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6 Things to Look for in Your PBM

April 11, 2022

Business Executives putting puzzle pieces together


Six Things to Look for in Your PBM Contract


Contract language review is often overlooked or outsourced to a “trusted advisor” after a decision has been made based on a spreadsheet comparison. There are many nuances in contract language. All aspects must be reviewed and considered before deciding on a component that represents approximately 25% of your total spend. Using an independent 3rd party with no financial incentive to assist in this step is a prudent choice.


  1. Are rebates paid post termination? Most PBMs do not pay rebates after you leave the relationship, causing the client to lose out on rebates, which can represent anywhere from 8-17% of your total annual drug spend.

  2. Is their flexibility to add and remove medications without financial penalties? Many PBMs include a contract clause that prevents the plan sponsor from receiving rebates if any medications are added or removed from the formulary.

    ABC Employer agrees to adopt PBMs National Preferred Formulary to be eligible for rebates , whether rebates are paid or applied. Drugs and supplies included on the selected formulary may be modified by PBM from time to time as a result of factors, including, but not limited to, medical appropriateness, manufacturer’s rebate arrangements, and patent expirations.
  3. closeup photo of prescription drugs

  4. Brand and generic definitions – Are they defined by the PBM or based on industry standards? Allowing the PBM to define what is a brand name and what is generic can drastically change the discount numbers offered. Generic isn’t necessarily generic. How is this possible? There is language in many contracts that defines a brand name drug as generic.

    Sample definitions:

    • Generics shall be classified as multi-source generics with two or more manufacturers.
    • Generics shall be classified as multi-source generics with more than two manufacturers.

    In the second definition, there must be three or more manufacturers to be defined as a multi-source generic.

    In the example in Part 2, you learned that the discount off of the Average Wholesale Price (AWP) was more than four times greater for generic versus name brand (80% versus 17.5%). If your PBM recategorizes a generic as a name brand, they enjoy a significant revenue increase at your expense.

  5. Does the contract allow for termination after one year or is your company locked in for 3 to 5 years? The ability to leave a relationship not producing results is key for any organization.

  6. How are paid rebates defined? In many cases rebates your company receives are a narrowly defined set of medications.

  7. Example: A PBM may state on the spreadsheet that they will pay Client ABC $150 for every brand name claim. But the contract guarantees that "Rebates will be paid on all second-tier rebate eligible products" which reduces the number of brand name claims Client ABC receives and reduces the rebate payment by 25 to 40%.

  8. Are there any additional fees included in the contract? Look for terms such as prior authorization, clinical programs, specialty management fees, shipping costs. If not included, these fees can add an additional 3 to 5% to your annual spend.




Blog Tags:

Rx Drugs,PBM, Prescription Benefits Manager, PBM Contracts,  Prescription Drug Costs, Fullfillment, Group Health Insurance, Cost Savings




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