It’s not uncommon for employers to be confused with all the industry-speak and confusing jargon that surrounds the work of pharmacy-benefit managers (PBMs). Here we’ll explain some highly relevant and commonly used PBM contract terms and what they mean for pharmacy benefit plans and patient health.
1. 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. That may sound simple but, in reality, there’s much more to it.
The AWP is calculated from data provided by drug manufacturers, wholesalers, and other suppliers — this pricing data were 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.
Fortunately, the real costs are out there. By working with trusted brokers and reliable data, employers can get actual, transparent, AWP pricing and use them to negotiate for lower cost benefits.
Importantly, PBMs negotiate with different industry players, including drug manufacturers, to contain the costs of prescription benefit programs. And when they do, they often negotiate with drug manufacturers to receive rebates in exchange for a drug being placed in the formulary — a list of approved drugs.
Rebates are then paid to the PBM and may or may not get passed on to the employer or plan sponsor. Therefore, it’s important to understand the way rebates are defined, as well as how they may be applied, so that you are aware of what could be yours.
In some cases, a PBM can circumvent the rebate pass-through process by categorizing rebates in a different way — such as calling it an administrative fee or grant.
3. Specialty Drugs
Specialty drugs generally fall into the category of high-cost drugs that treat complex medical conditions. They are important for employers and payers to understand because of their high cost and the fact that they’re difficult to control.
On average, specialty drug costs comprise a disproportionate share of a plan’s pharmacy budget for the relatively small number of people that benefit. Therefore, employers must strategize with PBMs or their prescription-benefit-plan sponsor, or consider using a carve-out strategy, to determine how best to manage and contain the costs of specialty drugs.
4. 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 several factors: the availability of a drug; whether multiple manufacturers make the drug; FDA ratings for the drugs; as well as prices of branded and generic drugs.
5. Single Source Generic
A single source generic occurs when the patent on a branded drug expires. Upon expiration, the FDA will sometimes grant one company the exclusive right to make the generic form of that drug for a period of time — typically six months to a year. During this period, there is only the single source for the generic drug; other companies cannot make a generic version until the exclusivity period is over.
Unfortunately, the price of single source generics is usually not much lower than the price of branded drugs. It’s only when multiple drug companies are allowed to make their own generic versions of a drug, that prices fall.
6. Step Therapy
Step therapy is a program that requires patients to try less expensive drugs indicated for a specific medical condition before stepping up to a more expensive medication. It is offered by prescription benefits plans and PBMs in an attempt to contain drug costs.
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.
7. 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.
During these reviews, PBMs can identify a drug’s effectiveness and safety concerns such as harmful drug interactions. Such information may be shared with physicians and/or patients.
Drug utilization reviews can be prospective, meaning safety checks are made before a drug is dispensed. Or they can be retrospective, where an analysis happens after prescribing.