A pharmacy under contract with a 340B covered entity to dispense drugs on behalf of the 340B covered entity. The use of an individual contract pharmacy or multiple contract pharmacies is voluntary, and a covered entity should first determine its needs for pharmacy services and the appropriate distribution mechanism for those services when deciding whether or not to utilize a contract pharmacy. Information on contract pharmacies can be found here: HRSA.gov- Contract Pharmacy

Eligible 340B covered entities are defined in statute and include health centers designated by Health Resources and Services Administration (HRSA), an agency within the Public Health Service (PHS) of the U.S. Department of Health and Human Services (HHS), as well as Ryan White clinics and State AIDS Drug Assistance programs, Medicare/Medicaid Disproportionate Share Hospitals, children’s hospitals, and other safety net providers. A full listing can be found here: HRSA.gov

This program was established with the intent of helping certain hospitals and federal grantees—known as covered entities—acquire drugs at discounted prices from manufacturers to stretch scarce federal resources to reach more eligible patients and provide more comprehensive services. The program was created through the Veterans Health Care Act of 1992, which added Section 340B to the Public Health Service Act (PHSA) and is administered by HRSA. Manufacturers’ Medicaid eligibility and 340B participation are linked, but the programs are separate, and federal law prohibits duplicate discounts (i.e., mandated Medicaid rebates do not apply to drugs obtained at 340B pricing).

An Abbreviated New Drug Application (ANDA) contains data for the review and ultimate approval of a generic drug product. Generic drug applications are called “abbreviated” because they are generally not required to include preclinical (animal) and clinical (human) data to establish safety and effectiveness. Instead, a generic applicant must scientifically demonstrate that its product is bioequivalent (i.e., meaning that it has the same amount of active ingredient, and performs essentially identically to the innovator drug). Once approved, an applicant may manufacture and market the generic drug product to provide the public with a safe, effective, low-cost alternative.

Actual Acquisition Cost is the state Medicaid agency’s determination of pharmacy providers’ actual prices paid to acquire drug products marketed or sold by a specific manufacturer. AAC is the current Medicaid benchmark to set payment for drug ingredients

 

ACA, also known as Obamacare, is the comprehensive health care reform legislation enacted in 2010 that makes insurance more affordable for low- to moderate-income Americans and addresses health insurance coverage, health care costs, and preventative care.  The Act: (1) provides consumers with premium tax credits or subsidies to lower the cost of insurance for those with incomes between 100 and 400% of the federal poverty level (FPL) for those entering the ACA marketplace; (2) expands the Medicaid program to cover all adults with income below 138% of the FPL in states that have expanded their Medicaid programs; and (3) supports specific medical care delivery methods designated to lower costs of health care.   The ACA marketplace, called the Exchange, is where ACA health plan sponsor offerings are sold.

 

A plan design option in which health plan sponsors (see definition under “plan sponsor”) lower costs by excluding coverage for certain, typically very high-cost, specialty medications. Working with the plan sponsor, alternative funding vendors inform patients that their benefits have changed and direct them to seek their medications from manufacturer patient assistance programs (PAPs). If a patient is not eligible for a manufacturer’s PAP, the patient may pay out of pocket (OOP), try to find funding through a foundation, have to rely on a secondary insurer (Medicare or Medicaid), or not receive treatment.

A policy that allows an interested pharmacy that is willing to accept the network participation terms and conditions of the plan sponsor to participate as an in-network contract pharmacy. AWP also refers to policies requiring PBMs and health plan sponsors to include such a pharmacy in their networks. This policy limits the use of performance-based metrics to assess the pharmacy and impacts the ability of the plan network administrator to exclude or terminate underperforming pharmacies or those not equipped to manage complex medications.

A term that is used interchangeably with NADAC. (See NADAC)

The average price paid to the manufacturer by wholesalers and pharmacies that purchase directly from a manufacturer. AMP, which is defined under federal law, is used to calculate drug rebates under the Medicaid drug rebate program. As of 2024, there no longer is any limit or cap on Medicaid drug rebates, so manufacturers who have large price increases may now be at risk for paying rebates above the total cost of the drug, which may further incentivize manufacturers to launch drugs at higher prices.

