State Actions

Over the past 5–8 years, state legislatures across the U.S. have enacted hundreds of laws aiming to regulate PBMs. According to the National Academy for State Health Policy (NASHP), all 50 states had passed at least one PBM-related law by 2023 (^[14]). Common provisions include:

• Licensing and Registration: Many states require PBMs to be licensed or registered as PBMs. In some jurisdictions, an insurance department regulates the PBM or the PBM must also qualify as an administrator; this does not generally make the PBM an insurance carrier.

• Transparency and Reporting: States like Oregon, Washington, and Maine created drug price transparency programs. For example, Washington requires PBMs to report certain data annually (which can feed into legislative oversight). Fifteen states had specific PBM reporting rules by mid-2023 (^[69]). These programs have uncovered insights on drug pricing trends.

• Spread Pricing Bans: Several states (Arkansas, Kentucky, Louisiana, Mississippi, now New York and others) have banned PBMs from practicing spread pricing in state plans (mostly Medicaid). This ensures PBMs pay pharmacies the same amount they bill plan sponsors.

• Copay Accumulators: Copay accumulator programs exclude manufacturer assistance from a member’s deductible or out-of-pocket limit. Some state consumer-protection laws restrict that exclusion and require qualifying assistance to count, although applicability varies by jurisdiction and plan type (^[70]).

• Rebate Pass-Through: A few states require PBMs to pass at least a portion of rebates to plan sponsors or to consumers at point-of-sale. Maine’s 2019 law (discussed above) is a notable example; California passed a similar reform in 2022 requiring rebates to lower patient costs. In Maine, drug-payer transparency reports demonstrated that PBMs retained less of the money flowing through them after the law (^[13]).

• Audit and Appeal Standards: Because PBMs audit pharmacies aggressively, some states have enacted rules to protect pharmacies (limiting retrospective audit amounts, requiring clearer explanations, etc.)

Recent state developments vary substantially by jurisdiction and effective date. California signed SB 41 in October 2025; the state describes the law as prohibiting spread pricing, requiring manufacturer rebates to be passed through to health plans, and limiting PBM charges to administrative fees (^[71]). Colorado’s HB25-1094 takes effect January 1, 2027 and restricts PBM income based on prescription-drug price or cost while allowing flat-dollar service fees (^[72]). Other state requirements should be assessed against the enacted law, its effective date, and the plan type at issue.

Overall, state regulation focuses on transparency and consumer protection. A NASHP analysis notes that more than half of all enacted drug price laws from 2017–2025 dealt with PBMs (^[14]). States largely see PBM reform as a tool to reduce drug costs: by increasing accountability, they hope to ensure health plan dollars are used more efficiently. However, state actions have uneven reach: ERISA typically preempts regulation of private self-funded plans (^[2]), so state PBM rules often target commercial plans, Medicaid, or the insurance market (not self-funded ERISA plans). Federal proposals may affect self-funded plans if finalized, but their scope, effective dates, and application depend on the text of a final rule or enacted statute.

Federal Initiatives

At the federal level, Congress and federal agencies have also turned to PBM issues in recent years:

• Medicare Part D Oversight and IRA Implementation: The Inflation Reduction Act (IRA) continues to reshape Part D. In 2025, a $2,000 annual out-of-pocket cap took effect for Medicare beneficiaries (adjusting to $2,100 in 2026), and the coverage gap ("donut hole") was eliminated. More significantly, CMS negotiated prices for the first 10 drugs taking effect in 2026, including Eliquis, Jardiance, Xarelto, Januvia, and Stelara, with negotiated discounts ranging from 38% to 79% off list prices – projected to save Medicare enrollees an estimated $1.5 billion in 2026 alone (^[73]). Fifteen additional drugs were selected in January 2025 for negotiation taking effect in 2027. The IRA also added requirements for transparent PBM reporting in Medicare Part D (e.g. disclosing negotiated prices, DIR payments, and rebate pass-through to CMS) (^[74]).

• FTC Investigation and Enforcement: The Federal Trade Commission launched its investigation into the three largest PBMs in mid-2022 (^[11]). The FTC released two interim reports: the first (July 2024) documenting PBMs' significant influence over drug access and independent pharmacy viability, and the second (January 2025) finding that the Big 3 PBMs marked up specialty generic drugs by hundreds or thousands of percent. For the analyzed specialty generics, their affiliated pharmacies generated more than $7.3 billion in dispensing revenue above estimated acquisition cost (NADAC) during 2017–2022; the FTC separately estimated $1.4 billion in spread-pricing income (^[75]). In February 2026, the FTC accepted a proposed consent agreement with Express Scripts for public comment. The proposal describes changes to Express Scripts’ business practices, but it does not have the force of law unless the Commission issues a final consent order (^[76]). The June 2026 hearing did not proceed as described: Caremark later entered a settlement agreement, and the FTC withdrew the OptumRx matter from adjudication to consider a proposed consent agreement.

