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When is a Pass-Through or Traditional Contract Better for the PBM?

PBM consultantPass-through PBM pricing models are a popular option. This is because of the perception that if the PBM is not creating any profit through margin pricing, paying a pharmacy less than the amount a PBM is charging a client will lower plan costs. Contrary to what many believe, this is not always the result.

Before choosing a pass-through or a traditional contract, you must understand the situations which will make it advantageous to choose either one. You must also evaluate the transparency of plan pricing to get the best possible deal.

Pass-Through Contract

A PBM consultant will agree that a pass-through contract guarantees profit. If the contract relies on administrative fees and does not offer discount performance guarantees, it will have no risk. The network risk is entirely on a plan sponsor and not on the PBM. If the PBM secures no or very low guarantees with the client, this model is a prompt and sure way to generate revenue.

This type of contract is ideal for those that do not have the critical mass to negotiate discounts or rebates with manufacturers. Plan sponsors do not know the profit stream and pricing methodologies of the PBM, making it easier to deflect a traditional price by casting doubt on a discount that seems too good to be true. This marketing strategy of casting doubt on traditional PBM pricing affected the industry.

Traditional Contract

Traditional contracts offer the PBM flexibility for competitive pricing. If the PBM analyzes a sponsor’s use without restrictions of a pass-through model, it may offset losses in one aspect while simultaneously applying the profit to another to make up for the losses. An example of this is a plan sponsor that has a high mail service. If the PBM has their own mail facility, it can estimate profit and will take a loss on retail claims.

One of the advantages of this model is when a plan sponsor does not continuously compare its PBM agreement to the market to make sure it competes with rates. For sponsors who will choose a traditional contract, it is important to make sure to test the competitiveness of the market of their agreement at least every two years.

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