A manufacturer’s average sales price to all purchasers, net of discounts, rebates, chargebacks, and credits applied during the sales process for drugs and biologicals covered under Medicare Part B. ASP is calculated by dividing the total revenue earned by the total units sold.

AWP is an average price, or “sticker price” or “list price” for a drug sold by wholesalers to retail pharmacies, physicians, and other retail purchasers before any discounts or concessions. AWP, which is not a government-regulated price, often serves as the basis for payment negotiations between wholesalers and retail pharmacies. AWP, which is reported by commercial publishers of drug pricing data, such as First DataBank and Thomson Medical Economics, is based on information obtained from manufacturers, wholesale distributors, and other suppliers.

Under Medicare, eligible individuals are generally referred to as beneficiaries, but once they enroll in a plan, they are considered enrollees in that plan. (see Enrollee)

Benefits consultants are experts in health care benefits who advise employers and other plan sponsors in developing requests for proposals (RFPs) that set forth detailed requirements for the sponsor’s health benefit offerings, including pharmacy benefits. For pharmacy benefit carve-outs, the consultants help select and then negotiate the contract with the PBM to best achieve the plan sponsor’s desired pharmacy benefit design.

The Medicaid best price policy requires drug manufacturers to give Medicaid programs the lowest price among purchasers with a few exceptions. Medicaid in turn must cover all the manufacturer’s drugs. Exceptions to best price include prices paid by the Department of Defense, the Veterans Administration, and under 340B, as well as prices negotiated under Medicare Part D.

 

The primary goal of a BLA is to demonstrate the safety and effectiveness of a biologic product allowing the FDA to evaluate and ultimately approve the biologic for marketing. A BLA contains specific information on the manufacturing processes, chemistry, pharmacology, clinical pharmacology, and the medical effects of the biologic product (see biological product). If the information provided meets FDA requirements, the application is approved and a license is issued, allowing the firm to market the product. Biological products are approved for marketing under the provisions of the Public Health Service Act (PHSA), which require a firm that manufactures a biologic for sale in interstate commerce to hold a license for the product.

Biological products are a diverse category of products and are generally large, complex molecules. These products may be produced through biotechnology in a living system, such as a microorganism, plant cell, or animal cell, and are often more difficult to characterize than small molecule drugs. Because they are manufactured from living cells, subsequent batches of these products are never exact replicas, but they produce the same predictable results in patients. The biological products are approved under a BLA and listed in the FDA Purple Book (see Purple Book).

A biosimilar is a biological product that is highly similar to and has no clinically meaningful differences from an existing FDA-approved reference biological product. Biosimilar Substitution – See Interchangeable Product.

BER is the relative rate of the full cost of pharmacy reimbursement (drug ingredient cost and dispensing fee) of all brand drugs over a defined period of time expressed as a discount of the total weighted average AWP for those same brand drugs over the specified time period. Reimbursement in some preferred pharmacy networks may be based at least in part on BER. Effective rate contracts may be used by PBMs to provide stability to the reimbursements that pharmacies receive in a given calendar year. (Also see GER)

A brand-name drug is a drug marketed under a proprietary, trademark protected name. Brand name drugs typically receive multi-year patent protection upon approval by the FDA, which allows the innovator manufacturer to market its product exclusively.

A process that leverages a specialty pharmacy to safely dispense certain provider-administered drugs directly to the patient for delivery to a provider’s office, where the provider then administers the drug to that patient. The specialty pharmacy bills the plan sponsor directly for the medication. (also see White Bagging)

In a carve-out pharmacy benefit, the plan sponsor “carves out” or separates the pharmacy benefit from the medical benefit rather than integrating the two and typically hire a PBM separate from the medical benefits administrator to provide and manage the pharmacy benefit.

Catastrophic coverage refers to insurance coverage that begins after an individual or an entity has spent or incurred a specified, usually significant sum of money. Under the Medicare Part D prescription drug benefit, starting January 1, 2024, after an enrollee’s total drug costs reach $8,000 (i.e., coverage gap limit), the enrollee will not be responsible to pay any OOP cost share for covered Part D drugs for the rest of the year.

