PBMs Shift Toward Transparent Fee Models: Traditional Margins Decline, but Core Cost-Control Value and Long-Term Earnings Stability Remain

Overview

The report summarizes Bernstein's August 20 teach-in on PBM reform, reviews how PBMs evolved from claims processors into highly concentrated, vertically integrated pharmacy benefit management platforms, and analyzes the new business model following the 2026 reforms. The core conclusion is that traditional spreads and rebate retention face structural compression, but the need to manage drug spending has not disappeared; industry earnings will shift toward explicit administrative fees, specialty pharmacy, utilization management, and other value-added services.

Core views

PBMs first emerged in the 1960s—70s because pharmacy claims were frequent and required real-time verification at the point of sale of eligibility, drug coverage, and patient cost-sharing, needs that traditional medical claims systems could not meet. Early PBMs primarily charged on a cost-plus or per-claim basis; they subsequently added pharmacy network negotiations, formulary management, patient drug steering, manufacturer rebates, mail-order pharmacy, and specialty pharmacy. Their core function has always been to help health plans and self-insured employers control drug and total medical spending by lowering the unit cost of drugs and reducing unnecessary utilization or steering patients toward lower-cost drugs. The traditional PBM model gradually developed three principal sources of profit. The first is the retail spread, where the drug price charged by the PBM to the client exceeds the amount paid to the retail pharmacy; fees for claims processing, utilization management, and cost-control programs were also often embedded in aggregate discount guarantees rather than disclosed separately. The second is manufacturer rebates and other revenue, including rebates for formulary access, market share, volume, and price protection, as well as GPO fees for contract management, reporting, and compliance services. The third is dispensing profit, initially derived mainly from mail-order pharmacy, with specialty pharmacy later becoming a more important source as high-cost drugs for complex diseases grew. One actual bid proposal cited in the report promised the following for standard 30-day retail prescriptions: an 18.4% discount to average wholesale price for branded drugs, an 83.9% discount for generic drugs, and a pharmacy dispensing fee of $0.85 per fill; it also guaranteed an additional $143 rebate for each qualifying 30-day branded prescription. The profit mix has changed materially. In 2014, retail spreads, rebates, and dispensing profits each accounted for approximately one-third of a typical PBM's profit. By 2022—2023, although clients and regulators demanded less rebate retention, PBMs maintained the overall economic contribution of manufacturer-negotiation revenue through GPOs and related administrative or service fees; meanwhile, retail spreads experienced the greatest compression, while dispensing profits from specialty pharmacy and similar operations rose to approximately half of total industry PBM profit dollars. In other words, profits did not simply disappear; they migrated from less transparent spreads and rebate retention toward dispensing and other fee mechanisms. Reform pressure first arose from the growing importance of drug spending. During the 2010s, annual drug-spending growth was typically approximately 5%—8% and was restrained in some periods by patent expirations for branded drugs and generic substitution. Subsequently, specialty drugs, GLP-1 drugs, rare-disease therapies, and orphan drugs drove drug-spending growth into the double digits. Although retail prescription drugs account for only approximately 10% of total U.S. healthcare spending, from the perspective of employer health plans, pharmacy spending often exceeded 25% of total medical costs by 2020; when drugs covered under both pharmacy and medical benefits are included, pharmaceuticals can approach one-third of total healthcare spending. Employers and health plans have therefore rebid PBM contracts more frequently and hired specialist consultants to review pricing and performance guarantees, significantly increasing transparency and competitive intensity. This client behavior had already reduced industry margins before formal reform. PBM margins were broadly stable during the 2010s but declined by approximately 50 basis points from 2022—2025. The report believes the pressure during this period came