Understanding Your PBM Contract: Brand vs. Generic Drug Pricing
At least once a year, you learn the rates that your dispensing will be reimbursed at in the year ahead and the same question arises: what does this mean for my bottom line? Part of you wants to set it aside and focus on your patients. But deep down, you know that understanding your reimbursement is how you take care of them—by keeping your doors open and your business strong. The goal of this blog is demystify the two core drug categories in your contract—brand and generic—explain their pricing mechanics and show you how to quantify the dollar value of just a 1% swing in each area.
The Two Pillars: Brand Drugs vs. Generic Drugs
Brand Drugs
These are the newer, single-source medications still under patent or exclusivity. Pricing here is usually structured around list benchmarks. Most of the time, your cost is based on the Wholesale Acquisition Cost (WAC), while the reimbursement is usually based on the Average Wholesale Price (AWP) minus a negotiated discount. Brand contract terms typically follow this model for ingredient cost reimbursement: “AWP minus X %, plus a dispensing fee.”
Generic Drugs
For generics—especially multi-source products—PBMs or payers typically reimburse using a Maximum Allowable Cost (MAC) list. These are updated frequently and reflect competitive acquisition costs. Essentially, the MAC is the cap on reimbursement, incentivizing you to buy them as cheap as possible. Sometimes an AWP-minus rate will be named, and usually a contract will use terminology like “the lesser of AWP minus X, or MAC”.
Effective Rates, BER, GER, and DFER
Brand, Generic, and Dispensing Fee Effective Rates are noted by the acronyms: BER, GER and DFER. For each of these effective rates, think of them as a committed average. Rather than expecting the same rate to be paid on every claim, you can expect the payor to reimburse those drugs at an average rate that is stipulated by the BER, GER or DFER. So for example, if you bill out three different claims, they could all pay at different rates of AWP-minus, but the overall reimbursement should average out to the contracted Effective Rate.
To make Effective Rates a little more complicated, you need to know what the measurement level will be at. A payor could measure their effective rate at the pharmacy level, PSAO or even plan level. As you can assume, this means that not all pharmacies will be treated equal, if it is measured at a level higher than just their single store.
How Pricing Metrics Work—and Why They Matter
Believe it or not, the AWP-minus system in place for most contracts is intended to work very similar to a cost-plus, or “time and materials” structure. It assumes that a pharmacy should be paid a price that provides a margin on the drug, and also an award for the service component. Unfortunately, the service component has been whittled down over time, and the drug portion is often inaccurately tracking with cost. For more on that, see the last Index article: Understanding AWP and Your Pharmacy’s Drug Blend.
While contracts in other industries have a variety of structures, pharmacy reimbursement has historically stuck close to this.
One exception, that isn’t as relevant anymore, was the DIR fee. Tying an award or fee to a measure of quality was a step in seeing if a better system could be developed. Unfortunately, it didn’t work that way for a majority of the industry and DIRs have now gone away.
Lets look at the way you can measure the impact of change, to have an idea of what lies ahead in the new year. Then, we’ll discuss some ideas for future contract structures.
Quantifying 1 %: What Does That Mean in Dollars?
Lets imagine you get the docket of PBMs and rates from your PSAO for the year ahead, and you are wondering what all of those plans and numbers mean. The best way to analyze it is with an approach of comparing this year to a theoretical next year.
First, get out last year’s rate publication, so you know what the baseline is supposed to be (remember, you may be running higher or lower, so we just need to look at what the network-wide rate is)
Next, pull a report that summarizes your dispensing by BIN, PCN, and Group if you can. Outcomes Insights has these reports ready for you, just reach out and we’ll help you run or build what you need.
Now you’re ready to find the value of 1%.
Brand Drugs
For the sake of ease, we’ll use round numbers. The Index data shows that an average pharmacy will dispense a dollar volume-by-plan similar to this example, and the average rate change is less, usually around 0.25%-0.50% at a time.
Example Plan calculation
- Total annual brand reimbursement under Plan 1 = $400,000 (ingredient cost basis).
- Plan 1 contract erodes from AWP– 17% to AWP–18 % (a 1 % deeper discount).
- Back the number up to AWP, and then apply the contract to find new reimbursement. If it comes out to more than 1%, you’re doing it right.
$400,000 = AWP – 17%. So; 400,000 / (1-0.17) = AWP
Total dispensing, at AWP = $481,928
Now apply the new AWP-18% rate. $481,928 x (1-0.18) = $395,181
Total decrease equals $400,000 - $395,181 = $4,819
This means that if your pharmacy dispenses the exact same prescriptions for that same plan next year, the total reimbursement will be less by $4,819.
Next, you can repeat the process for each plan, and determine what the overall changes look like, and where the largest swings will be. This may sound a bit tedious, but it is the best way to know which plans will be most advantageous, what the future may look like, and also how you can begin strategizing about how to dispense differently.
Another option, if you’re so inclined, is to use an AI tool like ChatGPT to analyze these things. By loading a spreadsheet of your dispensing into the thread, along with the plan rate guide, you can prompt it to give analysis and advice on what will change, and how much that could mean in the future. It’s amazing what they can do, and how they get better over time- or as our prompt abilities improve.
Generic Drugs
For generic drugs, it could be a very similar process, but MAC’s make it nearly impossible to set a benchmark. If a plan relies on language such as “lesser of AWP-minus or MAC”, don’t waste your time, and just focus on buying the cheapest drug you can every day.
But if you have plans that are anchored to a GER, then the same process can happen that we just used in the Brand section before.
One difference with generics, specifically regarding plans with GERs, is that not every NDC is created equal. The same drug and strength could mean very different profit amounts, if they have differing AWP spreads. This gap is usually called the spread, and is one of pharmacy’s most pernicious problems.
Two complicating factors with generics:
- MAC volatility: MAC lists shift, sometimes without advance warning—impacting predictability
- Market movements: Ideally, the MAC volatility moves with the net cost as the supply and demand adjusts prices. But not always, and you will have to watch closely to realize when a generic is going up in price while the MAC doesn’t change.
As AI tools continue to improve, we have been able to analyze dispensing reports better, and screen for anomalies like single-source or private label generics being mis-classified, or even to predict future trends in spread and MAC rates as supply and demand fluctuate. Also, using AI predictive analytics may be the best way to shop deals and bulk buy the best finds.
You can also work with your wholesaler(s) on this. They want you in business, and sometimes they will acknowledge that you will need to buy from secondary vendors to find the best pricing on certain products.
Medicare plan finder
If you want to get granular, perhaps with a list of patients taking a particular drug, or that have a particularly low margin profile, you could go directly to Medicare.gov and see what the plan rates will be for each med you put in. It’s tedious, but it’s the best way currently to see what the plan’s generic MAC rates are for particular drugs. I’ve not found an AI hack to make this process easier, yet. If I hear of one, I will gladly share.
Conclusion: Advocate for yourself
Don’t hesitate to tout your value, especially when it comes to situations where you are contracting directly with the PBM, without a PSAO to lead it. Let them know why you’re different, and how you are taking care of their patients better than they may already be aware. And whenever possible, use data to back it up. Historically, we haven't always been able to express the value of the various patient care activities beyond the dispensing.
But as costs rise and more pharmacy deserts emerge, it’s clear that something must change. Payors may not yet know how to make that change, but this is where communication and alignment become essential. By asking what matters most to them and shaping our business to deliver on that, we can move forward productively. At the same time, AI will play a key role—our work to embed an LLM agent directly into Insights will make data analysis and understanding easier. With a clearer view of how our business operates and the unique value it provides, we’ll be better positioned to find the right way forward together.