An intermediary pharmacy that is permitted by the state to prepare orders for dispensing by a registered retail pharmacy. The central fill pharmacy returns the labeled and filled prescription(s) to the retail pharmacy for delivery to the ultimate user. Such central fill pharmacy is “authorized” to fill prescriptions on behalf of a retail pharmacy only if the retail pharmacy and central fill pharmacy have a contractual relationship providing for such activities or share a common owner. Central fill pharmacies can add efficiency for retail pharmacies and can also provide mail-order pharmacy services.

A COC is a contract that sets forth an individual’s health insurance coverage as issued by their health plan sponsor. The COC details the health benefits the individual (and their dependents) have under the plan, including exclusions and applicable cost shares.

A group of pharmacies with four or more pharmacy locations under common ownership. (also see Independent Pharmacy)

A request from a dispensing entity (e.g., a pharmacy or pharmacist, hospital, or clinician’s office) to be reimbursed for the cost of filling or refilling a prescription or for providing a medical service, supply, or device to a patient.

A term that may be used to describe the practice of a plan sponsor or PBM retroactively changing the amount reimbursed to a pharmacy for a claim after review, often after finding overpayment or underpayment due to (i) clerical errors submitted by the pharmacy, (ii) the pharmacy not meeting agreed-upon performance metrics; or (iii) the pharmacy’s failure to otherwise meet the terms of a network contract. Retractive reconciliations, which may include both increased and decreased payments, are performed to ensure payments align with contract terms.

Determined by the plan benefit design, coinsurance is a type of OOP patient cost sharing calculated as a predetermined percentage of the billed or allowed costs for a medical service or products, including drugs covered under the plan, where the plan sponsor is responsible for the rest of the costs.

(see Retail Pharmacy)

A health plan program designed to allow a patient to use the value of a drug manufacturer’s coupon offerings without it counting toward the patient’s deductible and annual out-of-pocket maximum. While the coupon is applied to minimize the increasing impacts  of these programs on the  plan costs, the patient continues to be responsible for their out of pocket costs under the plan.

 

A health plan program designed to lower initial member out-of-pocket costs for higher-cost specialty medications by maximizing the application of available manufacturer copay assistance. Under this model, the total value of the coupon is applied evenly throughout the benefit year.

 

Determined by a plan benefit design, copayments are a type of OOP patient cost sharing calculated as a predetermined flat fee a patient pays when visiting a doctor, hospital, or other health care provider or receiving a prescription from the pharmacy.

The amount the patient is required to pay OOP that is not covered by the plan sponsor. Coinsurance and copayments are both cost shares.

(see Medicare Part D Redesign) The Medicare Part D coverage gap or donut hole is the phase of coverage after the initial coverage period. Enrollees enter the donut hole when their total covered drug costs, including what they and their plan sponsor have paid, reach a certain limit (the 2024 limit is $5,030); 2024 is the last year for the donut hole.

The amount determined by benefit design that a patient pays for health care services or products before their insurance plan begins to pay. Once this amount has been reached, patients usually pay a copayment or coinsurance for services or products while the insurance company is responsible for the rest.

Manufacturers, pharmacies, wholesalers, physicians, PBMs, and other participants in the drug supply chain are often compensated based on the list price of a drug. Delinking is a term used to describe proposals that would prohibit some or all of the participants in the drug supply chain from being compensated based on the list price of a drug or other drug pricing benchmark (e.g., AWP).

 

Digital therapeutics (DTx) are evidence-based therapeutic interventions that are driven by high-quality software programs to prevent, manage, or treat a medical disorder or disease. They are used independently or in concert with medications, devices, or other therapies to optimize patient care and health outcomes. Digital therapeutics products incorporate advanced technology best practices relating to design, clinical validation, usability, and data security. They are reviewed and cleared or approved by regulatory bodies as required to support product claims regarding risk, efficacy, and intended use.

Under Medicare Part D, DIR includes any price concession received by or paid by a PBM that impacts final prescription drug costs for the Medicare program. In the context of pharmacies, DIR arises when pharmacies participating in the Part D preferred network are assessed against performance standards related to quality of care. When network pharmacies meet or exceed the standards, they are eligible for additional payments, and when they fall short, they are required to reimburse the plan sponsor. The amount owed back to the plan sponsor may be referred to as a “clawback” by the pharmacy. As of 2024, the Centers for Medicare & Medicaid Services (CMS) has eliminated the retroactive application of DIR fees. Such fees must now be reflected in the negotiated price the patient pays when they receive their medication.

