Untangling PBM Contracts: A Guide to Better Understanding

Untangling PBM Contracts: A Guide to Better Understanding

A Pharmacy Benefit Manager (PBM) is a company that is responsible for administering prescription drug programs on behalf of plans and its employees. PBMs assist in decreasing and controlling pharmacy spend, improving adherence, and managing high-cost brand and specialty medications. PBMs help to manage prescription benefit programs by creating formularies, creating pharmacy networks, reviewing drug utilization, and implementing clinical programs.

Unfortunately, PBM contracts are also notorious for their complexity, flooded with industry-specific jargon and intricate financial clauses. We’re here to help you gain a better understanding of PBM contracts. 

Decoding PBM Contract Terminology

In simple terms, pharmacy benefit contracts are agreements between a PBM and self-funded employers, brokers, third-party administrators (TPAs), or consultants. The central aim is to provide the best benefit programs at the most cost-effective price. Key aspects of these contracts include stipulations regarding drug pricing, specialty drug provisions, prior authorization rules, step therapy protocols, and pharmacy benefit management techniques.

A well-drafted PBM contract should  include:

  • Clear Definitions: These definitions should clearly define brand and generic medications.
  • All Revenue Streams: All sources of revenue received by the PBM should be clearly defined.
  • Impact of Rebates: All revenue received by the PBM as a result of rebates should be clearly stated.

Specialty Drugs and Managed Care

Specialty drugs, due to their high cost and specialized administration requirements, have unique provisions within PBM contracts. Managed care models in PBM contracts help in controlling the cost of these expensive drugs. This approach involves close monitoring of drug utilization, maintaining regulatory compliance, and implementing solutions that have a positive social impact.

The Role of Financial Analysis

Financial analysis plays a significant role in designing and managing pharmacy benefit contracts. This involves analyzing drug spend data, assessing the effectiveness of step therapy protocols, measuring the benefits savings generated, and more. Detailed financial analysis allows a benefits optimizer to create strategies that improve the overall effectiveness of the pharmacy benefits plan.

The Influence of Diversity, Equity, and Inclusion

PBM contracts are increasingly reflecting the values of diversity, equity, and inclusion. Voluntary benefit offerings can be adjusted to accommodate varying health needs, ensuring that every member has access to the healthcare they require. Behavioral health, for instance, is a critical component of comprehensive health care coverage that should be considered when drafting PBM contracts.

Key Reasons Why Understanding PBM Contracts is Important

As a self-insured employer or organization making the switch to self-funding, understanding PBM contracts is crucial because PBMs play a significant role in managing your prescription drug benefit program. Here are the key reasons why understanding PBM contracts is important:

  • Cost Control: Prescription drug costs can be a significant expense for self-insured employers. By comprehending the terms and pricing structures in PBM contracts, you can evaluate whether the PBM is effectively managing costs, ensuring competitive pricing, and maximizing your savings.
  • Transparency and Accountability: PBM contracts often involve complex arrangements, such as rebates, discounts, and administrative fees. Understanding these contractual elements helps you ensure transparency and hold PBMs accountable for their actions. By having clarity on pricing arrangements, formulary management, and financial incentives, you can assess whether the PBM is acting in your best interests and optimizing your drug benefit program.
  • Access to Medications: Formularies are a critical aspect of PBM contracts. These lists determine which drugs are covered and at what cost-sharing level. By understanding the formulary design and its impact on your employees’ access to medications, you can ensure that the PBM’s formulary aligns with the healthcare needs of your workforce. This understanding helps you evaluate whether the PBM is providing appropriate coverage for essential medications and whether there are any restrictions or limitations that may affect your employees’ health outcomes.
  • Quality of Care: PBM contracts can also include provisions related to medication therapy management, drug utilization review, and adherence programs. These provisions aim to improve medication safety, effectiveness, and patient outcomes. By comprehending these contractual components, you can assess the PBM’s commitment to promoting quality of care and whether they provide services that enhance medication adherence and patient education.
  • Flexibility and Customization: Understanding the flexibility and customization options available in PBM contracts allows you to tailor your drug benefit program to meet your employees’ specific needs. This includes the ability to incorporate preferred pharmacies, mail-order services, specialty drug management, and other features that align with your organization’s objectives.
  • Contract Evaluation and Negotiation: When it comes to PBM contracts, it is essential to conduct a thorough evaluation and negotiation process. Understanding the terms, conditions, and true impact of performance guarantees within the contract enables you to make informed decisions during negotiations. It helps you identify areas for improvement, negotiate better pricing and service terms, and choose a PBM partner that aligns with your organization’s goals.

