By Neil Model

Prescription spending used to account for a very small percentage of health care spend. Today, it amounts to over 20 percent, and is rising faster than any other health care cost components. An employer with 1,000 employees may easily generate 20,000 to 30,000 prescriptions per year, so it is important and beneficial to perform an audit of a plan’s prescription program.

In addition to clinical pharmacy management strategies, which I wrote about in “Trimming the Fat: Getting to Lean Pharmacy Spending,” another way for CFOs, as well as HR and benefits managers, to identify cost cutting options is by taking a thorough look at their Pharmacy Benefit Manager (PBM) contract. These contracts are often complex and may require the assistance of a benefits expert versed in the PBM world to fully understand.

PBMs serve as the “middle man” between plan sponsors and insurance companies. They work to alleviate an employers’ administrative burden of processing pharmacy claims and negotiating drug pricing with the pharmaceutical companies. PBMs are compensated in many ways —rebates, administrative fees, pharmacy spread, and probably a dozen other ways. Knowing this will greatly help an employer identify further ways to reduce costs within the contract.


Rebates, while an attractive selling point to plan sponsors, are elusive and very much a mystery. PBMs will offer huge rebates on specialty drugs, which are quite expensive, not uncommonly upwards of several thousand dollars per month’s supply, and no one really knows the base price of any drug. The process by which they determine rebate amounts is lacking in transparency, needless to say, especially in investor-owned companies, where the main focus is boosting the bottom line. Employers often only receive a portion of the actual rebate amount, as the remainder is renamed, so it’s not included in the rebate calculation to the employer.

Take for example Duexis, which has no generic. It is a combination of Ibuprofen and Famotidine (Pepcid). The former has a cost of around $2,500, versus the minimal cost of the later combination. You may ask, why include the former in one’s formulary?

Another example is Vimovo, again, with an approximate cost of $2,500. It is sort of a combination of Naproxen (pain reliever) and Nexium (Proton-Pump inhibitor). The difference in price is significant.
When it comes to rebates versus drug efficacy, it’s not always the case that a more expensive drug is more effective than a generic. In making substitutions, pharmacists must consult the “Orange Book,” published by the FDA, which is the Approved Drug Products with Therapeutic Equivalence Evaluations.

Examples of brand versus generic cost comparisons are many, but here are two to consider:

  • Coreg, a beta-blocker, costs approximately $290-$315, likely with a rebate of almost one-third. Carvedilol, a generic equivalent, costs about $10 for the same 30-day supply.
  • Perhaps a more familiar drug, Prevacid, costs net of a rebate around $300-$400, versus Lansoprazole, with a cost of around $20-$40. This does illustrate the cost differences but, again, does not deal with the efficacy.

It’s important to not lose sight of manufacturer’s promotion also. If a manufacturer offers a coupon to offset the copay, the plan sponsor is still on the hook for the remaining cost.

In the summer of 2016, you may recall, there was a huge uproar over the very popular EpiPen, and the surging “cost” of this life-saving auto-injector. Consumers were shocked to discover that what used to cost them a $10 copay was now costing over $600 a dose. Much scrutiny of the pharmaceutical company, Mylan, ensued, which had everyone asking how they could (or would) charge so much money for a drug that was needed by so many. What the consumers didn’t realize, however, is that the “cost” had been steadily increasing for years prior, though it was masked under a copay. With the introduction of a High Deductible Health Plan (HDHP) by their employer, employees were having to meet deductibles before assuming their regular copays. As part of their explanation on the drug’s rising costs, Mylan claimed that PBMs and insurance companies receive over half of the wholesale price, and alleged they were partially to blame for rising healthcare costs.

Contractual Considerations

A contract with a PBM, such as Express Scripts or CVS Caremark, for example, will include well-known terms such as the Maximum Allowable Cost (MAC) or Average Wholesale Price (AWP). Sometimes, lesser-known terms will appear in the contract. For example, does the term “brand/generic algorithm” appear anywhere? This feature basically lets the PBM move generic (with higher discounts) into brand calculations when calculating end-of-contract-year reconciliation to determine contractual discounts applied (on average). It’s imperative that benefits managers understand everything contained in the PBM contract to effectively administer a prescription benefits program.

Pharmacy Spread

What is a pharmacy spread? It’s when a PBM charges a health plan more than the PBM pays the pharmacy for filling the prescription. This difference can be less than $5 per script or more than $100, and is known as the pharmacy spread (Creighton University study). The difficulty is that many (most) plan sponsors are not aware of how much a drug costs, and then how much a PBM should be paying. A study was conducted in 2010 where more than 95% of the plans interviewed did not know how much a drug costs or how much a PBM should be paying.*

Consider the example of going to Walmart to buy diapers. If you do not like the price there, you can go to Target, but at neither place do you know what the store paid for them.

Are there items you may be overlooking in your PBM contract? Would you like to operate a leaner pharmacy plan? Following the money can be a complicated task, but is absolutely necessary to execute a PBM contract that is beneficial to both you and your employees. Enlisting the help of an experienced benefits professional–one who has a focus on Rx spend–is one of your best defenses against unneeded spending, and will assist you in identifying money you can put back into your pocket. Knowing where the money goes is essential in determining how to get it back.

*Riley, Mark. (2010). Arkansas Pharmacists Association [Case Study]