A fee paid to a pharmacist for dispensing a medication. The fee is paid in addition to reimbursement for the cost of the drug.

A marketing tool used by drug manufacturers to drive demand for certain brand medications, usually when there is more than one therapeutic option for insured patients. Coupons insulate the patient from the true costs of the medication at the pharmacy. Removing the cost considerations encourages the use of more expensive drug products instead of lower-cost generics or therapeutically equivalent alternatives. Coupons, in addition to other programs like debit cards, also do not clearly indicate the source of payment.

 

Manufacturer means an entity that owns or operates an establishment that manufactures a drug. This term includes, but is not limited to, control laboratories, contract laboratories, contract manufacturers, contract packers, contract labelers, and other entities that manufacture a drug.

Patents, including those for drugs, are a proprietary right granted by the United States Patent and Trademark Office to protect the holder of a unique product, process, or technology against market competition. A patent prevents the invention from being produced, sold, or used by competitors for a limited time. Drug patents typically last for 20 years due to the range of extension schemes utilized by manufacturers.

Protecting a product with as many patents as a drug company can attain. Drug patent thickets are made up of duplicate patents linked through terminal disclaimers, secondary patents, and/or patents on each component or feature of a drug or device.

The Federal Food, Drug, and Cosmetic Act defines a drug shortage as a period of time when the demand or projected demand for the drug within the United States exceeds the supply of the drug. FDA tracks shortages at the national level and receives information from manufacturers about their ability to supply the market.

A patient safety check typically required by states and performed by a pharmacist. Pharmacists evaluate prescriptions based on health conditions, allergies, drug interactions, patient demographics, laboratory values, and other values to ensure the medication is safe for the patient. Reviews are completed systematically by pharmacists dispensing at any pharmacy, and at the PBM or plan sponsor. There are three forms of DUR: prospective (before dispensing), concurrent (at the time of prescription dispensing), and retrospective (after the therapy dispensing).

 

 

Using standards created by NCPDP, a prescriber is able to electronically send an accurate, error-free, and understandable prescription directly to a pharmacy from the point of care, which is an important element in improving the quality of patient care. ERx replaces a handwritten, verbal, or faxed prescription.

EPCS establishes the standards authorizing a prescriber to electronically transmit prescriptions for controlled substances (e.g., opioids or high abuse potential) directly to a pharmacy from the point of care. CMS mandates the use of EPCS, and the Drug Enforcement Agency (DEA) has requirements for provider and pharmacy systems.

Electronic Prior Authorization (ePA) is the electronic transmission of information between the prescriber and health plan sponsor to determine whether the prior authorization on a prescription is granted by the sponsor. The National Council for Prescription Drug Programs (NCPDP) has developed technical standards to support this electronic transmission and improve the timeliness of the exchange of information.

ERISA is the federal law governing employee health benefit plans, which also applies to employer-provided health insurance. The U.S. Department of Labor (DOL) defines “ERISA” as “a federal law that sets minimum standards for most voluntarily established retirement and health plans in private industry to provide protection for individuals in these plans.” First enacted in 1974, federal ERISA law is the result of plan sponsors, including businesses and unions, seeking to have a uniform standard of benefits for their employees across state lines. To achieve this goal, ERISA includes a robust preemption provision that prevents states from imposing a patchwork of conflicting state laws. Many health plans organized under ERISA are self-insured/self-funded, meaning that the plan sponsor, rather than a third party, bears the risk of coverage. This is distinct from fully insured plan sponsors, who purchase third-party health insurance to establish coverage and hold the ultimate risk.

A person enrolled in and covered by a health plan sponsor, also known as a member. Under Medicare, eligible individuals are generally referred to as beneficiaries, but once they enroll in a plan, they are considered enrollees in that plan.

When the original patent applicable to the active compound of a brand-name drug is due to expire, drug manufacturers often claim large numbers of complex and often highly speculative patents. This typically involves filing for new patents on secondary features of the product or on ancillary changes to the product formulation to artificially extend the term of patent protection.

A document provided by the health plan sponsor that helps a person understand the total charges for a health care service or product, such as a prescription drug, the amount negotiated by a plan sponsor or its delegated PBM, how much the health plan sponsor will cover, and how much the patient should expect to pay.

