Lawmakers, employers, consumer groups and other stakeholders have called for more transparency from pharmacy benefit managers (PBMs). Lack of transparency enables PBMs to engage in the practice of spread pricing where PBMs charge health plans more than they pay pharmacies for the same drug and keep the difference for themselves.

PBM contracts use complex language that might make it difficult to determine what kind of pricing the contract uses and how the PBM generates profits. This blog provides an overview of prescription drug pricing structures and a high-level look at PBM contract terms for PBM clients, such as health plans and employers.

PBM Overview

A PBM manages pharmacy benefits on behalf of a health plan, insurer or plan sponsor. The PBM negotiates prices with drug manufacturers and influences the behaviors of providers and patients who can affect the outcomes and cost of a pharmacy benefits plan. 

Typically, PBM contracts don’t list prescription drug prices. Instead, drugs are loosely defined into categories (e.g., brands, generics, specialty). Categories are identified by the PBM based on indicators that change often. In other words, PBMs can move drugs between categories unbeknownst to the health plan. However, clearer definitions for brands, generics and specialty drugs can be provided in a contract.

PBM Pricing Structures

The main pricing structures are spread pricing and pass-through pricing.

Spread Pricing

Spread pricing is the difference between the amount a PBM reimburses a pharmacy for a prescription and the amount it charges a health plan sponsor. The difference is profit for the PBM. The common practice that makes spread pricing possible is that typically, health plans do not see how much PBMs reimburse pharmacies, pharmacies don’t see the amount billed to health plans and little is known publicly about drug pricing information. PBMs say that spread covers the cost of services PBMs provide beyond administration, such as increasing medication adherence and formulary negotiations.

Pass-Through Pricing

Pass-through pricing requires the PBM to deliver or pass through the PBM’s actual drug costs to the plan—for every drug dispensed regardless of where the drug is filled. A pass-through pricing contract makes clear that the only profits a PBM can make are from administrative fees (which tend to be higher with pass-through pricing than with spread pricing). A possible disadvantage to this structure is that the PBM won’t provide the services beyond administration (mentioned above) that can affect patient outcomes and total costs. Most PBMs claim to provide pass-through pricing, but limit pass throughs in such a way that enables some spread pricing. The following are some ways a PBM contract could limit pass throughs to the plan:

  • If a contract requires that PBMs pass through only rebates, the PBMs retain money labeled as anything other than rebates (e.g., administrative fees, health management fees, data sales fees and prompt payment discounts).
  • If a contract requires pass through for network contracts at retail, then nonretail transactions, such as mail-order programs, would not pass through.

Reviewing Your PBM Contract

The following are some considerations for health plan sponsors on what to look for when reviewing PBM contracts and avoiding spread contracts. Keep in mind that contracts are complex, and this list is non-exhaustive.

  • Review for inconsistencies, contradictions and ambiguities.
  • Consider implementing contract provisions for:
  • Termination rights
  • Renegotiation rights
  • Carve-out rights, which specify that the plan sponsor can turn to another specialty drug pharmacy whenever necessary
  • The documents and data the PBM must produce for the plan
  • The level of plan sponsor control over exclusions, formulary and plan design
  • Requiring PBMs to pass through to the plan all rebates, third-party financial benefits and other administrative revenues paid by the drug manufacturer for all drugs.
  • Scrutinize definitions.
  • Pin down the definitions forbrand drugs and generic drugs. 
  • Make sure generic drugs are not included in the definition of specialty drugs.
  • Clearly identify which drugs are classified as specialty.

Learn More

  • On December 11, 2023 the House passed the Lower Costs, More Transparency Act (H.R. 5378) which would require PBMs to “semiannually report to health plan sponsors certain information on spending, rebates and fees that are associated with covered drugs. Contracts with PBMs for employer-sponsored health plans would be required to allow health plan fiduciaries to audit certain claims and cost information without undue restrictions.” Catch up on other PBM reform developments in our blog “PBM Reform Momentum Heats Up.”
  • The 2022 Employee Benefits Survey from the International Foundation of Employee Benefit Plans provides benchmarking data on the methods that health care plan sponsors are using to control escalating prescription drug costs. “Prescription Drug Cost-Containment Strategies” covers cost-sharing initiatives, limits by drug type, drug access controls and more.

Developed by International Foundation Information Center staff. This does not constitute legal advice. Please consult your plan professionals for legal advice.

Jenny Gartman, CEBS

Senior Content & Information Specialist at the International Foundation Favorite Foundation Member Service: Personalized Research Service Benefits Topics That Interest Her Most: Mental health and retirement security Personal Insight: Jenny likes spending time with family, knitting, reading memoirs and going for walks around the neighborhood.

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