The most important document for reducing the cost of prescription drugs in the pharmacy benefit is the PBM contract.  At WBC (  we know that this document or agreement for PBM services ultimately determines what the plan sponsors’ drug spend will be, and is driven by the key terms, definitions and provisions in the contract.

Actually, there are two contracts in a PBM relationship that are material for understanding how a sponsors’ plan will operate.  First, is the contract with the payor or plan sponsor.  This is what the PBM will invoice the plan sponsor for covered drugs used by plan members; and second, the contract between the PBM and the pharmacy. The second contract determines how much the PBM reimburses the pharmacy for filling the prescription. In many cases, the “buy” is not the same as the “bill.”

When selecting a PBM, a plan sponsor needs to understand the relationship between the business models used by the PBM and the impact that it has on your services agreement or contract.  A plan sponsor needs to ask themselves whether the goals and objectives as expressed in the type of services contract they receive, are aligned with their business needs and  objectives.

The first thing a plan sponsor needs to do when reviewing a contract for PBM services is to fully understand the 3 basic business models that are used by PBMs and will dictate which type of contract the plan sponsor will receive.

Traditional.  The oldest and most recognized in the PBM world and is built on the idea of spread-pricing.  This means that the PBM will pay a lower reimbursement to the pharmacy (whether retail or mail) and invoice the plan sponsor a higher amount.  The difference (or spread) is kept by the PBM for its efforts.  In addition to spread pricing, the traditional PBM model generates different sources of cash flow (rebates, data fees, manufacturers incentives, etc.) from the plan sponsors’ account and may or may not share any of  it with the plan sponsor.

Transparent. Has evolved from the Traditional model and tends to share more information regarding plan cash flows with the plan sponsor.  It really is more opaque than transparent, however, since the disclosure that  occurs usually involves telling the plan sponsor what they will not receive. 

Pass-Through.  Is the latest model which, as the name implies, passes through to the plan sponsor costs and revenues without creating pricing spreads or retaining hidden cash flow.  The only profit center for the PBM is in the form of an administrative services fee, which may be presented as either a per script transaction fee or on a PEPM basis.

Why is this so important? Aren’t all contracts pretty much the same? Well, they can be if the plan sponsor doesn’t know what to identify as potential problem areas and then, what to ask for in their contract. Also, make sure that if the plan sponsor is using a broker or consultant, that the broker/consultant is also subject to the same level of disclosure and transparency that is expected of the PBM. In many cases, the broker/consultant is being paid a transaction fee by the PBM that is selected.  Not only is this a flagrant opportunity for conflict of interest, it also may prevent the sponsor from seeing other competitive proposals from PBMs that are not invited to participate because they would not agree to undisclosed transaction fees.

 As previously mentioned, the contract does control the overall drug spend, and left unchecked, the plan sponsor will receive an Agreement with tons of “wiggle room” that allows the PBM maximum discretion and the ability to pretty much interpret key provisions anyway they want,  and usually in their favor.

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