The doctrine of federal preemption provides that federal law supersedes conflicting state laws pursuant to the Supremacy Clause of the U.S. Constitution. The U.S. Supreme Court has held that federal law can either expressly or impliedly preempt state laws, based on the legislative intent behind the federal law.

The Affordable Care Act (ACA) revised the FUL provisions, which were created to ensure that Medicaid is a prudent purchaser, to require the Secretary of HHS to set a reimbursement limit for some generic drugs, calculated as no less than 175% of the weighted average of the most recently reported AMP (see Average Manufacturer Price).

A traditional payment model for medical and related services where the provider is paid a fixed, separate amount for each service performed, such as office visits, blood work taken, and other tests administered.

A fiduciary is a person or entity that acts on behalf of another person and has a duty to operate in good faith, trust, and honesty, which typically requires putting that person’s interests ahead of the interests of a fiduciary. ERISA defines a fiduciary, in relevant part, as a person who “exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets,” or “has any discretionary authority or discretionary responsibility in the administration of such plan.” PBMs typically serve in administrative and advisory roles, and do not make decisions about whether the plan sponsor should offer pharmaceutical benefits or the scope or design of those benefits. Accordingly, PBMs are not considered plan fiduciaries.

Set up through an employer, a FSA allows employees to pay for many OOP medical expenses with tax-free payroll-deducted funds. The IRS sets a limit on the amount an employee can put in an FSA each year, and employees can use the funds on expenses like medical care and drug copayments, deductibles, and some non-prescription OTC items. Unlike health savings accounts (HSAs) attached to high-deductible plans (HDHPs), unused funds in FSAs expire at year’s end and cannot be rolled into the next year.

Formularies are preferred drug lists and include both brand-name and generic drugs. In most pharmacy benefit plans, members will have a tiered benefit whereby they pay a lower cost share for the formulary or preferred product versus that paid for a non-formulary or non-preferred product. Formulary tiering often plays a significant role in driving manufacturer price concessions. P&T committees help establish formularies based on clinical standards to encourage the use of safe, effective, and affordable medications. Plans can choose an open formulary, which includes most drugs, or a closed formulary whereby the list of preferred products is more limited. Non-formulary drugs are usually available at the higher cost share, although some plans may only allow coverage through an exception process.

 

FWA is a concern in the prescription drug distribution context, as it is in all health care service delivery contexts. While the three terms (fraud, waste, and abuse) are often intertwined, fraud occurs when someone knowingly and willfully uses or tries to use false information, statements, or misrepresentation to improperly obtain prescription drugs or payments. Waste is the overutilization of services caused by misuse of resources. Abuse is an inappropriate action that may directly or indirectly cause financial loss, such as requesting payment or filling prescriptions when there is no legal entitlement. The detection and elimination of FWA is a high priority for stakeholders in the prescription drug supply chain, including PBMs.

A fully insured policy may be offered directly for purchase to an individual or via an employer or other plan sponsor as a group health plan. Sometimes referred to as a “commercial plan,” an individual or group pays an insurer or carrier a monthly premium in order to have claims reimbursed under the terms of the coverage.

A generic drug is the same as the reference brand-name drug in dosage, safety, strength, how it is taken, quality, performance, and intended use. Before approving a generic drug product, FDA requires many rigorous tests and procedures to assure that the generic drug can be substituted for the brand-name drug. The FDA evaluates the ANDA for substitutability, or “therapeutic equivalence,” of generic drugs on scientific evaluations. By law, a generic drug product must contain identical amounts of the same active ingredient(s) as the brand-name product. Drug products evaluated as “therapeutically equivalent” can be expected to have equal effect and no difference when substituted for the brand-name product. Generic drugs often cost 80–90% less than a brandname drug. Generic drugs are listed in the FDA Orange Book (see Orange Book) with an AB-rating, which means that FDA has determined that the drug is bioequivalent to the brand drug.

