Pharmacy Benefits Glossary

A guide to general pharmacy benefits terminology.

The pharmacy benefit management (PBM) industry is filled with specialized terminology that can be challenging to navigate. To help you better understand the key concepts and terms used in this field, we created this comprehensive glossary. Each term is briefly defined – with certain terms linked to more detailed explanations where available – making it easier for you to grasp the intricacies of PBMs and their vital role in healthcare.

340B

The 340B Drug Pricing Program enables healthcare providers that serve low-income and uninsured patients to purchase drugs at reduced costs. Drug manufacturers participating in Medicaid must sell outpatient drugs at a discount to healthcare organizations that treat vulnerable communities to make medications more affordable for these patients. 340B was initially created by the US Congress in 1992 through the enactment of Section 602 of the Veterans Health Care Act, codified as Section 340B of the Public Health Service Act. More

Average Wholesale Price (AWP)

The average wholesale price (AWP) is the average cost wholesalers charge pharmacies, physicians, and customers for their drugs. It is the average price retailers in the PBM industry pay to buy drugs from wholesalers.

AWP is used as a benchmark for prescription drug pricing and reimbursement.

Brand-Name Drug

Brand name drugs are trademarked, patent-protected drugs marketed and sold by the original pharmaceutical manufacturer. They are sold under the trademarked name chosen by this drug manufacturer. The patent protects a brand-name drug’s exact formula and ingredients for a set duration when the manufacturer has exclusive rights to market and sell that prescription medication without competing generic versions. More

Claims Adjudication

This is the process health insurers use to determine whether to pay a claim in full, partially, or to deny a claim. Through claims adjudication, the payor evaluates a prescription drug claim with an initial review of data like the diagnosis code, service code, whether prior authorization is required, etc., while complex claims are manually reviewed. Denied claims may be due to an out-of-network claim, a non-approved prescription, or inaccurate codes used. An appeal process may involve the health plan’s medical director, prescribing doctor, and other providers. More

Coinsurance

Coinsurance is the percentage of a covered healthcare service the patient pays after meeting their plan’s deductible. It is the insured individual’s share of the costs of a covered expense, expressed as a percentage. More

Copay Maximizers

A copay maximizer is an insurance feature that applies the maximum amount of patient assistance program (PAP) funds toward the patient’s copay amount. The patient’s payments aren’t applied towards their plan’s deductible or out-of-pocket expenses while the maximum amount is applied towards their portion of medication costs.

A copay maximizer may be applied in even intervals throughout the year or front-loaded to apply to the maximum copay assistance as early as possible in the plan’s year.

Dispense As Written (DAW)

When a provider notes “dispense as written” (or DAW) on a prescription, that means the drug cannot be substituted with a generic or other alternative. DAW codes may also be called product selection codes. More

Deductible

A deductible is the amount of money an individual has to pay out-of-pocket for their healthcare services before their health insurance plan starts paying for coverage.

Once a deductible is met, the insurance provider starts covering a portion of medical costs as determined by the specific policy.

Discount Card

Discount cards are provided by third parties to help individuals save on prescription medication costs. These third parties negotiate drug discounts with pharmacies, using pharmaceutical manufacturer-sponsored programs and pharmacy savings plans.

Individuals use these cards like an insurance card when paying for medication, but discount cards cannot be combined with an insured individual’s copay.

Drug Class

This refers to the classification of drugs based on their therapeutic uses, chemical structure, mechanism of action, comparable side effects, and biological or functional changes they induce.

There are hundreds of classifications of drugs. Examples include:

  • Alpha Blockers: A drug class that relaxes blood vessels to increase blood flow.
  • Analgesics: A drug class that provides pain relief, either by reducing inflammation, blocking pain signals, or increasing the body’s pain-relieving chemicals.
  • Angiotensin II Receptor Blockers: A drug class of medications that help with high blood pressure.

Drug Coverage

This refers to insurance coverage for prescription medications. Drug coverage varies from one insurance plan to the next and may be reflected as separate tiers with different deductibles and copays.
Health insurance plans outline their specific formulary, or which drugs are covered, along with associated costs, medication types covered, and quantities.

Drug Type

Drug types are unique from drug classes. These are categorizations of drugs based on specific characteristics, effects on users, and dangers.

Drug Utilization Review (DUR)

A Drug Utilization Review (DUR) is an assessment of prescribed medications used to ensure medications are used correctly and safely and to evaluate the drug’s efficacy and cost-effectiveness.

A DUR involves reviewing a patient’s regimens, drug interactions, dosage, and adherence.