more from competitive bidding at contract renewals and clients' ongoing comparisons of PBM economics than from the new regulatory measures themselves. Accordingly, the industry's earnings reset is not a sudden event caused solely by policy, but the result of the combined effects of market forces and regulatory reform. The year 2026 marked a policy inflection point: federal PBM reform legislation passed early in the year, and the FTC also reached a settlement with PBMs. The reform agenda includes increasing contract transparency, shifting from spread pricing to explicit administrative fees, decoupling PBM compensation from drug prices, reflecting all discounts—including rebates—in consumers' net drug prices, and protecting unaffiliated pharmacies. PBMs have already begun offering rebate pass-through, full-cost pass-through, and administrative-fee-only arrangements. The report expects transparent models to become mainstream, although the actual pace of conversion will continue to depend on the choices of employer and managed-care clients; PBMs may also continue retaining some negotiated savings through GPOs. Bernstein estimates that reform, combined with existing market forces, will compress traditional PBM margins by 25%—35% from prior levels. However, the report believes reset margins will be more stable over the long term because revenue sources will be clearer and dependence on drug-price inflation and opaque spreads will be lower; more stable earnings streams could lead to a valuation re-rating. The new model will still charge per-member-per-month administrative fees, network access fees, and supplemental fees for cost-control programs, while mail-order and specialty pharmacies will remain important. The report uses the self-insured employer healthcare services market as a reference point for the PBM transition. The self-insured market initially relied on claims-processing or per-member fees, then added network leasing, stop-loss insurance, risk assumption, and cost-control products, ultimately developing into a mature model combining base service fees with high-value-added cross-selling. Illustrative margin characteristics for related services include: service-fee markups of 5%—15%; self-insured service fees typically equal to more than 5%—10% of comparable premiums, or more than $30—$40 per member per month for a $450 product; incremental margins on network leasing of 30%—50% or more; cost-control product margins of approximately 10%—20%; and capitated product margins of approximately 5%—15%. These figures illustrate that base administrative fees alone may not provide high growth, but networks, cost control, risk assumption, and differentiated services can expand the revenue base and profit dollars per member. Under the new PBM model, incremental earnings opportunities include stricter step therapy and prior authorization, improving drug selection through physician engagement and contract optimization, assuming risk for certain drug categories, integrating formulary management with medical management and benefit design, and providing high-touch management for high-cost drugs while sharing in the savings. The report expects the long-term margin of CI's PBM-related business to stabilize at 1.8%, with product cross-selling potentially increasing that margin by approximately 10%—20% to a range of approximately 2%—2.4%. This reflects the report's core view: future PBMs will no longer rely primarily on drug prices and embedded spreads, but will earn revenue through demonstrable cost-control outcomes. The U.S. PBM market remains highly concentrated. CVS Caremark, Cigna's Express Scripts, and UnitedHealth's OptumRx collectively account for approximately three-quarters of industry prescription volume, while a chart in the report summarizes the top three's share at approximately 80%; Humana accounts for approximately 7%, making it the smaller fourth player. ELV is estimated to account for 20% of Caremark's volume and Aetna approximately 10%; Cigna-affiliated health plans account for only approximately 5% of Express Scripts' volume, with Express Scripts also serving third-party clients such as CNC; OptumRx is more closely tied to UNH, with approximately 60% of prescription volume coming from UNH and related self-insured employer accounts. The report believes PBMs' cost-control value becomes even more important when drug spending is growing rapidly, but whether captive and vertically integrated pharmacies receive unfair advantages will be one of the most important remaining policy controversies.

