PBM Spread Pricing Explained: How to Tell If a Public Plan's Contract Has It

Spread pricing is the difference between what a pharmacy benefit manager (PBM) charges a health plan for a prescription and what it actually pays the pharmacy, kept by the PBM and usually invisible on the claim. Ohio's state auditor described it as "the difference between what the state's managed care plans pay the PBMs and what the PBMs pay pharmacies to dispense drugs" (Ohio Auditor of State). For a school district, city, or county that self-funds its employee pharmacy benefit, spread is a cost that never appears as a line item, which is why it is the first thing to look for in a PBM contract. This guide explains how it works, what public audits have found, and the five clauses that tell you whether a contract allows it. If you are new to PBMs, start with what a PBM is.

How spread pricing works

A PBM sits between a health plan and the pharmacies in its network. On each claim, two prices are set: the amount the pharmacy is reimbursed and the amount the plan sponsor is billed. In a "traditional" contract these two prices can differ, and the contract lets the PBM keep the gap.

Two prices, one claim:

For a sense of scale, the only reliable figures are audited ones: in Ohio Medicaid, the retained spread came to 31.4 percent of what managed care plans paid for generics over one year, versus 0.8 percent on brand-name drugs (see the Ohio audit below). Those are historical program-wide findings, not current prices for any drug or any local plan.

The mechanism that makes this possible is the maximum allowable cost, or MAC, list. A PBM sets a MAC price for each generic. If it maintains one MAC list for pharmacy reimbursement and a different, higher one for plan billing, spread is built into every generic claim. Because generics account for most prescriptions, small per-claim spreads add up to large annual sums. Understanding how pharmacies make money and how NADAC measures acquisition cost helps put the numbers below in context.

What public audits found

Ohio Medicaid, 2018. After state legislators asked how much PBMs were earning through spread, the Auditor of State analyzed a year of Medicaid managed care claims. Auditors found that "the Department, through its managed care plans, paid spreads totaling $224.8 million to PBMs for the one-year period" from April 1, 2017 through March 31, 2018 (Ohio Auditor of State). The spread was concentrated in generics: "PBMs collected $208 million in fees on generic Medicaid prescriptions, or 31.4 percent of the $662.7 million paid by managed care plans on generics," while "the fees or spreads retained by PBMs were $6.6 million (or 1.1 percent) on $617.6 million in specialty drugs and $9.8 million (0.8 percent) on $1.25 billion in brand-name drugs" (Ohio Auditor of State). The auditor recommended the state "perform an analysis to determine whether pass-through contracting would be more cost-effective."

FTC, 2024 and 2025. The Federal Trade Commission's July 2024 interim staff report examined the vertically integrated PBMs it called "powerful middlemen inflating drug costs" (FTC). Its second interim report, released January 14, 2025, quantified two related practices on specialty generic drugs from 2017 to 2022. The three largest PBMs' "affiliated pharmacies generated over $7.3 billion of dispensing revenue in excess of their estimated acquisition cost, as measured by the National Average Drug Acquisition Cost (NADAC)," and the same PBMs "also separately generated an estimated $1.4 billion of income from spread pricing" on the analyzed specialty generic drugs over that study period (FTC). The FTC added that the PBMs "netted such significant revenues all while patient, employer, and other health care plan sponsor payments for drugs steadily increased annually" (FTC).

These are government findings about specific programs and drug categories. They do not mean every PBM contract contains spread. The contract shows whether spread is permitted; measuring whether it actually occurred, and how much, requires comparing plan invoices against pharmacy remittances or an independent claims audit.

How regulators treat spread

Medicaid managed care. In a May 15, 2019 informational bulletin, CMS made clear that a managed care plan "may not use the entire capitated payment to the PBM as incurred claims" when calculating its medical loss ratio. Instead, "the PBM must calculate incurred claims as the amounts paid to the retail or mail-order pharmacy (e.g., drug ingredient costs and dispensing fees) minus any prescription drug rebates," and other PBM revenue must be "classified appropriately and reported to the managed care plan" (CMS). In plain terms, retained spread counts as administrative revenue, not as medical spending, in Medicaid.

Employer and public plans. Federal gag clause rules prohibit group health plans from entering into an agreement with a provider network, third-party administrator, or "other service provider offering access to a network of providers that would directly or indirectly restrict a plan or issuer from" providing "provider-specific cost or quality of care information" to the plan sponsor, or from "electronically accessing de-identified claims and encounter information or data" including per-claim financial information; "Plans and issuers must annually submit an attestation of compliance with these requirements" (CMS). Whether a given PBM agreement falls under these rules is a question for the plan's counsel, but a plan sponsor that cannot see claim-level pharmacy reimbursement should ask why.

States. A growing list of states has enacted laws that prohibit or restrict spread pricing in some or all markets, often alongside pass-through requirements. NASHP maintains a tracker of enacted state PBM legislation that can be filtered by provision and state (NASHP). The guide to prescription price transparency laws covers related state rules that affect what you pay at the counter.

Traditional vs. pass-through contracts

Neither model guarantees the lowest total cost by itself, and the label "pass-through" does not by itself deliver claim-level audit rights, a shared MAC list, or every category of manufacturer revenue; those exist only if the contract spells them out. A pass-through contract with a high administrative fee can cost more than a well-negotiated traditional contract. The point of pass-through is that the cost is visible and therefore negotiable.

Five clauses to check in a PBM contract

1. Two definitions of price. Look for separate terms such as "Plan Sponsor Rate" and "Participating Pharmacy Rate," or two MAC schedules. If they are defined separately, ask in writing whether they are ever different for the same claim.
2. "Lesser of" language that only protects one side. Many contracts bill the plan the lesser of the discounted price, the pharmacy's usual and customary price, or the MAC. Check whether the pharmacy is paid on the same basis. See usual and customary price explained.
3. The word "retain." Any clause allowing the PBM to retain the difference between amounts billed and amounts paid, or to retain "excess" rebates or manufacturer administrative fees, describes spread or its rebate equivalent.
4. Guarantee reconciliation as the only remedy. If the PBM's obligation is to meet an aggregate discount guarantee rather than to pass through actual pharmacy cost, spread can exist within the guarantee.
5. Audit and data access limits. Clauses that limit audits to guarantee math, cap the number of claims reviewed, or bar the sponsor from seeing pharmacy paid amounts are the practical barrier to detecting spread.

How to check your own district or city

For public employers, the PBM agreement, its pricing exhibits, and reconciliation reports are often obtainable under state public records laws, subject to each jurisdiction's exemptions, which can include trade-secret claims by the PBM. The BetterBuyRx PBM Commons publishes PBM contracts obtained so far from Texas public entities, including school districts, cities, counties, university systems, and state plans, scores the contracts it has reviewed against a published rubric that includes a "No spread pricing" item and a "100% pass-through of manufacturer revenue" item, and provides a records request builder with a document list for entities not yet covered. Reading a scored contract is a practical way to see what the clauses above look like in real agreements.

If you are a plan member rather than a plan sponsor, spread pricing still affects you indirectly through premiums and contributions, and sometimes directly when a copay exceeds a pharmacy's cash price. That is a separate problem with a direct fix: compare the cash price before you fill.