Formulary

A formulary is a list of generic and brand-name prescription drugs covered by a health insurance plan. Formularies are created by independent committees of physicians, PBMs, and pharmacists to provide doctors and other healthcare providers with the safest, most effective, and affordable medication options. Drugs on the formulary may be divided into tiers based on type, brand or generic, preferred, non-preferred, and specialty. More

Gap in Care

A gap in care refers to a discrepancy between healthcare industry best practices and the resulting patient care provided. This could be reflected in a patient missing screenings, non-adherence to a prescribed treatment plan, and numerous other factors, including:
  • The lack of preventive care
  • Missed appointments
  • Failure to take medication
  • Lack of access to medical services. More

Gene Therapy Medications

Gene therapy medications are breakthroughs in medicine, used to prevent or cure complex diseases by modifying the patient’s genes. They are ultra-high-cost medications due to the continuing research in the field. As a result, health plans, PBMs, plan sponsors, and reinsurers all have to determine when and how to fund treatments. More

Generic Dispensing Rate (GDR)

The generic dispensing rate (GDR) is used to measure the utilization of generic drugs. It is the percentage of generic medication prescription fills compared to all prescription fills within the same therapeutic class in a given year.

A high GDR indicates a greater preference for generic drugs.

Generic Drugs

Generic drugs are prescribed medications containing the same active ingredients as brand-name drugs. The FDA requires generics to be identical to the brand name in dosage, strength, safety, performance, and intended use. When a generic drug meets these criteria, it is also referred to as a generic equivalent. More

Maximum Allowable Cost (MAC)

Maximum allowable cost (MAC) is the highest amount a health plan will reimburse pharmacies for a drug.

The MAC is set by insurers or PBMs and is used to keep drug costs competitive in the marketplace. The MAC factors in how widely available a drug is, how many manufacturers make a generic version, and how long a generic version has been available.

MAC Drug List

The maximum allowable cost (MAC) list is a compilation of generic drug prices established by health plans or PBMs. The MAC list represents the maximum amount pharmacies, drug benefit plans, or PBMs will pay for generic and brand-name drugs. All participants in the marketplace contractually agree to these prices. More

Market Check

A market check is an evaluation of PBM pricing for prescription medications. Market checks are intended to ensure competitive pricing and identify cost-saving opportunities.

Market checks use benchmark comparators from prior annual data to help the market factor in new competing drugs and to help companies assess rate changes and adjust for inflation.

Maximum Allowable Benefit (MAB)

A maximum allowable benefit (MAB) is a cap on how much a health plan will cover for a prescription medication. The MAB limits the prescription benefits available to members of insurance plans. 

Once the MAB limit is reached, plan members must pay out-of-pocket for prescriptions.

NADAC

The National Average Drug Acquisition Cost (NADAC) is a benchmark used by Medicaid programs in the US to determine reimbursement rates for prescription medications. NADAC is the average acquisition cost from wholesalers by retail community pharmacies. It is arrived at using a random sample from all 50 states. 

It was developed by the Centers for Medicare and Medicaid Services (CMS) to determine an average price paid by pharmacies.

Non-Formulary

This refers to medications or other pharmaceutical products not included in the list of preferred or approved drugs covered by specific insurance policies or health plans. Since these medications and products are not included in the formulary of approved items, they may require higher out-of-pocket costs. Non-formulary claims require special authorization or are simply denied for reimbursement. More

Out of Pocket

Out-of-pocket costs are medical expenses not covered by insurance plans. They may include:

  • Deductibles
  • Coinsurance
  • Copayments
  • Costs for non-covered health care services
  • Medical services
  • Prescription drugs
  • Medical supplies

Once a patient reaches their deductible, most plan tiers will cover a set percentage of many of these products and services. However, some medications may require prior authorization or have a limit to coverage.

PBM Audit

PBMs and associated third parties conduct these audits to monitor the performance of network pharmacies. PBM audits ensure patients receive quality care by identifying fraud, waste, and abuse (FWA) cases, as well as uncovering non-compliance and payment errors.

Audits include reviewing:

  • Inventory management
  • Claims
  • Billing
  • Documentation
  • Adherence to regulatory requirements

Performance Guarantee (PG)

A performance guarantee (PG) is a contractual agreement between PBMs and health plan sponsors regarding metrics like cost savings, medication adherence, rebates, and customer satisfaction.

A PG agreement sets the expected standards for PBMs to follow, offering financial incentives or penalties to ensure PBMs meet target expectations.

Pharma Copay Card

A pharma copay card is an assistance program offered by pharmaceutical companies to assist with out-of-pocket costs for prescription medications.

These are also called copayment assistance cards or prescription savings cards. Most often, they are offered for high-cost, specialty medications, providing added financial support. This is accomplished by reducing copayments or coinsurance amounts and covering part or all of deductible and copay costs.

Pharmacy Benefit Administrator (PBA)

A Pharmacy Benefit Administrator (PBA) handles administrative services for health plan sponsors. They manage numerous services and processes, including:

Pharmacy Claim

This is an invoice sent to a health insurance company or PBM. It is a request for reimbursement or payment for pharmacy services, which include dispensing medications and clinical interventions.

Claims include patient information, the prescribed medication, dosage, and quantity dispensed, the prescribing physician, dates, and associated costs. Claims may be approved, partially approved, or denied.

Pharmacy Network/Covered Pharmacy

A pharmacy network, or covered pharmacy, is a group of pharmacies that contract with a health plan or PBM to provide products and services to members, including prescriptions and medical equipment. These networks negotiate with PBMs to get the lowest prices for covered products and can typically offer substantially lower costs than out-of-network pharmacies.