Contracting Strategies: The Art and Science of PBM Contracts

Unraveling PBM contracts requires an understanding of the various strategies used in their creation and execution. PBM contract negotiations are often a balancing act, delicately poised between maintaining affordable drug pricing and ensuring a sustainable revenue stream. Here, knowledge of PBM rules becomes crucial.

When crafting the strategy for PBM contract negotiations, it is important to study PBM contract examples to understand industry practices and norms. A well-defined plan design is paramount and should account for key considerations such as utilization management, voluntary benefits, and regulatory compliance. Additionally, in an era that increasingly values social equity, provisions for diversity, equity, and inclusion should be integral to PBM contracting strategies, ensuring a comprehensive and inclusive benefits administration.

The Money Trail: Revenue Streams in PBM Contracts

How does a PBM make money? Understanding the revenue streams is an integral part of making sense of PBM contracts. There are typically two models to understand: spread pricing and pass-through pricing.

Spread pricing involves the PBM charging the plan sponsor more for a drug than it reimburses the pharmacy. The difference, or “spread”, constitutes the PBM’s profit. This model can sometimes lead to less transparency, as the actual drug costs may not be readily apparent to the plan sponsor.

On the other hand, pass-through pricing is an alternative model where the PBM passes on the same cost to the plan sponsor as it paid the pharmacy, making its revenue from administration fees and other services. This model tends to promote greater transparency as the costs passed to the plan sponsor directly reflect the actual cost of the drugs.

The Myth and Reality of Contract Guarantees

One of the most contentious areas in PBM contracts lies in the realm of “so-called” guarantees. These guarantees can include rebates, discounts, and claims, and are often highlighted as major selling points in PBM contracts with manufacturers. However, these guarantees can sometimes exclude specific claims, thus affecting the overall cost and utilization outcomes, skewing the benefits optimizer, and adding yet another layer of complexity.

Understanding these guarantees, their scope, and their limitations is critical to comprehending the overall structure and implications of PBM contracts. A comprehensive evaluation of the guarantees can ensure that your plan reaps the intended benefits without being blindsided by excluded claims or other hidden costs.

The MaxCare Difference: A New Paradigm in PBM Contracts

What sets MaxCare apart in this convoluted landscape of PBM contracts is our steadfast commitment to transparency and clarity. We aim to redefine PBM contracts, moving away from the traditional, spread-pricing PBMs that often leave plan sponsors in the dark.

Our contracts feature clearly defined language surrounding both brand and generic drugs, leaving no room for ambiguity. We extend this transparency to all revenue streams that are often cloaked in secrecy in traditional PBM contracts. 

MaxCare’s approach to specialty pharmacy management emphasizes optimal drug utilization. We focus on managing the costs of specialty and expensive drugs to ensure that you get the best possible value. Our PBM contracts prioritize benefits plan design, placing equal emphasis on cost management, patient outcomes, and satisfaction. We also acknowledge the importance of behavioral health alongside physical health, understanding that comprehensive health management encompasses both.

At MaxCare, our core principles of clear communication, integrity, and transparency set us apart. We strive to simplify and optimize your PBM contracts, ensuring that you reap the maximum benefits.


Untangling the complexities of PBM contracts is no easy feat. It requires a thorough understanding of the strategies, financial implications, and rules that govern these agreements. It involves delving into the specifics of PBM contracts with pharmacies, manufacturers, and employees. With the right guidance and approach, these contracts can transform from bewildering documents into strategic assets that significantly contribute to your health management efforts.

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