A PBM contract serves as the foundation of your pharmacy benefit program, defining everything from pricing guarantees and rebate arrangements to clinical management and reporting expectations. Yet many employers sign agreements without fully understanding the contract language that governs how their pharmacy benefit is administered. Taking a closer look at these key provisions can help organizations better evaluate PBM proposals and protect the financial interests of their health plan.
Whether you're evaluating a new PBM partner or preparing for a contract renewal, understanding the fundamentals can help you make more informed decisions and avoid costly surprises down the road. The information below summarizes several key concepts every plan sponsor should understand when reviewing a PBM contract.
Traditional vs. Pass-Through PBM Contracts
When evaluating PBM partners, one of the first considerations is understanding the type of contract being offered.
Traditional PBM Contracts: Traditional PBM arrangements often generate revenue through spread pricing, which is the difference between what the PBM pays a pharmacy and what the PBM charges the plan sponsor for the same claim. Administrative fees are typically not collected separately because PBM compensation is built into the pricing structure.
Potential advantages may include:
Simpler fee structure from the employer's perspective
Lower visible administrative fees
Established pricing models commonly used throughout the market
Important contract considerations include:
How spread pricing is defined
Rebate retention practices
Audit rights
Performance guarantees
Financial reconciliation processes
Pass-Through PBM Contracts: Pass-through arrangements generally provide greater transparency by passing through pharmacy costs, manufacturer rebates, and other negotiated savings directly to the plan sponsor. In exchange, the PBM receives an administrative fee that is typically disclosed upfront.
Potential advantages may include:
Greater pricing transparency
Clearer understanding of PBM compensation
Increased flexibility for formulary and utilization management strategies
Important contract considerations include:
Administrative fee structure
Rebate pass-through methodology
Reporting transparency
Audit provisions
Performance guarantees and reconciliation processes
When selecting a model, the key is ensuring the agreement clearly defines how the PBM is compensated and how performance will be measured.
Five Areas of Every PBM Contract You Should Review
While every agreement is unique, five contract areas deserve special attention.
1. Definitions
Definitions form the foundation of the contract. Terms as simple as "brand drug," "generic drug," "specialty drug," "rebate," and "average wholesale price (AWP)" can have substantial financial implications.
Even seemingly straightforward terms can be defined differently across PBMs. Ambiguous language may create opportunities for interpretation that affect guarantees, pricing calculations, and reporting outcomes.
When possible, plan sponsors should look for definitions that rely on established industry references and independent third-party benchmarks rather than subjective PBM discretion.
2. Financial Guarantees
Competitive pricing is important, but guarantees are what hold pricing promises accountable.
Strong financial guarantees help provide:
Budget predictability
Cost management
Transparency
Accountability if pricing benchmarks are not achieved
Contracts should clearly explain what happens if guarantees are missed and how any financial shortfalls will be reconciled. Plan sponsors should also pay close attention to the circumstances under which pricing guarantees can be modified mid-contract.
3. Exclusions
Not all drugs may be included in contractual pricing guarantees.
Certain categories can be excluded from reconciliation calculations, including:
Over-the-counter products
Vaccines
340B-eligible drugs
Compound medications
Limited distribution drugs (LDDs)
These exclusions can materially impact reported savings and guarantee performance. Understanding what's included and excluded is critical when comparing PBM proposals.
4. Performance Guarantees
Performance guarantees extend beyond financial terms. They measure whether a PBM is delivering on promised services and outcomes.
Examples may include:
Claims processing accuracy
Customer service standards
Call center responsiveness
Clinical program effectiveness
Reporting timeliness
Employers should seek guarantees that are measured at the client level rather than broad book-of-business targets, ensuring accountability reflects the performance of their specific plan.
5. Reconciliation and Audit Rights
Even the strongest guarantees provide little value if they cannot be verified.
Contracts should include clearly defined audit rights and reconciliation procedures that allow plan sponsors to validate:
Pricing guarantees
Rebate payments
Network discounts
Administrative fees
Performance metrics
An effective auditing process helps ensure transparency and confirms contractual commitments are being fulfilled.
Going Beyond the Contract
Your PBM should be a true partner; someone you can trust to come alongside your organization to help manage costs, improve member outcomes, and navigate an increasingly complex pharmacy landscape. While pricing is certainly an important consideration, contract terms tell only part of the story. Employers should also evaluate the strength of the relationship, the quality of service provided to both administrators and members, the PBM's approach to clinical programs and utilization management, the depth and transparency of reporting, and the overall flexibility of the contract structure. Taken together, these factors provide a more complete picture of whether a PBM is equipped to support your organization's long-term goals.
PBM contracts are complex, but they don't have to be confusing. By focusing on definitions, financial guarantees, exclusions, performance standards, and audit rights, plan sponsors can better understand what they're purchasing and how success will be measured.
Most importantly, employers should ask questions, seek clarification when language seems unclear, and work closely with trusted advisors and legal counsel during the review process.
The most effective PBM contracts are often the simplest: clearly written, transparent in intent, and aligned with the goals of both the plan sponsor and the PBM partner. A partnership built on transparency, clear communication, accountability, and a shared commitment to helping members access affordable medications is your path forward.