GER is the relative rate of the full cost of pharmacy reimbursement (drug ingredient cost and dispensing fee) of all generic drugs over a defined period of time expressed as a discount of the total weighted average wholesale price (AWP) for those same generic drugs over the specified time period. Reimbursement in some preferred pharmacy networks may be based at least in part on GER. Effective rate contracts may be used by PBMs to provide stability to the reimbursements that pharmacies receive in a given calendar year. (also see BER)

 

 

A 12- or 14-character number used to identify generic products by therapeutic use. It represents specific information on the drug, including drug group, drug class, drug subclass, drug base name, drug name, dosage form, and dosage strength.

The practice of dispensing an FDA equivalent generic drug (see generic drug) for a brand-name drug without needing the approval of the prescriber. Some states have substitution laws for certain drug classes, and prescriptions may need to be written a specific way to either allow or to override substitution.

A program used by some health plan sponsors that waives, on a limited basis, prior authorization (PA) rules for certain services provided by clinicians who are deemed “high performing.” The clinician’s “gold card” exemption from PA is effective for a limited service or set of services, for a defined period, and is reviewed regularly by the plan sponsor to ensure the clinician continues providing care meriting the PA exception.

A group purchasing organization is an entity that leverages the purchasing power of a group of businesses to obtain discounts from vendors based on the collective buying power of the GPO members. In health care, providers and organizations — such as hospitals, nursing homes, PBMs, pharmacies, and home health agencies — realize savings and efficiencies by aggregating purchasing volume and using that leverage to negotiate discounts with manufacturers, distributors, and other vendors. (See  also Rebate Aggregator). GPOs have existed in the U.S. since the early 1900s. Congress established the GPO Safe Harbor from the anti-kickback statute in 1987 to facilitate scale purchasing in health care goods and services.

 

Health disparities are preventable differences in the burden of disease, injury, violence, or opportunities to achieve optimal health that are experienced by socially disadvantaged populations. Despite significant progress in research, practice, and policy, disparities in youth health risk behaviors persist. Populations can be defined by factors such as race or ethnicity, gender, education or income, disability, geographic location (e.g., rural or urban), or sexual orientation. Health disparities are inequitable and are directly related to the historical and current unequal distribution of social, political, economic, and environmental resources. (also see Social Determinants of Health)

 

Health equity is the state in which everyone has a fair and just opportunity to attain their highest level of health irrespective of personal characteristics.

Available to those enrolled in a high-deductible health insurance plan, an HSA is a savings account used to set aside pre-tax funds to pay for qualified medical expenses, including prescription drugs (as well as certain OTC drugs), such as deductibles and copayments. The IRS sets a limit each year on the tax-deductible dollar amount that may be contributed to an HSA, which is indexed to inflation. The contribution limit for HSAs is higher than the limit for FSAs and, unlike an FSA, the funds in an HSA carry over from year to year. Additionally, HSA dollars can be invested, unlike FSA dollars.

A plan with a higher deductible than a traditional insurance plan. The monthly premium is usually lower, but plan participants pay OOP for more health care costs before their insurance company starts to pay its share. A high-deductible plan, also called an HSA-eligible plan, can be combined with an HSA for patients to pay for certain medical (and related) expenses with pre-tax money. Deductible limits are adjusted annually by the IRS.

The Health Insurance Portability and Accountability Act of 1996 (HIPAA) established rules banning the use of pre-existing condition exclusions for those with continuous health insurance coverage. It also required HHS to issue a regulation governing the use and disclosure of personally identifiable health information, including electronic information. Typically, the phrase HIPAA refers to the privacy and security requirements under the rule promulgated per HIPAA by the HHS Secretary.

HIPAA standard transactions are exchanges involving the electronic transfer of information between two parties for specific purposes. HIPAA regulations set up the following standard transactions for Electronic Data Interchange (EDI) of health care data: 1) claims and encounter information, 2) claims status, 3) coordination of benefits and premium payment, 4) eligibility, enrollment, and disenrollment, 5) payment and remittance advice, and 6) referrals and authorizations.

These three terms are often used interchangeably and may refer to either:  (i) pharmacies that solely ship self-administered drugs (such as insulin and oral medications) directly to a patient’s home, typically dispensing  a longer days’ supply for the treatment of chronic or longer-term health conditions, and (ii) pharmacies that dispense prescriptions and deliver them to patients’ homes (or other designated locations) by mail, common carrier, or other delivery service.

