Business of Well-being

Pharmacy Benefit Manager Contract Language that affects Plan Sponsors Costs.

The pharmacy benefit management (PBM) industry is on the verge of significant transition.  The PBM market place is being consolidated as two of the largest players merge to a form an organization serving over 100 million members.  

While there is considerable discussion concerning what the implications of the acquisition are in terms of market dynamics, pharmacy negotiation power and client pricing, there are often overlooked implications that will have significant impact on plan sponsor pharmacy benefit costs.  

One such aspect is common PBM contract language that may seem innocuous but in reality may give the PBMs financial advantages that do not translate to savings for plans sponsors. After conducting thousands of pharmacy benefit audits, as well as PBM request for proposals, we have found that most plan sponsors do not understand how PBM contract language can affect the PBM's discount guarantees, and ultimately their pharmacy plan costs.

The following is a summary of some of the common PBM contract language we suggest every plan sponsor become familiar.  We will focus on explaining the impact of the following three sections frequently found in a PBM service agreement.

Mail service discounts based on 100 unit package size

Exclusion of Single Source Generics from the generic discount guarantee

Inclusion of Zero Balance Due claims for discount guarantees

Mail Service Discounts Based on 100 Unit Package Size:

Most PBMs include contract language which states that mail service discount guarantees are based on 100 unit package sizes (or lower).  Package size language may be found in the pricing section or as a definition within the PBM service agreement. The language is contrary to how mail service pharmacies purchase medications.  

The goals of mail service pharmacies to purchase medications in the largest package size available to take advantage of volume price points where greater discounts are offered by the pharmaceutical manufacturer.  

Through the use of this language, PBMs can increase the Average Wholesale Price (AWP) discount offered to the plan sponsor by as much as 3.5 percent for generic medications. To support this conclusion, we compare the average package size for retail claims to the average package size used for mail service claims when auditing client data.

Below is a sample analysis. This client example demonstrates that the average generic package size submitted through mail service is 42 percent smaller than the average package size submitted through retail channel.  

By comparing the top 500 generic medication's actual unit costs (cost per pill) for retail versus mail service unit costs, we determined that the actual unit costs for mail service are the same as the retail generic unit costs. The difference between retail and mail from a unit cost basis is only 1 percent.

In this example we determined for this client that the actual generic costs for mail service are virtually the same as retail generics.  The PBM mail service discount guarantee set forth in the PBM contract based on 100 unit package size is greater than the retail discount guarantee, but the costs are the same.

Unfortunately most of the larger PBMS have structured their mail service operations to utilize 100 unit package size, and are resistant to removing the 100 unit package size language.   Plan sponsors with high mail utilization should consider the requirement of MAC (maximum allowable cost) pricing for mail service generics.  

PBMs develop aggressive MAC pricing to be used to price retail generic claims to prevent the retail pharmacy from using similar pricing.  With that said, requiring the PBM to use the same MAC pricing at mail service will lessen the impact of the 100 unit package size language and generate greater cost savings for the plan sponsor.

Exclusion of Single Source Generics (SSG) from the Generic Discount Guarantee:

In the next 5 years the pharmaceutical marketplace will see a significant increase utilization of generic medications as a result of many highly utilized brand medications losing their patent protection.  Once a brand medication is available as a generic, the unit cost savings does not occur immediately.  

Generic medication pricing is much like any businesses where supply and demand plays a crucial role in price.  Once a brand medication loses its patent protection, it is typically the existing brand manufacturer that launches the first generic version.  

If the new generic, only has one manufacturer, that manufacturer will establish the cost of the generic at a price point only slightly lower than the existing brand.  Once a generic medication is introduced, it will take between 9 to 18 months before the generic costs will decrease significantly as generic prices are dependent upon the number of generic manufacturers competing in the market.

Since the unit cost of a new generic is not much lower than the existing brand medication, PBMs prefer to exclude these new generic medications from their overall generic effective discount guarantee.  

The reality is, the PBMs are not going to obtain the same AWP discounts for new generic medications as they would for generics that have been in the marketplace for years where competition is prevalent.