Analysis framework

The report first reconstructs PBMs' functions, integration process, and profit sources by historical stage, then disaggregates changes in retail spreads, manufacturer rebates/GPO revenue, and dispensing profits. It subsequently uses the share of drug spending, client bidding behavior, industry margins, and market concentration to explain why reform occurred. Finally, it draws an analogy with the self-insured employer services model to assess how specialty pharmacy, cost-control products, risk assumption, and cross-selling could replace traditional profit sources under a transparent administrative-fee model.

Methodology notes

• Competitive and Strategic FrameworkValue chain analysis

  PBM value chain and role decomposition

  The report traces contractual relationships and drug flows among manufacturers, PBMs, pharmacies, health plans, employers, and consumers, analyzing how PBMs create value and generate profits through network negotiations, formularies, rebates, claims processing, and dispensing.

• Industry/Sector Analysis FrameworkUpstream, Midstream, and Downstream Industry Chain Transmission

  Transmission analysis of changes in drug prices, rebates, and regulation

  The report examines how drug-price increases, rebate pass-through, and fee decoupling sequentially affect payers' net costs, consumer prices, unaffiliated pharmacies, and PBMs' own margins.

• Corporate Fundamentals and Financial FrameworkEarnings Quality Analysis

  Analysis of PBM profit sources and stability

  The report divides profits into retail spreads, manufacturer revenue, and dispensing profits, and compares the profit mix in 2014 with that in 2022—2023 to assess whether earnings under the new model will be more transparent and stable.

• Event-Driven Strategy and Behavioral FinanceEvent-driven analysis

  Impact analysis of 2026 PBM legislation and the FTC settlement

  The report treats the federal reform legislation and FTC settlement as formal catalysts for business-model changes and analyzes their effects on fee structures, rebate pass-through, pharmacy protections, and vertical integration.

• (Out-of-Vocabulary Method)

  Analogy with the self-insured employer services model

  The report uses the self-insured employer market's evolution from basic claims-processing fees toward network leasing, stop-loss, cost control, and cross-selling as a reference for forecasting the future revenue structure of transparent PBMs.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Cigna (CI)

  Its Express Scripts subsidiary is one of the three largest U.S. PBMs and provides services to affiliated health plans and third-party clients such as CNC; rated Outperform with a target price of $381.

  Strengths

  Express Scripts has industry-leading scale, with affiliated health plans accounting for only approximately 5% of its PBM activity, giving it a broad external client base.

  Weaknesses

  Traditional PBM profit sources are being compressed by transparency initiatives and competitive bidding.

  Comparison

  Compared with OptumRx, it is less dependent on parent-affiliated business.

  Risks

  Fee-model reform, FTC regulation, and vertical-integration policies may affect PBM margins.

• CVS Health (CVS)

  Its Caremark subsidiary is one of the three largest U.S. PBMs; rated Outperform with a target price of $106.

  Strengths

  It has large-scale PBM and dispensing operations, with ELV accounting for approximately 20% of Caremark's volume and Aetna approximately 10%.

  Weaknesses

  The report uses CVS data to show that PBM margins had already compressed by approximately 50 basis points from 2022—2025.

  Comparison

  Caremark, Express Scripts, and OptumRx collectively control approximately three-quarters to 80% of the market.

  Risks

  Retail spread compression and further policy scrutiny of captive pharmacies and vertical integration.

• UnitedHealth (UNH)

  Its OptumRx subsidiary is one of the three largest PBMs; rated Outperform with a target price of $512.

  Strengths

  Approximately 60% of OptumRx prescription volume comes from UNH and related self-insured employer accounts, reflecting close internal business integration.

  Weaknesses

  Compared with Express Scripts, it has a higher concentration of business from its parent company and affiliated accounts.

  Comparison

  OptumRx is more closely tied to UNH than Express Scripts is to Cigna-affiliated health plans.

  Risks

  Vertical integration, self-preferencing, and affiliated-pharmacy policies are regulatory focal points emphasized in the report.

• Humana (HUM)

  It accounts for approximately 7% of the U.S. PBM market and is the smaller fourth-largest participant; rated Outperform with a target price of $425.

  Strengths

  It has independent scale in a highly concentrated PBM market.

  Weaknesses

  Its market share is materially lower than those of the three largest PBMs.

  Comparison

  The top three collectively account for approximately three-quarters to 80%, while Humana accounts for approximately 7%.

  Risks

  Its smaller scale may limit its leverage in negotiations with drug manufacturers and pharmacies.

• Elevance Health (ELV)

  It is an important external client of CVS Caremark and is estimated to contribute 20% of its PBM volume; rated Outperform with a target price of $488.

