Five ways to get the contract done right

Pharmacy benefit managers (PBMs) are third-party administrators of prescription drug programs, who are primarily responsible for processing and paying prescription drug claims. A PBM can be daunting, and there are often large discrepancies between the purported outcomes from a PBM, and the true value provided.

The underlying contract between the customer (e.g., plan sponsor) and the PBM can vary widely along dozens, if not hundreds, of different definitions, contract terms and other caveats. “Getting the contract right is very important,” says former HealthTrust SVP of IHP, Joey Dizenhouse. “For example, in our experience, the actuarial difference from a high-performing PBM contract can be a reduction of 10% (or more) in terms of expected drug spend. That translates to savings of at least $100 to $150 per life, per year.”

As a result, it is critical to ensure that the PBM’s value is maximized by aligning the contract around the right drugs, at the right time, and in the correct setting, with the appropriate levels of transparency.

The contract is one of the essentials in maximizing the value of the relationship with a PBM. “This is also where HealthTrust can help. We are both a large purchaser of pharmaceuticals direct from manufacturers and we operate the largest sole-sourced PBM in the nation,” says Dizenhouse. This provides comprehensive data and true visibility to all sides of the complex pharmaco-finance ecosystem.

Within the context of contract negotiation, Dizenhouse recommends paying special attention to these five key components of a PBM plan:

1. Average Wholesale Price

Average Wholesale Price (AWP) is a common and practical term. AWP is not the pharmacy or PBM’s actual acquisition cost. Rather, it’s an index that creates a spread between drug costs versus what the pharmacies really pay for drugs from wholesalers.

In a contract, a PBM may offer discounts off the AWP, often broken down by type of drug. For example, generic drugs filled at a retail pharmacy for a one-month supply might have one “AWP minus x%” guarantee, whereas brand drugs filled by the PBM’s own mail-order pharmacy might have “AWP minus y%” for those prescriptions.

Within the PBM contract, an AWP should be based on a specific and credible index and should not be able to be substituted or repackaged. This language should be firm before making a PBM decision, as it alone can have a meaningful financial impact.

2. Brand vs. Generic Drugs

Identifying the differences between brand and generic drug classification is also critical. How a PBM contract defines brand versus generic drugs will have a substantive impact on overall value.

There are many variations in practice, but when dealing with brand versus generic drugs in a PBM contract, it is advisable to ensure that:

  • Single-source generics should be classified as generics.
  • The definition of “generic” should also include “generics in short supply,” any drugs under patent litigation, “House Generics” and “DAW-5” claims.
  • Any drug that is moved to be treated as a brand should always receive the minimum rebates. Appropriate language here can have a significant monetary impact.

3. Specialty Drugs

These are the most ambiguous segment in pharmaceuticals today, so properly defining specialty drugs is important. Specialty drugs are also the largest single area of spend for a given plan. When it comes to a PBM contract, pay close attention to:

  • Including a fixed list of National Drug Codes (NDCs) that comprehensively represent what is deemed a specialty drug, regardless of the included specialty definition.
  • Ensuring this specialty drug list is not updateable merely at the PBM’s discretion.
  • Treating limited distribution drugs the same as any other specialty drug.
  • Making sure any movement of drugs on or off the specialty drug list requires approval by the plan, and with sufficient notice. “This is a critical element because without this language your specialty drug spend could increase significantly,” Dizenhouse shares.

4. Rebate Language

Most PBM deals offer minimum rebates that vary in amount by type of claim, with the largest amounts paid on specialty drugs. “When it comes to rebate language in your PBM contract, you should demand 100% pass-through pricing in both rebates and other forms of compensation as well. The fact is that rebates are just one component of monies paid to PBMs, many of which they retain if you don’t negotiate that differently,” he says.

Dizenhouse advises being explicit in defining which drugs are not paid the minimum rebate, as well as documenting the key sub-types that are included for application of the rebates. Minimum rebates should also be required to be paid quickly, and associated documentation should be included for plan validation. The financial impact of this language can be material to the monies credited to one’s plan.

5. Treatment of Generics

While there can be different prices for the same drug, the maximum allowed cost (MAC) price is a subset of products where the PBM may also have the ability to set the price for many individual drugs. The less that is codified in the contract, the more flexibility the PBM has to bend the results in its favor.

When dealing with the treatment of generics in a PBM contract, make sure the total generic discount (GER) guarantee encompasses all kinds of generics (whether MAC or non-MAC). The MAC list should be contractually well-defined, and the overall audit rights also need to include the MAC list. As with the other examples, the effect of this language is meaningful toward the plan’s drug spend.

PBMs are an important tool that can and should be leveraged to maximize cost savings for plan sponsors and patients. But how the PBM is used is as important as anything. “At HealthTrust, our objective is always the same,” Dizenhouse says. “To secure the best price and the most advantageous terms for enrollees of our PBM program, leveraging our scale and expertise.”

Maximize the value of your PBM relationship by contacting your HealthTrust Account Manager or emailing

Check out our related podcasts: PBM Candid Conversations.

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