Part 3: To Remove Wasteful Spending Start With Your PBM Contract

Posted by Navitus Health Solutions on 10/22/20 8:30 AM

Let’s compare two types of PBM contracts. A complex contract that may be filled with legalese or a simple contract with fewer pages. The PBM industry has gotten very complex over the years, requiring contract reviews involving procurement, benefits and legal teams.

Typically, a traditional model PBM offers a complex contract where revenue sources may not be fully disclosed. A pass-through PBM, on the other hand, offers a simple, clear and concise contract, where revenue sources are fully disclosed.

e book 7 waste Social 1

The key to a successful negotiation is to make sure what you want, is written in the contract. A simplified contract helps to spell out exactly what you are signing up for. Trying to add contract terms later is a lot more difficult, especially in complex contract arrangements.


A recent report noted: “To successfully remove waste from drug formularies, plan sponsors should make sure that their contracts with PBMs have three core attributes: fee-based (i.e., full pass-through) model, transparency (full audit rights) and formulary flexibility.”1

Here are PBM contracting strategies to eliminate wasteful drugs to lower cost, while still providing access to care for your members.

1: Choose an admin fee only model with a full pass-through PBM 
Here’s why: When a PBM’s only source of revenue is an admin fee, there’s an “alignment of interest”, rather than a “conflict of interest” from spread revenue and other revenue sources.

A full pass-through model provides 100% of rebates and all other manufacturer/pharma revenue are passed back to you (the plan sponsor). This model eliminates incentives to include wasteful drugs on the formulary and the PBM will partner with you to remove them.

In a traditional PBM model, it may retain some portion of rebates and other upside revenue. This model may have incentives to include wasteful drugs on the formulary and it may charge you additional fees to remove them.

2: Look for PBM transparency that provides both operational and financial disclosure
To remove wasteful drugs from your formulary, you will need to determine if the PBM is acting in your best interest. Most PBMs will say that they are transparent, but contractually it may only apply to some (not all) areas of the contract.

So, how will you know if your Rx plan is providing value and performance? A truly transparent PBM will allow you to:

  • View and audit all documents and data pertaining to your benefit program
  • View and audit all network pharmacy arrangements
  • View and audit all pharma contracts
  • Access all claims data down to the NDC-11 level
  • Access all MAC list(s) – if more than one list, access to how/when will multiple lists be used
  • Access your PBM’s contracts with all third parties that result in financial benefit to the PBM
  • Access actual and total claim files for audit purposes (rather than separate and partial claim files)

3: Choose a PBM that offers a flexible formulary
You and your organization may have a unique member population that needs a customized solution. Does the PBM you have or are evaluating offer a flexible formulary without any additional costs? In a pass-through model, the PBM is more flexible and will help to customize your plan formulary at no additional cost. However, in a traditional model, the PBM may be more rigid and may not make formulary customizations, or may charge additional fees to make changes.


Now that we’ve defined and discussed why wasteful drugs are included on formularies, you can apply what you’ve learned to remove them and start lowering costs. Removing wasteful drugs goes beyond ‘first-year’ or a ‘one-time’ savings. When you switch to a waste-free formulary, you’ll benefit year after year from lower costs, helping you keep drug trend low over time.

Download our e-book to learn more about wasteful drugs and how you can start saving now.

e book 7 waste cover

E-book Download


1. Anderson G, Ph.D., Cordeiro T, R.Ph., Socal M, M.D. Ph.D., Vela L, M.B.A., Removing waste from drug formularies, The Pacific Business Group On Health, Published October, 2019. Accessed September 2020.

Topics: Insider

Subscribe Here!