The above is the title of a useful primer from Kenny and Kister (2024). I summarized the key points below.
Overview of pharmacy contracts among stakeholders in the healthcare ecosystem.
How does the rise of health maintenance organizations (HMOs) impact pharmacy contracting?
The Health Maintenance Organization (HMO) Act of 1973 spurred the growth of comprehensive health plans such as Kaiser Foundation Health Plan, Puget Sound Group Health Cooperative, and the Greater New York Health Insurance Plan. 3 It also requires employers with 25 or more employees to offer coverage in a federally qualified HMO if one is available on their market, which has led to a further expansion of HMO plans.
Interesting, but what do HMOs have to do with pharmacy contracts now?
Although pharmacies were not a standard part of benefits in early HMO plans…some plans offered prescription drug coverage as an additional benefit to attract members. HMOs that provide drug coverage adopt prescription plans modeled after hospital systems and create preferred drug lists with tiered copayments.
How do discounts work in practice?
The table below summarizes these calculations, where Brand A is a high-cost, high-rebate product and Brand B is a low-cost, low-rebate product.
The net price calculation starts with an agreed-upon reimbursement amount between the PBM and pharmacy, where the reimbursement amount is typically a percentage of the wholesale acquisition cost (WAC). Next, subtract any out-of-pocket costs (copayments, coinsurance, or deductibles) paid by the health plan member. Finally, any rebates paid by the manufacturer to the PBM are subtracted to arrive at the net price paid by the PBM.
What types of contracts are there?
- purchase discount agreement. The agreement is a negotiated contract for a drug that the health plan pays when purchasing it directly from the manufacturer, rather than through a PBM. If a wholesaler is used, the wholesaler uses the “refund method” in which the manufacturer authorizes the wholesaler to sell the product to the health plan at the contract price, and the wholesaler simply charges the manufacturer the difference between the WAC price and the contract price. A management fee is charged.
- rebate.Rebates are retroactive discounts offered by manufacturers to PBMs back Medications purchased and dispensed. In this process, the manufacturer pays a percentage of the drug's price (a rebate) to the PBM, and the PBM shares all or part of the rebate with the health plan. Types of rebate agreements include access agreements (rebates based on any prescription placement), market share rebates (rebates based on market share or volume), or preferred formulary status agreements (rebates based on prescription levels).
- value based contract. Payment for medicines depends on the “value” of the product. Value may include specific patient outcomes, whether patients adhere to medications, and CMS' cell and gene therapy models use value-based contracts.
You can read the full article, including a discussion of Medicaid’s best prices here.