Pharmacy networks/covered pharmacies may include retail pharmacies, preferred pharmacies, and mail-order programs.

Pharmacy Spread (Spread Pricing)

The pharmacy spread is the difference between what PBMs charge health plans for prescriptions and what they reimburse to pharmacies. The spread is profit earned by PBMs for their services. 

Spread pricing is partly how PBMs guarantee prices in the market. Still, critics, including the Centers for Medicare and Medicaid Services (CMS), are concerned it inflates prescription drug costs and leads to unfair price models.

Price Transparency

Price transparency is about open disclosure of data relating to drug pricing. Health plans and issuers post their pricing information for covered items and services to help consumers understand costs connected to healthcare.

Industry-wide, there is an effort for greater price transparency for research and development (R&D), manufacturing, pricing for tier levels, deductibles, and copay amounts.

Pricing Variance

Price variance refers to the difference between contracted prices negotiated between PBMs and pharmacies and the actual prices charged for prescription medications. Drug manufacturers charge different prices to different purchasers for the same medications, while PBMs negotiate different prices with pharmacy networks, including unique terms regarding rebates and discounts. All of this results in pricing variance. More

Prior Authorization

Prior authorization means a prescriber must receive approval from their patient’s health plan or PBM  before the prescription can be filled. Prior authorization helps health plans and PBMs evaluate whether a service or prescription is medically necessary. Since there isn’t a single set of standards regarding prior authorization, conditions may differ from one plan to another regarding different medications. More

Rebate

This is a price concession paid by drug manufacturers to health plan sponsors or PBMs. Rebates are compensations from drug manufacturers that are meant to help lower overall drug costs.

Single-Source Brand

A single-source brand is a drug that is only available from a single manufacturer, without any generic versions available. This is in contrast to multi-source drugs, available from multiple manufacturers at the same time. 

When the term of protection from a patented drug ends, it is possible for a single manufacturer to sell and market the generic version, in which case PBMs may classify a generic as a single-source brand if it is the only one available.

Single-Source Generic

A single-source generic refers to a drug sold by a manufacturer that has the sole right to produce a generic version of a drug for a specified period, usually from six months to one year.

A single-source generic may also be called an authorized generic, approved for marketing and sale. The FDA may grant this exclusivity to one company after the original manufacturer’s patent expires.

Specialty Drugs

These medications treat complex, chronic, or rare medical conditions. Specialty drugs may be accompanied by the need for special handling, administration, and/or monitoring. Specialty drugs are typically very high in cost and historically have gone to treat conditions like cancer, autoimmune diseases, multiple sclerosis, and HIV/AIDS. More

Specialty Pharmacy

Specialty pharmacies assist patients dealing with complex medical conditions like:

  • Blood disorders
  • Cancer
  • Crohn’s disease
  • HIV/AIDS
  • Infertility
  • Multiple Sclerosis
  • Rheumatoid arthritis

These pharmacies dispense expensive specialty medications that are usually in limited distribution and provide counseling, dose guidance, treatment, and administration.

Usual and Customary (U&C)

Usual and Customary (U&C) is the lowest net price cash-paying patients pay for a prescribed medication on a given day. It is the price a patient pays without health insurance coverage or discount applied. 

U&C also refers to the actual cost for a Part D drug if a member seeks to have it filled by an out-of-network pharmacy or physician’s office.

Utilization Management (UM)

Utilization management (UM) is a set of techniques payers use to manage healthcare costs, reduce waste, and ensure treatments are effective for patients. UM programs include:

  • Prior authorization
  • Step therapy
  • Concurrent review
  • Retrospective study
  • Drug utilization review

Value-Based Contracting (VBC)

VBC is a payment model between providers (like physician’s groups and hospitals) and payers (like health insurance companies) that links payments, reimbursements, or coverage to a provider’s treatment performance. 

VBCs set in place predetermined care-quality standards and patient experience targets that must be met for providers to receive rewards. Multiple VBC payment models are all based on a shared risk-reward model that aims to improve patient outcomes by incentivizing the best patient care.

Weight Loss Medications/GLP-1s

GLP-1s are glucagon-like peptide-1 receptor agonists. They are effective in treating type 2 diabetes, hypertension, and weight loss and continue to receive approval for new indications. GLP-1s mimic natural hormones that regulate blood sugars and promote weight loss.  Because they are a newer approach to obesity treatment, GLP-1s aren’t always preauthorized for weight loss. Some plans may not cover them at all, and others may only cover them for treating type 2 diabetes.

Wholesale Acquisition Cost (WAC)

Wholesale Acquisition Cost (WAC) is a manufacturer’s list price for a drug sold to wholesalers or direct purchasers, excluding any discounts, rebates, and other price concessions.

The WAC serves as a reference point for negotiating prices throughout the supply chain. While it reflects the published price from the manufacturer to direct purchasers, the real price is adjusted for bulk discounts, distribution fees, rebates, and discounts for prompt payments.

Disclaimer: The list of terms noted is not all inclusive, but a selection of commonly used terms and acronyms.

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