Administrative Fees - Per claim fees paid by clients to PBMs for services like claims processing. Also used to denote the fees paid by manufacturers to PBMs for administering formulary rebate contracts. Average Wholesale Price (AWP) – A published suggested wholesale price for a drug, based on the average cost of the drug to the pharmacy. AWP is often used by pharmacies to price prescription drugs. Benefit Administration – The administration of drug benefit designs. It includes setting up and maintaining the drug coverage and exclusions, setting limits on drug coverages, and defining member cost sharing requirements. Capitated Contract – A very rare contract among PBMs. It is used when a PBM agrees to assume financial risk for a client’s drug spending. Capitation is a set dollar amount, established by analysis of pharmacy claims data, used to cover the prescription costs for a member, usually set at a per member per month rate (PMPM). Claims Adjudication – The online processing of a prescription drug claim. Most claims are submitted electronically at the point of service (the retail or mail pharmacy). Client – A MCO, employer, or insurer that contracts with a PBM to administer their drug benefits and cost control programs. Co-pay – A fixed dollar amount paid for every prescription. Co-insurance – The fixed percentage members pay of the cost of each prescription. Deductible – A specific annual dollar amount that a member must pay out-of-pocket for prescription drugs before the drug benefit program begins. Disease Management Programs – Programs developed by PBMs to identify and categorize patients (especially those with chronic conditions) and to direct these patients towards a specific treatment protocol. Fee-for-Services Contract – The most common pricing arrangement PBMs have with their clients. Under the contract, PBMs are paid for the administrative services they provide, and they do not assume the risk for the cost of the drugs dispensed. Formulary – An approved list of branded (and generic) drugs developed by the PBM, or the client. Open Formulary – A list of recommended drugs. Under this structure all drugs are reimbursed irrespective of formulary status. However, a client’s plan design may exclude certain drugs (OTC, cosmetic, and lifestyle drugs). Incented Formulary – An incented formulary applies differential co-pays or other financial incentives to influence patients to use, pharmacists to dispense, and physicians to write formulary products. Closed Formulary – A closed formulary limits reimbursement to those drugs listed on the formulary. Non-formulary drugs are reimbursed if the drugs are determined to be medically necessary, and the member has received prior authorization. Health Care Financing Administration (HCFA) – the federal agency that administers Medicare, Medicaid, and the State Children's Health Insurance Program (SCHIP). Ingredient Cost – The cost to the pharmacy for dispensed drugs (AWP – discount %). Click here to register for: "How To Slash the Cost of Your PBM Service, up to 50%, Without Changing Providers or Employee Benefit Levels." Mail Pharmacy – Mail pharmacies dispense a 90-day supply of drugs through the mail; typically used for chronic conditions. Most pharmacy benefit plans offer a mail pharmacy service as a way to promote cost savings and improve access. Managed Care Organization…

Pharmacy Benefit Managers are often known simply as “PBMs.” While they are largely unrecognized by most employees -- and even by many benefit managers -- they have a tremendous impact on US health care decision-making because they influence more than 80 percent of prescription drug coverage. The sector is dominated by a handful of very large national players, but there are smaller and regional PBMs as well. PBMs commonly operate on behalf of employers, insurance companies, and unions; they are also sometimes referred to as “third-party payors.” The original purpose of PBMs was straightforward: issue drug cards for easy ID and account tracking and offer their customer groups cost-effective services as well as reliable claims information. Over time, however, PBMs have evolved into much more complex organizations. PBMs now take advantage of various strategies associated with rapid growth, including large-scale “block purchases” of drugs and medical products that dramatically lower their wholesale costs — even as PBM fees have consistently increased for customers. Some PBM practices are, in fact, the subject of lawsuits or federal and state regulatory investigations. So how can you, as a benefit manager, make the best pharmacy decision for your employees?  How can you have confidence that your company is receiving optimum PBM value and service?  What key questions should you ask your current or potential PBM—or your health insurer contracting with a PBM?  The following 10 questions are designed to help you and other Benefit Managers select the best PBM for your organizations. 