• Legislation: After years of bipartisan proposals that stalled in Congress, federal PBM reform was finally signed into law in February 2026. Key provisions include: PBMs serving large fully insured or self-insured employer health plans must pass 100% of prescription drug rebates directly to the plan sponsor; for Medicare Part D, PBMs are limited to collecting service fees and prohibited from tying compensation to the size of negotiated discounts (^[77]). However, notable gaps remain: no spread-pricing prohibition was included, and the law does not apply to ACA individual-market plans. Earlier legislative efforts – including the PBM Reform Act of 2025 (introduced July 2025 by Reps. Carter and Dingell) and the Modernizing and Ensuring PBM Accountability Act – helped build momentum for the final package (^[29]).

• GAO and HHS Reports: The Government Accountability Office has issued reports on PBM pricing in Medicaid and Part D, often finding that state Medicaid contracts were not adequately monitored for value. The Department of Labor and HHS have convened working groups to consider PBM-related fiduciary and transparency issues under ERISA.

It should be noted that PBMs also operate in the global context. Other countries have different systems (often with government-run formulary negotiations, single-tier pricing, etc.). U.S. PBMs are unique in their scale and opacity; Canada and many European countries negotiate at the government level, and do not have commercial PBMs dominating the market. Several proposals on PBMs pivot on adopting some features of these models (though adapting wholesale here is difficult given the employer sponsorship model of U.S. coverage).

As of August 2026, the policy landscape includes a proposed Department of Labor PBM fee-disclosure rule, FTC settlements involving Express Scripts and Caremark, a proposed consent process involving OptumRx, and continuing state-law activity. Employers and PBMs may reassess contracts in response, but the ultimate operational effects will depend on final agency action, applicable effective dates, and individual contract terms.

Expert Opinions

Experts and analysts have varying perspectives on PBM roles. Our sources reflect this diversity:

• Industry Analysts: Consulting firms and benefits brokers often tout PBMs’ contributions. For example, a 2025 analysis by a benefits firm stated that “the PBM is a cornerstone of self-funded cost containment,” emphasizing generic substitution and data analytics (^[65]). Industry sources frequently highlight PBM savings of 20–30% on drug costs for engaged employers (preceding implementation of transparent models) (^[65]). They argue that without PBMs, drug spending would be far higher – because insurers would have to contract separately with pharmacies, and plans would lose leverage.

• Economists & Academics: Researchers like Conti et al. (BU) and Mattingly et al. (JHU) take a more balanced view. They acknowledge PBMs’ efficiency benefits (scale negotiations, formulary expertise) but focus on market failures (information asymmetry, anti-competitive practices). For instance, Conti et al. conclude that, while PBMs have the potential to enhance market efficiency, realizing that potential requires careful regulatory attention to issues like vertical integration and secrecy (^[78]) (^[11]). JAMA Health Forum authors similarly note that PBM regulations should aim to correct market failures rather than just protect incumbents (e.g. breaking up dominance vs. locking prices in place) (^[6]) (^[78]).

• Employer/Consumer Advocates: Groups like the American Benefits Council or the Pharmaceutical Care Management Association (PCMA, the PBM trade group) argue that the PBM model overall saves money and increases access. PBM executives often claim that average net price increases (to plans) are below inflation. Conversely, consumer advocate groups (Families USA, Public Citizen) and independent economists (Ken Ginsburg, Frank Lichtenberg) produce reports branding PBMs as middlemen who profit without adding commensurate value. These reports raise questions about patient out-of-pocket increases and call for strict reforms. For example, a 2023 Families USA report estimated that 2021 PBM spread-pricing amounted to $38 billion in hidden costs to plans nationwide (though the methodology of such estimates is debated).

In presenting this analysis, we cite both provider (JAMA, HMPI economics) and critic (state audits, government reports) sources to give a comprehensive account. The overall picture is that PBMs are powerful and multi-faceted, demanding careful oversight. The evidence suggests some net benefits (especially in generic adoption) but also nontrivial costs and distortions.

Looking ahead, several scenarios and policy changes could reshape pharmacy benefits and funding models:

• Transparency and Regulation: The Department of Labor’s proposed PBM fee-disclosure rule could establish additional disclosure requirements for self-insured group health plans if finalized. The FTC case has produced settlements involving Express Scripts and Caremark, while the OptumRx matter was withdrawn from adjudication for consideration of a proposed consent agreement. The practical effects on PBM pricing, manufacturer behavior, premiums, and patient cost sharing remain uncertain.

• Continued Tilt to Self-Funding: Historically, each major insurance regulation surge (HIPAA, ACA small-group reforms) inadvertently encouraged self-funding (via ERISA preemption). It is plausible that future reforms (e.g. a public option) might further shift risk into large ERISA plans, continuing the long-run trend. This would mean more employers directly negotiating with PBMs and potentially more innovative benefit designs (like direct primary care arrangements for pharmacy). However, a reversal of ERISA preemption (e.g. Congress allowing states more control over large plans) could change that calculus dramatically. Some state-level single-payer advocates see ERISA as a barrier to reform (^[79]).