Further, with the large market share these medications represent, if PBMs do include SSG in the client's discount guarantee, they will struggle to meet the guarantee. Looking specifically at the brand medications that are losing their patient protection in 2011 to 2015, the impact is significant.  

By reviewing client clams data, we project plan sponsors can expect over 30 percent of their existing brand claim utilization to transition to generic medications in the next five years If the PBM generic pricing terms included SSG, the PBM will realize an approximate 13.2% reduction in the overall effective generic discount guarantee .

It is obvious why PBMs want to exclude SSG from their overall generic effective discount guarantee.  The PBM language excluding SSG from the overall generic effective rate is not the problem.  Our concern with this language is how SSG are defined.  

Most PBM contracts allow the PBM to define what is a SSG, and how long the SSG are excluded from the discount guarantee.  In our experience we have found large variations with regards to SSG definitions, and in many cases, SSG are not defined at all.

Plan sponsors should understand that through 2015 they can expect their generic utilization to increase approximately 10 percent.  Currently we see plan sponsors generic utilization at approximately 70 percent.  In 2015 generic utilization should approach 80 percent.  

It is commonly understand that the majority of the PBMs traditional revenue is the pricing spread for Generics.  In the next 5 years, plan sponsors need to focus in generic discount language, and how it will impact their costs.

Our recommendation to plan sponsors is require your PBM to provide a definition of SSG  medications, a list of the SSG drugs that will excluded from the discount guarantee with regular updates, and the length to which SSG are excluded from the generic discount guarantee.  

Only by defining SSG, monitoring which SSG drugs are excluded from the generic discount guarantee and auditing to determine of the PBM accurately applied the SSG provisions of the contract, will a plan sponsor be able to validate their PBM's generic discount guarantee.

Inclusion of Zero Balance Due Claims for Discount Guarantees:

Zero Balance Due Claims (ZBD) are defined as claims were the member cost share (copay) pays the full cost of the prescription drug claim and the plan sponsor is billed $0.  As an example, if the cost of a generic drug is $4 and the member's copay is $5, the copay would cover the entire cost of the drug and the plans sponsor would incur no claim cost under most benefit plans.  

The volume of ZBD claims are a function of the plan sponsor's plan design.  As member copays increase, the number of ZBD claims also increase.  Conversely, plan sponsors with benefit plan designs with low member copays have fewer ZBDs claims.

For many years, it was the industry norm to exclude ZBD claims from calculating PBM discount guarantee.  The rational is if an auditor determined a ZBD claim paid in error, there are no damages to the plan sponsor because the plan sponsor paid $0 for these claims.

The inclusion of ZBD claims in calculating plan sponsor AWP discount guarantees, have become the norm.  In the past few years many retail pharmacies are provided $4 generic programs.  The retail pharmacies have offered these medications in some instances at or below their cost  for the purpose of increasing traffic to their retail pharmacy locations.

Many if not most of these medications result in a zero balance due claim because the $4 member copay is less than the plan sponsors copay. By including these claims, the PBM is taking credit for the retail pharmacies decision to offer these medications at or below their acquisition cost.  

The savings impact of ZBD claims is not a result of the PBMs discount negotiations with retail pharmacy chains, savings is strictly a function of plan design and retail pharmacy pricing practices.  As a result ZBDs should be excluded from the calculation of PBM discount guarantees.

In reviewing client data, we estimate that ZBD claims may represent as much as 25 percent of retail claims and 11 percent of mail service claims.  The impact to plan sponsor AWP discounts is between 1.5 and 2.0 percent and primarily applies to retail generic medications.

Since ZBD claims only benefit the PBM, and in most cases are not representative of the PBM network negotiated discounts, we recommend plan sponsors require the exclusion of ZBD claims from the PBM AWP discount guarantees.


The Pharmacy Benefit Management service agreement language highlighted in this article is an example as to how often ignored contract terms can affect AWP discount guarantees and plan sponsor costs.  

Now and in the future it is important for the plan sponsors when reviewing potential PBM vendors, understand how PBM contact language can affect their plan costs, and the savings generated by the PBM discount guarantees.

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