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Your Clients are Getting Gouged on this Class of Drugs

Most people think of the term “generic drugs” as a universally accepted group of drugs.  Obviously, it’s just a drug sold under its chemical name.  But in a pharmacy contract – the umbrella term “Generic” has myriad ways that PBMs can reclassify medications and charge clients more for prescriptions.  In particular, the most abused classification of generic drugs may be those that are defined as specialty medications by a PBM.  This may be a bit hard for some people to understand because it requires some foundational knowledge of the pharmacy benefits management landscape:  Spread Pricing, Contract Guarantees, and Specialty Lists.  Below I will highlight a very cursory overview of these items and how they combine to create significant volatility in drug pricing on specialty generics.

What is Spread Pricing

The topic of spread pricing could be a book in and of itself and, fortunately, is something many consultants are now familiar with.  It is greatly vilified, and greatly misunderstood.  Its foundation is built on the great misconception that there is a “Price” for a drug.  The price that a plan sponsor pays for a medication is the price which is charged by the PBM to the plan sponsor.  The PBM then reimburses the pharmacy that dispensed the medication a completely different amount.  The PBM’s profit is the difference between the two numbers.  And there is really no requirement the two numbers need to be related.  Even in accounting for PBMs – the amount a plan sponsor pays for the drug is considered “Revenue”, and the amount reimbursed to the pharmacy is considered “Cost of Goods Sold”.  That practice is the core of spread pricing.  While the price is generally based on a combination of the manufacturer of the drug, the drug itself, and the pharmacy dispensing it, it is imperative to understand that it does not have to be based on anything.  The PBM can charge a client in a completely arbitrary manner for a prescription drug at any given time.   This practice is akin to how you buy groceries at a grocery store.  You have no clue what the grocery store bought the item for – you only know how much the grocery store is charging you for the item.  The amount the grocery store makes in profit on each item can vary greatly from item to item.  In the PBM world – you do not know how much the PBM is actually reimbursing the pharmacy for the medication – you only know how much they are charging your client.  The alternative to spread pricing is pass-through pricing – which I’ll emphasize is no panacea.  This is a cost-plus method.  In the grocery store analogy – you would know how much profit the grocery store is making – and you know how much you are being charged.  But you have no idea how good their acquisition cost is and absent a market reference point – you still have no idea how competitive the price for that item is.  So the logical question should be:  what should an employer do to make sure the price they’re paying for a drug is reasonable?

How Do Contract Guarantees Work

Using the above examples – a consultant and their client can put guardrails around how much a spread PBM contract (or pass-through contract) can charge by working to get a client-level contract guarantee that limits the pricing manipulation over the course of a year.  It also ensures that pass-through PBM contracts have a competitive acquisition cost for the drugs rather than just passing through a high-cost drug with an additional markup.  Grocery Store analogy – if I bought an item from CVS and added $3.00 – I might be making less than Wal-Mart on the item but the purchaser would certainly be paying more than if they bought the item from Wal-Mart.  These guarantees typically work with an “AWP – %” approach that takes a published Average Wholesale Price, typically from First Data Bank, Medispan, or Redbook, and provides an overall guaranteed discount percentage.  A growing alternative pioneered by PBMs, such as CapitalRx, are NADAC plus models.  NADAC stands for the National Average Drug Acquisition Cost.  These pricing methods use the acquisition cost of a pharmacy, as reported to CMS by pharmacies, and add a dispensing fee or transaction fee.  Regardless of the model, these guarantees are typically structured into channel guarantees such as “Retail 30 generic”, “retail 30 brand” or “specialty”.  And it’s that last category where some of the most egregious abuses take place. 

What are Specialty Lists and Why Should I Care?

We talk A LOT about specialty drugs in the PBM industry.  But have you ever asked the question: what exactly is a specialty drug?  Funny you should ask….because it depends.  CMS defines a specialty medication as any drug over $600.00.  Which is a lot of drugs at this point and a very arbitrary definition.  In practice, the definition of a “Specialty” drug depends entirely on the PBM’s independent definition.  And the PBM’s definition is also arbitrary.  (The frequency with which I use the word arbitrary in the PBM space should be indicative of some of the overall issues plaguing the industry).  Every PBM maintains a “Specialty Drug List” and the drugs on it can vary wildly.  In some instances migraine medications like Emgality are on the list – in others, they are not.  In some instances, HIV medications are defined as specialty – and in others, they are not.  So when you are reviewing two PBM contracts that have a contract guarantee for specialty drugs at 20% and a specialty rebate of $2,800 – the actual result of that contract can have a substantial variance depending on what exactly the PBM defines as a specialty drug.

