In February 2024, Johnson & Johnson (J&J) plan participants filed a complaint alleging J&J and its pension and benefits committee mismanaged drug benefits by overpaying. A federal court has dismissed the core plan-mismanagement claims for lack of standing, most recently in November 2025, without prejudice and without ruling on whether the plan overpaid. The case still raises a question for every benefits leader: would your pharmacy benefit manager (PBM) contract hold up if examined claim by claim?

The answer usually depends on how the plan chose its PBM. Evaluating discounts and evaluating what the plan actually pays reward different outcomes, and a cost-based evaluation gives employers a defensible way to choose a PBM.

PBM Selection: Discount-Based vs. Cost-Based Evaluation

Let’s start with a simple analogy: Imagine shopping for a gallon of milk and basing your decision on the biggest discount rather than the best price. If the biggest discount is 50%, and the sticker price of that milk is $12, then you’d pay $6 for the gallon. That would be fine if it were the only milk available; however, imagine if a gallon from a different brand, one that offered no discounts at all, cost only $5. Even though you purchased the milk with the biggest discount, you’d still be paying $1 more than the lowest-cost milk available. This is an oversimplified example of discount-based versus cost-based methods of PBM evaluation.

Discount-Based Evaluation

This method compares the discounts and rebates a PBM gets from pharmacies and drug makers. It focuses on getting the biggest discounts (i.e., the highest percentage off the sticker price), but misses out on other ways to save money.

Cost-Based Evaluation

This approach starts with what the plan actually pays. It totals drug costs after rebates, discounts, and PBM fees, then divides by members and months to produce net cost per member per month (PMPM). Measured across a full year of claims, net PMPM captures every expense in one figure, so employers can compare proposals on the same basis.

The J&J complaint alleged that the plan paid far more than pharmacy acquisition costs for some generic drugs. We examined the drug-level pricing examples in the complaint in a separate analysis. Whatever the litigation's outcome, the pattern is familiar: a plan can secure attractive discounts and still miss the lowest overall cost.

Like choosing milk by the biggest discount, selecting a PBM on discounts alone can raise expenses when those discounts go untested against net cost.

The Limitations of Legacy, Discount-Based PBMs

The problem with PBMs that prioritize discounts, which are often also referred to as legacy PBMs, is that they don’t aim to reduce plan costs. While optimizing for average wholesale price (AWP) discounts and rebate guarantees may sound financially beneficial, our milk analogy demonstrates how they’re not the same as capturing the lowest-cost drug for a claim.

We often see legacy PBMs point to their long-standing industry experience and the promise of predictable costs as key advantages. These claims are designed to reassure employers that they are in capable hands, with a clear roadmap of their pharmacy benefit expenses.

In our view, legacy PBMs use intentionally intricate systems and pricing structures, which obscure the true financial implications of their services and undercut the predictability they promise.

Legacy PBMs commonly generate revenue through spread pricing, which the Department of Labor's PBM fee disclosure rule describes as charging the plan more than the PBM pays the pharmacy for a drug and keeping the difference. Pharmacy consultants attempt to minimize this “spread” by having the PBMs guarantee overall percentage discounts across the various drug categories.

This method of evaluation, which was intended to hold PBMs accountable, has led to higher drug costs: a legacy PBM is incentivized to increase drug costs for its clients, capturing revenue through spread. Alternatively, it can favor expensive drugs with high manufacturer rebates over more affordable alternatives to fulfill rebate guarantees. Often, it may employ both strategies. 

As the healthcare sector evolves, the challenge for employers to deliver both comprehensive and affordable benefits grows. Traditional PBMs, deeply rooted in long histories of opaque practices, will find it difficult to adapt to these changing demands. And without adopting evaluation methods that prioritize transparency and focus on actual costs over discounts, businesses face the same fiduciary questions raised in the J&J case. The case should serve as a cautionary example, underscoring the importance of a more thorough approach to selecting and overseeing PBMs.

How SmithRx Approaches Cost-Based PBM Evaluation

The good news for SmithRx clients is that by choosing a cost-based PBM solution, you’re safe from the types of allegations raised in the J&J lawsuit. In fact, the lawsuit cites a SmithRx case study in Paragraph 169 of the complaint as a savings success story and an example of what J&J should have done.

Employers evaluating PBMs on net cost need a partner whose compensation does not rise with drug spend. At SmithRx, we combine transparent economics with a fixed PMPM administrative fee and 100% pass-through of manufacturer rebates. We use no spread pricing, so the plan pays the same amount the pharmacy receives.

Curious to know how much switching to a cost-based PBM could save you? Request a repricing analysis.

Frequently Asked Questions

Is a larger rebate check a sign of a better PBM deal?

Not necessarily, because a drug with a higher list price may produce a larger rebate, so a formulary that favors high-list-price drugs can grow rebate checks even as net spend rises. Compare rebate dollars against net cost PMPM to see what the plan actually pays.

Does a pass-through contract guarantee the lowest net cost?

No, pass-through is a contract feature, so confirm which rebates and discounts pass through, how the PBM is paid, and whether ownership relationships affect decisions. Clinical execution and data access also shape net cost.

What is the difference between a fiduciary-aligned PBM and a legacy PBM?

A fiduciary-aligned PBM aligns contract and compensation with the sponsor's ERISA duty, while non-aligned models may use spread pricing, retained rebates, or owned-channel incentives. The difference shows up in contract terms, data access, and whether the PBM earns more when costs rise.