The PBM contract remains the key element in reducing pharmacy benefit costs. At WBC ( we know that creating a favorable “client-focused” contract takes some work.  When challenged over language that sounds open-ended or uncertain, many PBMs rely on what I’ve come to call “The 4 most dangerous words in the PBM lexicon.” Those four words are “It’s Standard Industry Practice” and unfortunately, in many cases, it’s true.  Just because a large portion of the industry has been able to retain fuzzy language that doesn’t provide the client with well-defined and unambiguous guidance on key operational areas such as pricing, claims and audit rights to name a few, doesn’t mean that it’s right, or that it should continue.

Plan sponsors need to ask themselves whether the business philosophy deployed in their PBM Services Agreement is serving the needs of their  organization, or of the PBM and their shareholders. The PBM contract is one of the few business agreements that clients enter where they really don’t know what the product will cost; where the  vendor can adjust the price at any time; and where they have to ask the vendor “how are we doing?”

Just about every PBM contract begins with a definitions section and sets the stage for how the plan will operate.  Some of these terms look familiar and the plan sponsor would think, pretty straight forward, but that’s not always the case.  Here are a few key contract terms and definitions to consider:

  • AWP. Means Average Wholesale Price for a standard package size of a prescription drug from the most current pricing information provided by First DataBank or such other drug database supplier “as determined by the PBM at any time.”  Of course, the standard package size they mean is 100 units, regardless of the size that is filled, unless it’s a smaller size.  This enables the PBM to create pricing spreads based on different size quantities and to use multiple pricing sources, at their discretion.
  • Claim. Means those prescription drug claims processed through the PBM’s on-line claims adjudication system, but what about errors, duplicates and reversals?  Without clarification, the plan sponsor could be billed for everything, and if there is a per click admin. fee being charged, this can really add up. These “false claims” can represent as many as 20% of total claims!
  • Brand and Generic Drug.  Sometimes it’s not even mentioned in the contract.  In which case, the PBM is free to classify any prescription as one or the other, and then, reverse themselves, when advantageous.  For example, a single-source generic may be designated as a generic when the PBM calculates their generic fill rate (“GFR”) to meet contract guarantees, yet they may adjudicate the claim as a brand in order to assign a lower discount rate (the brand discount).
  • Rebate. Means monies the PBM receives from pharmaceutical manufacturers for formulary access and/or market share increases.  Many contracts, however, also say “excluding any other payments or fees.” What about all the other revenue streams that are payable by a pharma manufacturer?  In addition to base and market share rebates, these should include sales target incentives, prompt-pay discounts, data selling fees, administrative fees and rebates on specialty drugs.

There are many more definitions and contract provisions to consider when negotiating a PBM services agreement. The plan sponsor is well-served to include contractual language requirements as part of the RFP response, where vendors understand and accept the terms and conditions being requested.  That way, they can underwrite their pricing offer to reflect client requirements and should agree to be bound to the terms defined.  The client gains the advantage of using the leverage inherent in the RFP procurement process.

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