  Strengths

  As a major PBM client, it has strong bargaining power in competitive procurement.

  Comparison

  Its contribution to Caremark's volume exceeds Aetna's approximately 10% share.

  Risks

  PBM contract restructuring and rapid growth in drug spending may alter its pharmacy-benefit costs.

• Centene (CNC)

  It has a third-party PBM service relationship with Cigna's Express Scripts; rated Outperform with a target price of $79.

  Strengths

  It can obtain pharmacy benefit management services through a large external PBM platform.

  Comparison

  It is an external client of Express Scripts rather than a Cigna-affiliated health plan.

  Risks

  Changes in PBM fee models and drug costs may affect its payer costs.

• agilon health (AGL)

  Included in Bernstein's U.S. Healthcare Services coverage table; rated Market-Perform with a target price of $86.

• HCA Healthcare (HCA)

  Included in Bernstein's U.S. Healthcare Services coverage table; rated Market-Perform with a target price of $426.

• Molina Healthcare (MOH)

  Included in Bernstein's U.S. Healthcare Services coverage table; rated Outperform with a target price of $266.

  Risks

  Changes in PBM fees and drug spending may affect managed-care costs.

Key data

• Traditional PBM margin reset25%—35% compression from historical levelsBernstein's estimate of the combined impact of reform and market forces.
• Recent industry margin changeDeclined by approximately 50 basis points from 2022—2025The report believes this was driven primarily by client bidding and market competition.
• PBM profit mixIn 2014, retail spreads, rebates, and dispensing profits each accounted for approximately 1/3; in 2022—2023, dispensing profits from specialty pharmacy and similar operations accounted for approximately 1/2Shows the shift in the earnings center of gravity from retail spreads toward dispensing operations.
• Drug-spending growthTypically increased 5%—8% annually during the 2010s; recently accelerated to double digitsSpecialty drugs, GLP-1s, rare-disease drugs, and orphan drugs are accelerating factors.
• Share of drug spendingRetail prescription drugs account for approximately 10% of total U.S. healthcare spending; pharmacy spending in employer plans often exceeded 25% in 2020; including drugs under medical benefits, the share can approach 1/3The importance of pharmaceuticals to payers differs materially across statistical definitions.
• Market concentrationThe top three account for approximately 3/4 of industry volume; the chart summarizes the share as 80%; Humana accounts for approximately 7%The top three are CVS Caremark, Express Scripts, and OptumRx.
• Major client relationshipsELV accounts for approximately 20% of Caremark's volume and Aetna approximately 10%; affiliated health plans account for approximately 5% of Express Scripts' volume; UNH and related self-insured accounts account for approximately 60% of OptumRx prescription volumeShows differing levels of dependence among the three largest PBMs on their parent companies and external clients.
• PBM bid example18.4% discount for branded drugs, 83.9% discount for generic drugs, dispensing fee of $0.85/fill, and a rebate of $143/fill for qualifying 30-day branded prescriptionsAn example of an actual PBM quote presented in the report.
• Self-insured service margin characteristicsService-fee markup of 5%—15%; network leasing of 30%—50% or more; cost-control products of 10%—20%; capitated products of 5%—15%Used as an analogy for the future earnings structure of PBM value-added services.
• CI PBM-related business marginApproximately 1.8% over the long term; approximately 2%—2.4% after cross-sellingThe report estimates that product cross-selling could increase the margin by approximately 10%—20%.
• AGL valuation tableCurrent price $95.74, target price $86; adjusted EPS: 2025A -$24.46, 2026E -$4.81, 2027E -$4.52; adjusted P/E: -3.9x, -19.9x, -21.2xAs of August 26, 2026; Rel. Perf. in the table is 171.5%, with a Market-Perform rating.
• CNC valuation tableCurrent price $65.47, target price $79; adjusted EPS: 2025A $2.08, 2026E $5.05, 2027E $5.43; adjusted P/E: 31.4x, 13.0x, 12.1xAs of August 26, 2026; Rel. Perf. in the table is 108.9%, with an Outperform rating.
• CI valuation tableCurrent price $280.87, target price $381; adjusted EPS: 2025A $29.84, 2026E $30.48, 2027E $33.02; adjusted P/E: 9.4x, 9.2x, 8.5xAs of August 26, 2026; Rel. Perf. in the table is -25.9%, with an Outperform rating.
• CVS valuation tableCurrent price $94.32, target price $106; adjusted EPS: 2025A $6.75, 2026E $7.37, 2027E $8.14; adjusted P/E: 14.0x, 12.8x, 11.6xAs of August 26, 2026; Rel. Perf. in the table is 10.7%, with an Outperform rating.
• ELV valuation tableCurrent price $402.54, target price $488; adjusted EPS: 2025A $30.30, 2026E $27.09, 2027E $30.60; adjusted P/E: 13.3x, 14.9x, 13.2xAs of August 26, 2026; Rel. Perf. in the table is 10.2%, with an Outperform rating.
• HCA valuation tableCurrent price $427.16, target price $426; adjusted EPS: 2025A $28.21, 2026E $29.92, 2027E $30.68; adjusted P/E: 15.1x, 14.3x, 13.9xAs of August 26, 2026; Rel. Perf. in the table is -15.1%, with a Market-Perform rating.
• HUM valuation tableCurrent price $391.06, target price $425; adjusted EPS: 2025A $16.60, 2026E $9.45, 2027E $15.40; adjusted P/E: 23.6x, 41.4x, 25.4xAs of August 26, 2026; Rel. Perf. in the table is 13.6%, with an Outperform rating.
• MOH valuation tableCurrent price $202.43, target price $266; adjusted EPS: 2025A $11.03, 2026E $5.28, 2027E $10.68; adjusted P/E: 18.4x, 38.3x, 19.0xAs of August 26, 2026; Rel. Perf. in the table is -5.8%, with an Outperform rating.
• UNH valuation tableCurrent price $401.01, target price $512; adjusted EPS: 2025A $16.35, 2026E $20.11, 2027E $22.11; adjusted P/E: 24.5x, 19.9x, 18.1xAs of August 26, 2026; Rel. Perf. in the table is 10.7%, with an Outperform rating.

