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 %).

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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 (MCOs) – A broad term encompassing a variety of healthcare delivery systems utilizing group practice and providing an alternative to fee-for-service health plans. The primary goal of a MCO is to create incentives to use a prepaid and organized healthcare system that serves a defined population.

Manufacturer – A company that manufacturers branded and/or generic pharmaceuticals.

Maximum Allowable Cost (MAC) – The price basis for generic drugs which is typically 50–60% below AWP. PBMs can either set the MAC prices themselves, or use the MAC prices set by HCFA for Medicaid beneficiaries.

Member – A covered individual within a health plan.

PEPM – Per employee per month.

PMPM – Per member per month; in an employer plan includes employees and their covered dependents.

Pharmacy Benefit Manager/Management (PBM) – A company providing administrative and clinical services through a complex system that includes retail pharmacies, manufacturers, clients, physicians, and members. These companies administer drug benefits and drug cost control programs for their clients, and secure substantial discounts from retail pharmacies and drug manufacturers. PBMs establish and maintain large pharmacy networks with chain and independent pharmacies. Also, PBMs contract with manufacturers of branded products to receive rebates and administrative fees.

Pharmacy Network – Specifies which pharmacies are approved for members, and includes retail, mail, and in some cases specialty pharmacies.

Prior Authorization – A prior approval process that allows prescription drugs to be dispensed to members only when specific conditions have been met.

Shared Savings Contract – A contract between a PBM and a client that provides incentives for both sides to collaborate and run the pharmacy benefit effectively and to share in the overall cost savings.

Therapeutic Substitution Programs – Typically operated in mail pharmacies to encourage physicians and patients to switch from the drug prescribed to lower cost, comparable drugs. Substitution requires physician and typically member permission.

Rebates – Paid by manufacturers to PBMs for the sale of branded drugs to PBM members.

Usual and Customary (U&C) – The price pharmacies charge to cash paying customers for prescription drugs.

Utilization Management Programs – Programs designed to lower drug costs and utilization and to encourage the use of generics or preferred products. These programs include services such as prior authorization, drug utilization review (concurrent and retrospective), academic detailing programs, and patient education.

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