The Hidden Cost-Saving Opportunities in Your PBM Contract

Posted in: Employee Benefits

Did you know that pharmacy claims are the number one health care expense for most businesses due to specialty drugs? At a recent PSA Partnership seminar, Ken Huber CPBS, Executive Vice President of Employee Benefits at PSA, pulled back the curtain to explain what’s going on in today’s market with specialty drugs in your Pharmacy Benefit Management (PBM) contract and how that affects your business’ bottom line.

As a plan sponsor providing employee benefits to your employees, there are some typical goals you probably set for PBM contracts and plan administrators, but it’s likely you should be demanding more. But before we discuss what terms and conditions you should be negotiating in your PBM contract to achieve greater transparency and better cost-savings for your health plan, let’s discuss what most businesses are looking for typically in PBM contract negotiation.

Greater savings and better results in your pharmacy benefit plan

Typical goals for PBM contract negotiation

Here is what we see most businesses typically ask for in their PBM arrangements:

  • Low/no administrative fees
  • Low dispensing fees
  • Deep discounts off of AWP (Average Wholesale Price)
  • High rebates
  • Guaranteed rebates
  • Broad formulary with low member disruption

Aspirational goals for PBM contract negotiation

Here’s what we think you should really be asking for instead of those typical requests:

  • Transparency—as the client, you should be aware of all the different fees, and your Pharmacy Benefit Manager should be open and honest with you about the revenue stream. Otherwise, there’s no way for you to confirm that the fees and rebates are fair.
  • Pass through pricing— essentially, whatever your PBM is paying to the pharmacy for the drug is what you should be charged. It’s likely your PBM is collecting more from you for a drug claim than they are reimbursing the pharmacy. This practice is known as spread pricing. The difference between what the pharmacy is paid and what you pay for the drug claim is retained by the PBM.
  • Uncorrupted formulary—this is a list of drugs designed to provide medications to you at the lowest net cost. An example of a corrupted formulary could be your PBM including a certain medication because it provides a significant rebate that they can collect, but there might be another drug available with a lower cost that could treat the same condition.
  • Audit rights—this is the ability for you as the client to verify that your PBM is adhering to the terms of the contract. For example, you would hire a third-party auditor to audit your PBM’s practices and follow the payments of a certain drug to see that you are getting the fees and rebates agreed upon in your contract. You may not always take advantage of this option—but it is important to have the right to do so.
  • Clarity of definitions—it is important that terms are clearly and uniformly defined throughout the contract. For example, a generic drug is always generic. The key is consistency—drugs can sometimes be reclassified to fit PBM objectives, so make sure this isn’t the case.
  • Pass through ALL manufacturer revenue—manufactures will pay rebates to PBMs for including their drugs on the formulary, achieving drug dispensing targets (e.g. volume, market share), as well as, for providing other “services” important to the manufacturer. This additional revenue is often undisclosed to the plan sponsor. In short, you want to make sure your PBM doesn’t have incentives that don’t negatively impact your organizational goals, and that you are receiving, or at least are made aware of, all other manufacturer revenue being received by the PBM on behalf of your plan.

Greater savings and better results in your pharmacy benefit plan

Work with an employee benefits broker

So, how do you get from your typical PBM contract negotiation asks to a transparent contract with cost-saving opportunities? We recommend working with a trusted broker/advisor who is skilled at negotiating and improving the terms of your pharmacy plan. A broker will generally take one of three approaches below:

  • Recommends their proprietary arrangement—with this model, a broker will form its own coalition with certain PBMs that is only available to their clients through them. These brokers like to advertise the prices through their coalition as the best deal you can get (though this is not always the case). The danger with these types of agreements is that there can be hidden fees such as rebates and administrative fees being retained by the coalition manager (broker) that you can’t do much about. Additionally, these arrangements are written to keep you in the coalition, so it may be difficult to get out without losing rebates or paying fees.
  • Uses a single aggregator as outsourced pharmacy “expert”—in this scenario, the broker will have multiple contracts with different PBMs. They will push you towards which is best, but they get paid as THE expert, and may retain hidden fees such as rebates or per-script charges instead of passing it to you.
  • Uses unbiased approach and has internal Rx expertise—this type of broker specializes in understanding the PBM contracts and knows the industry, but has no personal gain from you choosing one PBM or another. The goal is to get you the lowest net cost and achieve savings for your company, so that you value this free service and trust them as your employee benefits broker going forward.

At PSA, we have invested in several of our consultants earning their Certified Pharmacy Benefit Specialist (CPBS) designation from Transparent Rx, accredited by the University of Kentucky College of Pharmacy. The knowledge gained through the CPBS program allows these consultants to provide unbiased PBM contract review expertise and better serve the needs of our clients by providing PBM cost strategies in this dynamic and uncertain pharmacy climate.

If you’d like us to take a look at your pharmacy benefit plan and contract to identify potential cost-savings, request your free PBM contract review or if you have questions about the pharmacy dilemma we’re facing in the current market, contact me at