1) Do you use the same average wholesale price (AWP) and maximum allowable cost (MAC) in calculating price to clients and payments to pharmacies? Some PBMs realize hidden profits by employing a practice known as “differential or spread pricing.” Differential pricing is when a PBM establishes a discount off the average wholesale price (AWP) for the individual employee filling a prescription, but establishes a different AWP discount for retailers. Here’s an example of differential pricing in action: Your employee or group member pays AWP minus 15% PBM pays retailer AWP minus 18% PBM pockets the 3% differential Although PBM revenues derived from differential pricing can run between $5 and $8 depending on the type of program served, typical PBM disclosed fees hover at $1 per prescription. While differential pricing is a common business practice, PBMs should disclose the differential to you or your health insurer. If you have a plan governed by ERISA, you should keep in mind that the U.S. Department of Labor requires full disclosure of all compensation, fees, and income from a PBM that acts in a fiduciary capacity as an administrator and/or claims payor for an employer with a benefits plan. Recommendation: Ask to see your PBM’s contract with network pharmacies (including large chains) and compare to the PBM’s contract with your organization. The reimbursement rates should be the same on both contracts for both AWP and MAC. 2) Do you participate in rebates from drug manufacturers? PBMs often receive rebates from drug manufacturers in return for placing products on formularies and for working to increase sales volume for these drugs (rebates can…

Plan sponsors, while getting smarter about managing prescription drug benefits, continue to be plagued by drug spreads.  A drug spread is the difference between the amount paid to a PBM and the amount that should've been paid, by the plan sponsor, for the prescription drug ingredient portion of a transaction in the pharmacy benefit manager's retail pharmacy network.  This definition is very simplistic, but the strategies a PBM employs to maintain these spreads are often complicated and inconspicuous. The larger spreads generally take place with generic medications.  This is due in part to much smaller COG (cost of goods) and larger profit margins attained from generic compared to brand medications. Think about it for a second.  A generic medication may have fifteen different manufacturers (multi-source) all competing for the same purchaser while a brand product will have in most instances only one manufacturer (single-source).  This, ultimately, leads to lower costs for generic medications and much higher costs for brand medications. Supply-side economics tell you that much more money is too be had from the sell of generic medications vs. brand medications.  Don't be upset with your local pharmacist due to the high price of brand medications.  He or she has very little control, to the downside, on the price of these products. Small to medium-sized businesses are most often the victims of spreads.  Larger companies often maintain a staff (which may include a seasoned pharmacist or two) dedicated to thwarting the efforts of any PBM attempting to hide cash flows.  Make no mistake about it; spreads are an opportunity cost and hidden cash flow.  I urge you to read the pilot study conducted by American Pharmacists Association.  Here is the abstract from this study. The Spread: Pilot Study of an Undocumented Source of Pharmacy Benefit Manager Revenue Objective: To document the difference between what pharmacy benefits management companies (PBMs) charge employers and what they pay dispensing pharmacies for the drug ingredient portion of prescription transactions (the “spread”). Design: Descriptive, cross-sectional study. Participants: Two large employer groups, each of which used a different PBM, and six independent community pharmacies participating in these plans during 2002. Interventions: Two sets of financial records issued by each of two PBMs were reviewed retrospectively, including 129 line-item prescription transactions billed to the employer and the line-item transaction information that accompanies the PBM payment to the dispensing pharmacy. Main Outcome Measure: Spread between drug ingredient cost billed to the employer by the PBM and drug ingredient cost paid to the dispensing pharmacy by the PBM for brand name versus generic drug products. Results: For both PBMs, the mean (± SD) spread was $12.29 ± 27.93 per prescription, with a range of –$1.67 to $201.65. Considering all 129 transactions, the mean spreads for brand name and generic medications were significantly different from one another, with mean (± SD) spreads of $4.65 ± 10.47 and $23.45 ± 39.47 per prescription, respectively. The two PBMs differed significantly in their spreads for brand name drugs ($3.20 ± 2.85 and $5.93 ± 14.12), but the spreads for generic products did not achieve statistical significance in absolute dollars ($10.83 ± 13.58…