Inside a drug pricing contract

Pharmacy benefit managers (PBMs) — middle men that manage drug coverage for businesses throughout the country — steer negotiations with drug companies to benefit their own financial interests.

Why it matters: These PBMs have a lot of power over the prescription drug coverage people get through their employers, and they’re supposed to negotiate discounts so coverage is cheaper for insurers and employers.  The contract between the PBMs and manufacturers is not in the public’s view.  Since it’s a template, there are no hard numbers or terms of any specific agreements.

The big takeaway: There’s nothing illegal about these contracts.  But the language is clearly written with the PBMs financial interests in mind, and critics say those kinds of provisions can result in lost savings for everyone, especially for small companies and their employees.


Even some of the largest companies think they are protected because they have in-house and outside attorney’s vetting contracts, yet that’s not necessarily the case.

“That’s a little bit like going to Las Vegas and consistently thinking you can beat the house at their own game,” said one source who has worked in the industry for many years.  “These PBMs have entire departments of lawyers where this is their game.”

Rebates:  A primary function of a PBM is to negotiate rebates from drug companies.  Most of those rebate dollars flow back to employers (not workers).  But some PBMs collect other rebate-like fees from drug companies that it doesn’t have to pass along to employers.   One such PBM contract explicitly says “rebates do not include things’ like administration fees from drug manufacturers”, “inflation payments” and numerous types of “other pharma revenue.”

There are so many carve-outs of what they consider a rebate that it’s very murky of what’s being kept and what’s being passed through to clients.

Multiple industry people say the “proprietary” algorithm is one of the most important definitions, as it gives the PBM full authority to determine whether a drug is a brand or generic without being transparent.   The algorithm allows a PBM to pocket the difference between a brand-drug discount and a generic-drug discount — a major tactic to maximize profits.