By Beckie Fenrick, PharmD, MBA, Chief Pharmacy Officer, Navion
A PBM proposal often arrives looking reassuringly precise. The discounts run to two decimal places. The rebate guarantees typically carry exact per claim dollar amounts.
Then the contract begins.
Those numbers may apply to fewer claims than the plan sponsor assumes, exclude certain drugs or carry a narrower meaning than the proposal suggests. That’s how a deal that looks competitive in a spreadsheet can produce a very different financial result.
Why PBM Contract Language Matters More Than Ever
Plan sponsors are under growing pressure to understand how their pharmacy benefit works, what their PBM retains and whether the arrangement best serves the plan and members’ interests.
The PBM transparency provisions of the Consolidated Appropriations Act, 2026 raises that standard. For plan years beginning on or after Aug. 3, 2028, PBM arrangements with ERISA plans must meet new requirements involving rebate pass-through, disclosure and annual audit access. Those requirements live in the contract itself, and PBM agreements often run three years, so contracts signed well before the deadline will need to satisfy them.
A compliant contract still isn’t necessarily a good one. The law will put more in front of plan sponsors, but it won’t interpret any of it for you.
PBM Contract Definitions That Shape Plan Costs
A PBM contract isn’t governed by what a term typically means. It’s governed by how the agreement defines it.
Once “Rebate” becomes a defined term, every capitalized use carries that meaning, and only that meaning. The same is true for “Brand Drug,” “Generic Drug,” “Specialty Drug” and “Limited Distribution Drug.” Those definitions can determine which claims count toward which guarantees.
Authorized generics often show that cost impact. An authorized generic is an approved brand-name drug marketed under a generic label. Because they share characteristics of both brands and generics, PBMs can manipulate them to their financial advantage if they aren’t explicitly defined in your contract.
Without strict definitions, a PBM can group these claims to exploit pricing guarantees:
- For Network Discounts: They group them with brand drugs to hold the claim to a lower promised discount.
- For Rebates: They group them with generic drugs to avoid paying higher brand-name rebates.
The Result: It’s the exact same drug, but your organization gets a smaller discount.
Some contracts exclude limited distribution drugs from guarantees but without defining which drugs qualify. When the contract doesn’t say what belongs in that category, the plan sponsor has no way to know how much of its spend the guarantee actually covers.
What PBM Pricing Guarantees Actually Cover
A large rebate or discount guarantee isn’t proof of a strong deal. Brokers and plan sponsors should ask:
- Which claims are included?
- How are they counted?
- Can performance in one channel offset performance in another?
I once reviewed a rebate guarantee that applied only to brand claims for which the health plan paid at least one cent. When members were still satisfying their deductibles and paying the cost themselves, those prescriptions didn’t count toward the guarantee. For a high-deductible plan, that could exclude a meaningful number of claims, making the rebate guarantee appear more generous than the total value it delivered.
Offsetting can have a similar effect. PBM guarantees are often set separately for retail, mail-order and specialty claims. If the contract allows offsetting, the PBM can combine performance across those channels. For example, if retail exceeds its guarantee by $100,000 but specialty falls short by $100,000, the PBM may use the retail overperformance to cover the specialty shortfall and owe the plan nothing.
What “100% Rebate Pass-Through” Actually Includes
“100% rebate pass-through” sounds complete. It may not be.
First, look at what the contract defines as a rebate. If it includes formulary rebates but excludes price protection payments or other manufacturer revenue, the PBM may be passing through 100% of a limited category.
Then examine how pass-through interacts with the guarantee. If actual rebates fall below the guarantee, does the PBM make up the difference? If they exceed it, does the full upside remain with the plan?
A guarantee should operate as a floor, not a ceiling.
What “Transparent PBM Pricing” Does and Doesn’t Reveal
“Transparent pricing” should prompt a simple follow-up: transparent about what?
If a contract eliminates spread pricing, the plan should expect an administrative fee or another clearly stated form of compensation. If neither is visible, ask how the PBM is being paid.
Transparency may also vary across the network. Passing through the amount paid to an independent retail pharmacy doesn’t necessarily explain pricing at a mail-order or specialty pharmacy owned by the PBM or an affiliate.
That doesn’t automatically make the arrangement unfavorable. It means retail transparency may not show the entire benefit.
How to Evaluate a PBM Contract as a Whole
A guarantee is only as strong as the terms around it. Definitions decide which claims count toward it. Exclusions pull some back out. Offsetting can cancel what’s left.
A contract should explain not only what the PBM promises, but how the plan can verify it. Review who may perform an audit, which records are available and whether affiliates are included. Confirm the plan can access its claims and pricing data during the agreement and after it ends. And watch for exclusivity language, which can limit the plan’s ability to add a clinical program or cost-containment strategy from an outside vendor later. A favorable price today gets expensive if the contract prevents the plan from changing course.
Don’t stop at the numbers in the proposal. Trace the definitions into the pricing exhibits, then follow the guarantees through the exclusions, reconciliation terms and audit rights. The deal isn’t the number on the page. It’s the contract’s rules for determining whether that number is ever realized.
Navion helps brokers, TPAs and plan sponsors evaluate PBM contracts as complete economic arrangements, not collections of attractive numbers. Because the costliest language is often the language everyone thought they understood, until the first reconciliation arrives.