Impact & implications

The report believes the PBM economic model will shift from opaque retail spreads and rebate retention toward explicit administrative fees, network fees, dispensing profits, and verifiable cost-control services. The short-term result is a material reduction in traditional margins; the long-term result may be improved revenue quality and stability. Specialty pharmacy, utilization management, risk assumption, and cross-selling will become more important, while vertically integrated groups that own both PBMs and pharmacies will continue to face policy uncertainty.

Risks

• Reform and market competition may reduce traditional PBM margins by 25%—35% from historical levels.
• The linkage between PBM fees and drug prices, opaque pricing, and misaligned incentives constitute structural risks explicitly identified in the report.
• The FTC's focus on market concentration, vertical integration, self-preferencing, information asymmetry, and potentially anticompetitive conduct may lead to further constraints.
• Captive and vertically integrated pharmacies are the next major area of policy contention, and future rules may weaken the economic advantages of PBMs operating dispensing businesses.
• Clients' more frequent rebidding and comparison of PBM contracts may continue to pressure pricing and margins.

What to watch

• Track the pace at which employers and managed-care organizations shift from traditional contracts toward full rebate pass-through and administrative-fee-only models.
• Monitor subsequent policy changes concerning vertically integrated pharmacies, captive dispensing, and fair reimbursement for unaffiliated pharmacies.
• Assess whether specialty pharmacy, utilization management, cost-control, and high-cost drug management products can offset the decline in traditional profit sources.
• Monitor whether PBMs continue retaining some negotiated savings through GPOs and the transparency of the related revenue.
• Track whether the margin of CI's PBM-related business can stabilize at 1.8% and increase to approximately 2%—2.4% through cross-selling.