Where Are My Clients at Greatest Risk?

The largest percentage markups I see in the pharmacy industry are on drugs that are generic drugs that are defined as Specialty.  Again, the definition is arbitrary, so drugs that have a NADAC of $6.00 can be billed to plan sponsors at rates 10X – 20X that amount or more.  Drugs like Methotrexate, Mycophenolate, and Tacrolimus often find themselves on these lists despite having been around for decades and being simple chemical compounds (non-biologic medications) that require no special handling.  Perhaps the single greatest abused drug in the industry is Imatinib Mesylate – the generic form of cancer medication Gleevec.  I have used this example countless times.  This drug has a NADAC of ~$250 for a 30-day supply but may be billed to plans at $5k-$8k per month.  You can buy this drug at Costco for $250.  You can see a great example illustration of this on the Ohio Medicaid plan in 2018 done by 46brooklyn (which is a website consultants should familiarize themselves with).  The illustration shows the average markup of various drugs in the space.  While this analysis was done in 2018 it’s a practice I still see today.  As more and more biologic brand specialty medications fall off patent – it is highly likely that they will find themselves under this classification of medication.  That is what is happening with drugs like Gleevec vs. imatinib mesylate, Zytiga and abiraterone acetate, Tecfidera, and dimethyl fumarate and it is almost certainly going to happen with generic forms of Humira.  The list goes on and on.

What Can I Do To Protect My Clients From This Practice?

There are three steps that a consultant can take to help manage this practice.  The first and easiest step is to ask for a specialty generic guarantee in your contract.  Specialty guarantees often have an overall effective guarantee of 19%-22% depending on the contract.  This is not a very good discount on a generic drug with multiple manufacturers.  Asking for a specialty brand and specialty generic discount will lower your specialty brand discount guarantee but you should see a 55%-70% discount on specialty generic medications.  This alone will greatly reduce the volatility of your clients’ performance and reduce the opportunity for abuse. 

The second step a consultant should take is doing apples-to-apples comparisons.  It is imperative you request a specialty drug list from a PBM when asking for a bid so you can do an apples-to-apples comparison.  If you are not comparing specialty definitions you are doing your client a disservice. 

The third step is to look for the above-mentioned drugs and see if the generics are on the formulary.  Some PBM formularies will exclude the generic versions of these specialty medications and drive the brand medication so that higher drug rebates can be achieved.  This may lead to a lower net cost for the client – but it needs to be reflected in substantially higher rebate guarantees and you should consider adjusting your analysis to account for higher drug prices on the PBM using this practice.

Finally, you can look for NADAC-based contracts.  NADAC is not a panacea – you still need to do the work and evaluate the net cost to a client.  But if I were to define where, in my opinion, NADAC-based contracts are the most effective – it is in eliminating this contract gamesmanship of specialty generic definitions.   With the drug cost based on an independently reported (and more accurately reflected market rate) the opportunity for specialty generic manipulation is almost completely eliminated.  Only when a drug does not have a NADAC price would the client be open to manipulation – which is rare in the generic drug market.


In conclusion, understanding the complexities and potential pitfalls of pharmacy benefit management (PBM) contracts, especially concerning specialty medications and generic drugs, is crucial for consultants and their clients. The practice of reclassifying generic drugs as specialty medications by PBMs can lead to significant cost discrepancies and potential exploitation of clients. By grasping concepts like spread pricing, contract guarantees, and specialty drug lists, consultants can navigate these challenges more effectively. Implementing strategies such as securing specialty generic guarantees, conducting thorough comparisons, examining formularies for drug exclusions, and exploring NADAC-based contracts can help mitigate risks and protect clients from overpriced medications. With diligence and strategic planning, consultants can play a vital role in safeguarding their clients’ interests and promoting transparency and fairness in pharmaceutical pricing practices.

Written by Jason Wenzke

President, Ringmaster Rx

Ringmaster Technologies