• Digital and Value-Based Innovations: Technology firms and new entrants are disrupting the PBM space. Waltz Health launched a direct-to-employer obesity-medication access model on January 1, 2026. The company describes the model as integrating fixed pricing with employers’ existing benefit structures; its effects on PBM arrangements will vary by contract (^[80]). “Transparent” PBMs and pharmacy retailers continue launching new models (flat fees, 340B pass-through, etc.), and some public entities (Seattle, Denver) have tested municipally-run prescription programs bypassing commercial PBMs. On the insurer side, advances in predictive analytics are sharpening how self-funded employers use PBM data for wellness incentives and narrow networks.

• Drug Pipeline and Spending: The pipeline of expensive gene therapies and specialty drugs will continue to challenge any plan model. PBMs may negotiate outcomes-based contracts (paying per response) or expand “buy-and-bill” controls through medical benefit carve-outs. How these innovations are handled in self vs insured plans may diverge: large self-funded employers might pursue pilot programs for such contracts (since they have nimbleness), whereas fully insured plans negotiate coverage at scale.

• Consumer Impact: New policies like expanded direct-to-consumer advertising of generic alternatives, greater pharmacist prescribing authority, or OTC Rx switches could alter dispensing patterns. The way PBMs adapt to these (for example, reforming copay structures for OTC drugs) will matter. Additionally, consumer pressure (through social media or advocacy) might increase if patient cost burdens (driven by high deductibles and list prices) remain high. Some PBMs are exploring point-of-sale rebate tools to directly lower copays, which could become more common if states mandate them.

• Enterprise Health Strategies: Employers and buyers are not passive. We may see more concerted buyer coalitions or employee advocacy on PBM contracts. For instance, large plans might band together to demand “125% pass-through” or sue for harm. Self-funded employers might increasingly alert employees to the difference between list price and net cost, pressuring PBMs to seek win-win (like earlier patient assistance entry rather than coupon abuse).

As these developments unfold, the fundamental tension persists: employers and patients want affordable drugs and choice of therapy, while PBMs (and pharmaceutical firms) seek to preserve incentives that fund innovation and business viability. The ideal solutions will balance these goals. For instance, improving generic and biosimilar competition (through faster market entry or anti-evergreening rules) could reduce reliance on rebates as a negotiation tool. Similarly, fostering more PBM competition (breaking up the top firms or easing entry) might encourage efficiency. Because ERISA limits the reach of many state insurance laws over private-employer self-funded plans, federal legislation or regulation may be relevant to PBM practices affecting those plans; the scope and effect of any measure depend on its final text and effective date.

The interplay between PBMs and plan funding models is a defining aspect of modern U.S. healthcare. We have found that most large employers now self-insure (67% of covered workers in 2025) (^[1]), seeking flexibility and potential savings (^[3]), while fully insured plans still cover tens of millions, especially in smaller markets (^[35]). PBMs manage pharmacy benefits across both types of plans, performing essential functions in drug pricing and utilization. The evidence shows that PBMs have both positive and negative effects: they drive generic use and negotiate significant rebates for plans (^[5]) (^[40]), but their secretive pricing and rebate-retention can distort incentives (^[10]) (^[46]). The net result for patients and payers depends on contract details and market conditions.

Policy action on PBMs continues through proposed federal disclosure requirements, FTC enforcement activity, and state legislation. The FTC case has resulted in settlements involving Express Scripts and Caremark, while the OptumRx matter was withdrawn from adjudication to consider a proposed consent agreement; states also continue to consider and implement PBM-related measures. At the same time, escalating drug costs (total spending up 10.2% in 2024, with the pharmacy trend projected at 11.4% for 2025 (^[15])) – driven significantly by GLP-1 adoption – mean that mastering PBM negotiation has never been more critical.

In sum, self-funding has become the norm for large employers, allowing them to take charge of benefits but also bearing the cost of pharmaceutical inflation. PBMs face a changing regulatory environment—including proposed federal disclosure requirements, FTC enforcement developments, and state-law activity—but the extent and timing of any resulting business-model changes remain uncertain. This report has provided a detailed foundation for understanding these systems. All claims have been supported by the latest available data and expert analyses, to inform stakeholders whether they are employers designing benefits, PBMs setting strategy, or policymakers setting rules. The key question now is how quickly these reforms will translate into lower costs for plan sponsors and patients – and whether PBMs will find new revenue streams that recreate old problems. The dynamics of self-funding versus full insurance and the rapidly evolving PBM business models will continue to shape healthcare costs and access in the United States.

References: Key factual statements are supported by inline citations to government, academic, survey, and industry sources (^[2]) (^[25]) (^[29]) (^[10]) (^[14]) (^[15]) (^[12]), among others.