Contracting with PBMs

Contracting with PBMs

It is important that employers align their overall benefits strategy to include clear objectives and requirements that are consistent across both the medical and pharmacy benefit before they set out to select a vendor. Make sure to consider the following:

  • Benefit objectives should focus on supporting the health of employees/members.
  • Overall strategy and design should determine the purpose for how or why care coverage is offered or not.
  • Plan requirements should identify what is most important for vendor selection, including employer goals, employee/member coverage and how coverage requirements will be managed by the vendor to ensure they are in full compliance with federal and state laws.
  • Contracts should avoid using boilerplate language and assure consistency of coverage throughout all sections.

Today’s PBM contracts are much more complex, minimally transparent and employ various strategies to control costs that may or may not fit the plan coverage strategy. It is important to make sure that your business needs (and not just the PBMs) are being met during the selection and contracting process.  

Depending on the employer plan contract for PBM services, prescription drug coverage may or may not include all or some of the specialty drug products that are available today. As a result of the growing number of these drugs and their use by providers, it is a good idea to look at the value of carving in or carving out the pharmacy benefit for specific conditions such as cancer.


Originally, health insurance included drugs used in the delivery of medical services. This was separated into a medical or pharmacy benefit in the 1970’s, however still under a single plan administrator. Some plan designs provide one-stop and integrated coverage options to include all drugs (medical or pharmacy benefit). With the carve-in model, availability of drug data is generally good but fully integrated data may still be limited depending on the vendors utilized.

  • The downside is the lack of specialized resources to integratively manage just the drug component or IT systems to handle the volume of claims flowing through a pharmacy benefit itself.
  • The upside is a single point of data collection, case management and claims adjudication. This should result in lower total health care claims costs when done as intended.


As pharmacy benefits and claim adjudication became highly computerized in the 1980’s, it was more common and easier to manage drugs as a separate benefit that could also save costs by primarily moving branded drugs to generics or through a centralized mail order pharmacy distribution center. The carve-out model works well with traditional chemical drugs but has not been as beneficial for managing specialty drugs.

  • The downside is a lack of integrated data to manage all drugs and the coordination across medical and pharmacy benefits, since 50% of specialty drugs are adjudicated through medical benefits. While data cross-walks are used, this lack of integration or interoperability around data continues to be a challenge for employers. There is also a transparency gap in true claims cost reported through middlemen. Although it is still a small percent of drug claims overall, this category represents a disproportionately large drug spend per claim that is tied to services under medical benefits. In addition, this model can cause access barriers, administrative or care disruption issues for those who require the use of a specialty drug that were not intended in the plan design.
  • The upside is the historical ability to manage a large volume of drug claims and leverage existing pharmacy supply chain relationships. Data on drug claims remains readily available and robust compared to the medical data sources.


Carve-Out Considerations

Most medical plans use J-codes to process specialty drug claims, allowing charges that range from AWP to 2,000 times AWP.  Accordingly, your company could carve out specialty drug claims from your medical plan and/or require as many specialty drugs as possible to be processed through your PBM where specialty drugs can be invoiced based on NDC codes. The following are things to consider:

  • Modify current PBM contracts to ensure all specialty drugs processed are invoiced at the lowest price by your PBM. Your contract should define all specialty drugs by cross-referencing to a contract exhibit list that includes all such drugs and that allows you to amend the list on at least a quarterly basis to add all new-to-market specialty drugs.
  • New contracts should require PBMs to satisfy a specified “minimum guaranteed discount” for EACH specialty drug on the exhibit list.
  • All contracts should require the specialty drug vendor or PBM to meet quarterly to review new specialty drugs and to revise specialty drug “minimum guaranteed discounts” to ensure that discounts remain as good as can be obtained in the marketplace, throughout the life of the contract.
  • Contracts should contain a “default discount guarantee” for all new-to-market specialty drugs.

Data Integration Considerations

Virtual or full integration are the two general categories where employers are pursuing better coordination across benefits along with the integration of care management to optimize outcomes and minimize spend where possible.

  • Virtual integration comes in a variety of options depending on how the contract is written and the degree of IT data integration provided or available among vendor partners. This integration strategy offers many of the benefits seen with full integration but some benefits of separating the two benefit offerings to maximize drug savings.
  • Full integration generally is led by an ASO/TPA organization that has overall responsibility to the employer for plan performance and coordination of all services on behalf of plan members. Use of IT technology, better care optimization and waste reduction across service offerings are also part of the benefits of this option.

Categories for Comparison of Vendors

Once the strategy, objectives and requirements have been set, the vendor selection process can begin by sending a select group of vendors a Request for a Proposal (RFP). The RFP should include requirements and expectations for how specialty drug benefits will be managed by the vendor including the following general categories for comparison purposes: 

  • Formulary development and management, contracting incentives in supply chain or other influences in P&T Committee operations.
  • Medications the PBM will supply directly and those drugs that must be obtained from another source due to manufacturer/FDA requirements. Orphan or rare disease category drugs and alternatives to high cost drugs should be addressed.
  • Clear determination of drug classes covered under the pharmacy plan versus the medical plan, along with benefit coordination capabilities.
  • Benefit design and utilization features including tiers, cost sharing and co-pay/co-insurance approaches to meet the needs of plan sponsors’ population health outcomes.
  • Management of the benefit to meet the needs of plan sponsors’ population related to philosophy, strategy, etc.
  • Network contracting, including alignment, oversight and outcomes focus of providers/prescribers and pharmacies/pharmacists.
  • Account services offered in support of the plan sponsor.
  • Claims processing, payments operations and transparency in reporting.
  • Distribution of specialty drugs and supply chain partners.
  • Drug utilization review, step therapy, quantity limits, prior authorization and other edits and controls that align with the plan sponsors’ goals for population health outcomes.
  • Medication adherence programs and patient support services.
  • Reports for the employer provided monthly and from POS data.
  • Patient support, education and communications with employees/members.

Once the information is obtained and compared among the RFP respondents, the plan sponsor can either consider a meeting with finalists or move forward in contracting with a vendor(s) to provide support in managing pharmacy benefits. Some key PBM contract items or terms are provided in the checklist in the next section to assure the best opportunity for high performance from your vendors while allowing proper oversight in the administration of drug related benefits.