An on-site pharmacy at an employer’s facility or at a hospital, which usually is the preferred pharmacy for that employer or organization.

A pharmacy that is either stand-alone or part of a group of two or three pharmacies that are pharmacist-owned, privately held businesses.

The IRA, enacted in 2022, made several changes to Medicare, including the following changes affecting drug pricing:

Medicare Drug Price Negotiations: The IRA authorized Medicare Part D to negotiate prices for covered drugs. Negotiations are underway as of 2024 between CMS and manufacturers of the first 10 drugs selected; prices are expected to be finalized so that they can be in effect under Part D in 2026. Negotiated drugs must be covered in Part D, but plans are not prohibited from putting them on non-preferred formulary tiers or imposing prior authorization of step therapy restrictions .

Medicare Part D Redesign: The IRA made several changes to the Part D drug benefit, which generally require Part D plans and manufacturers to pay a greater share of costs for enrollees with high drug costs, including:

• As of 2024, once enrollees hit the catastrophic phase (which is set at $8,000), they no longer have to pay the 5% coinsurance.


• As of 2025, there will be an annual $2,000 cap on enrollee out-of-pocket (OOP) drug spending.


• As of 2025, Part D plan sponsors and manufacturers will pay a larger share of costs for catastrophic coverage, and Medicare will pay a smaller


• Other changes include limits on increases to the base beneficiary premium, establishment of insulin copay caps, and a new option for enrollees to spread out their OOP costs over the year rather than face high OOP costs in a given month .

A pharmacy benefit that is developed and administered by the health plan sponsor as part of its overall health care benefits offering.

An interchangeable biological product is a biosimilar that meets additional study requirements and may be substituted for the brand reference product at the pharmacy, depending on state pharmacy laws. Interchangeable biological products (also called interchangeable biosimilars or interchangeable products) may help increase patient access to biologics.

The IND is an application that exempts a drug that is in development from current federal law requirements on transportation or distribution across state, thus permitting testing of its diagnostic or therapeutic potential in humans through clinical trials.

A limited distribution drug is created when a pharmaceutical manufacturer decides to limit the number of specialty pharmacies contracted to dispense a particular specialty medication.

(See Pharmacy Networks)

List prices represent manufacturers’ price to wholesalers or direct purchasers but do not account for discounts. Net prices represent revenue per unit of the product after all manufacturer concessions are accounted for (including rebates, coupon cards, and any other discount).

(See Home Delivery)

MCO is a general term used to describe entities that manage the cost and utilization of covered services and products to optimize quality patient care through efficient use of limited resources. (also see Medicaid MCO)

Fees paid by manufacturers to PBMs (or their contracted Rebate Aggregators) for administrative services rendered in connection with aggregating, allocating, collecting, and invoicing claims for rebates.

Beginning in 2025, the IRA eliminates the coverage gap benefit phase and replaces it with manufacturer discounts in the initial and catastrophic coverage phases.

Exclusivity provides a fixed period following drug approval during which the originator can market its drug without direct competition from other manufacturers of duplicate or reformulated products. Exclusivity periods can vary and are dependent on a multitude of factors. Exclusivity is designed to promote a balance between new drug innovation and generic drug competition. Below are each kind of drugs exclusivities and their time frame (not including traditional extensions):

• Biologics: 12 years


• Small Molecule: 9 years


• Orphan Drugs: 7 years (drugs developed to treat certain rare medical conditions)


• New Drug Application: 5 years


• New Indication: 3 years


• Pediatrics: 6 months


• First Generics: 6 months

A MAC list specifies the maximum amount that a PBM will reimburse a pharmacy for a particular generic drug or brand drug with marketed generic equivalents. PBMs set and regularly update MAC lists at a level that reflects the average acquisition cost of an efficient pharmacy. MAC lists encourage pharmacies to purchase drugs at the lowest possible cost, driving competition among wholesalers and drug manufacturers.

A shared, state-federal health insurance program of public assistance to eligible persons, regardless of age, whose income resources are insufficient to pay for health care. Most recipients are low-income women and children, but 70% of the funds pay for nursing home and other long-term care services for elderly and disabled people. Funded through both state and federal funds, each state administers its own Medicaid program, with some flexibility in benefits provided and according to federal requirements. While pharmacy coverage is an optional state benefit under federal Medicaid law, all states have opted to provide outpatient prescription drug coverage to virtually all their Medicaid covered recipients. Medicaid coverage may be through fee-for-service or through managed care (see Medicaid MCO).

