PBM Contracts: 7 Terms Employers Need to Know

PBM Contracts: 7 Terms Employers Need to Know

Jan 12, 2018


Employers can be confused with the industry-speak and jargon that surrounds the work of pharmacy-benefit managers (PBMs). Here we’ll explain some commonly used PBM contract terms and what they mean for pharmacy benefits plans.


Average Wholesale Price

Average Wholesale Price (AWP) refers to a calculation of the average price at which prescription drugs are purchased at the wholesale level. The AWP is calculated from data provided by drug manufacturers, wholesalers and other suppliers. This pricing data was originally designed to help government and private payers know how much prescription drugs cost.

However, the AWP does not reflect the true market prices for pharmaceuticals. In recent years, lawsuits have exposed the practice where AWPs have been inflated by price reporting services, wholesalers, and pharmacy benefit managers.

What this means is that employers may end up paying more than necessary due to an inflated AWP. By working with trusted brokers and reliable data, employers can negotiate for lower cost benefits using the real AWP.



We’ve explained before that PBMs negotiate with different industry players, including drug manufacturers. These negotiations are important in containing costs of prescription benefit programs.

Pharmacy benefit managers negotiate with drug manufacturers to receive rebates. Drug manufacturers offer rebates in exchange for a drug being placed in the formulary – a list of approved drugs.

Rebates are paid to the PBM and may or may not be passed to the employer or plan sponsor. Therefore, the definition and application of rebates is important for employers to understand. Rebates are negotiable element in PBM contracts.

In some cases, a PBM can circumvent the rebate pass through process by categorizing rebates in a different way – by calling it an administrative fee or grant.


Specialty Drugs

Specialty drugs are important for employers and payers to consider because they’re expensive and those costs are difficult to control. These drugs generally fall into the category of high-cost drugs that treat complex medical conditions.

Specialty drug costs comprise a disproportionate share of pharmacy budgets that help a relatively small number of people. Employers must strategize with PBMs or their prescription benefit plan sponsor on how to contain the costs of specialty drugs.


Maximum Allowable Cost

A maximum allowable cost (MAC) refers to the upper limit a PBM will pay for prescription drugs. MAC is applied to generic drugs or brand name drugs that have generic versions (referred to as multi-source brands).

PBMs establish a MAC list to reduce drug costs. These savings are either passed through to the employer or kept as revenue for the pharmacy benefits manager.

There is no standardized MAC formula and PBMs each have different lists. Generally, MAC lists are created based on the availability of a drug, whether multiple manufacturers make the drug, FDA ratings and prices of brand and generic drugs.


Single Source Generic

After a brand drug’s patent expires, the FDA sometimes grants one company the exclusive right to make the generic form of the drug for a period of time. This time period typically lasts six months to a year. During this period, there is one source for the generic drug; other companies cannot make a generic version until the exclusivity period is over.

As we’ve discussed, the price of single source generics is usually not much lower than the price of branded drugs. When multiple drug companies make their own generic versions of drugs, then prices fall.


Step Therapy

Step therapy is a program offered by prescription benefit plans and pharmacy benefits managers (PBMs) to contain drug costs. The program requires patients to try less expensive drugs indicated for a specific medical condition before trying a more expensive medication.

The drugs included in step therapy are often considered first-line medications, which means physicians or medical authorities generally agree the drugs have been found effective. In addition, these drugs are less costly due to the availability of generic formulations.

If a person is not successfully treated with a less costly drug, then a physician may prescribe a more expensive treatment option. In effect, step therapy means physicians prescribe a series of medications before a patient can receive authorization for an expensive drug option.


Drug Utilization Review

Drug utilization review is a process where PBMs evaluate the prescribing, dispensing and use of prescription drugs. PBMs collect information from their pharmacy networks and analyze prescription histories.

The purpose of these reviews is to protect patients during the prescribing process. Drug utilization reviews are meant to make prescription drug use safer and uncover potential dangers to patients.

PBMs can identify a drug’s effectiveness and safety concerns such as harmful drug interactions. Such information may be shared with physicians or patients. Drug utilization reviews can be prospective, meaning safety checks are made before a drug is dispensed, or retrospective where an analysis happens after prescribing.

Truveris helps organizations understand the complex pharmaceutical ecosystem. Learn how our team can help you navigate PBM contracts and negotiate for high quality coverage at the lowest possible cost.



Posted by: Truveris Team