Medicaid MCO is a non-government health care plan sponsor that contracts with a state Medicaid agency to manage the health care of the Medicaid population. The pharmacy benefit may be provided by the MCO through a PBM, or it may be a stand-alone benefit.

The Affordable Care Act requires health insurance issuers to submit data on the proportion of premium revenues spent on clinical services and quality improvement, also known as the Medical Loss Ratio (MLR). Issuers must incorporate (into this data) information provided by their contracted PBMs regarding the provision of the drug benefits covered under ACA. Incurred claims for drug costs are included in the MLR, net of rebates. It also requires issuers to issue rebates to enrollees if this percentage does not meet minimum standards. The Affordable Care Act requires insurance companies to spend at least 80% or 85% of premium dollars on medical care, with the rate review provisions imposing tighter limits on health insurance rate increases. If an issuer fails to meet the applicable MLR standard in any given year, as of 2012, the issuer must provide a rebate to its customers.nt on clinical services and quality improvement, also known as the Medical Loss Ratio (MLR). Issuers must incorporate (into this data) information provided by their contracted PBMs regarding the provision of the drug benefits covered under ACA. Incurred claims for drug costs are included in the MLR, net of rebates. It also requires issuers to issue rebates to enrollees if this percentage does not meet minimum standards. The Affordable Care Act requires insurance companies to spend at least 80% or 85% of premium dollars on medical care, with the rate review provisions imposing tighter limits on health insurance rate increases. If an issuer fails to meet the applicable MLR standard in any given year, as of 2012, the issuer must provide a rebate to its customers.

A federal program operated by the CMS that provides health insurance benefits primarily to persons over 65 years of age and adults under 65 years of age with permanent disabilities (as well as certain other persons eligible for Social Security benefits). Different “parts” of Medicare cover different health care goods and services:

• Part A: Pays for inpatient hospital, skilled nursing facility (SNF), and home health care.


• Part B: Pays for physicians’ professional services, some outpatient services, preventive services, infusions and durable medical equipment. Part B coverage is optional with no outof- pocket maximum.


• Part C (also known as Medicare Advantage or MA): Pays for Part A and B benefits through private health plan sponsors, certain part D components, and some benefit coverage not provided under traditional Medicare Parts A and B, like vision and dental.


• Part D: Pays for outpatient prescription drugs through private plan sponsors. In effect since 2006, Part D benefits are provided through plan sponsors approved by the federal government. These plans receive premiums from both Part D enrollees, as well as the federal government. States are federally preempted from regulating Part D plans, except in specified, narrow instances (e.g. plan solvency).


• Medicare Advantage with Prescription Drugs (MA-PD): Enrollees receive all Medicare coverage from one entity.


• Prescription Drug Plan (PDP): Medicare FFS beneficiaries may enroll in a stand-alone PDP separately.

See Medicare

See IRA

The original Medicare Part A and Part B program, sometimes called traditional Medicare, in which the federal government pays physicians, hospitals, and other health care entities for each service provided based on established fees, most of which are updated annually through regulations.

See IRA

A system run by CMS that rates the quality of MA-PDs and stand-alone PDPs using a scale of 1 (lowest) to 5 (highest). The quality ratings, which beneficiaries are encouraged to use to compare Part C and Part D options available to them, are based on factors including clinical performance, patient experience, enrollee complaints, and customer services. Star ratings are used by CMS for a range of regulatory and payment incentives and disincentives.

A distinct set of services that a Part D sponsor must establish in a program to ensure optimum therapeutic outcomes for targeted enrollees, typically those with multiple chronic conditions, through improved medication use.

A multi-sourced brand drug is a brand-name drug that is marketed or sold by two or more manufacturers or labelers, is no longer protected under patent exclusivity, and has a therapeutically equivalent generic available.

 

NADAC pricing is the approximate invoice price pharmacies pay for medications. This benchmark is compiled from a voluntary survey of pharmacies.  Though voluntary self-reporting can result in market distortion, due to the limited number of (mostly independent) pharmacies that participate in the survey, this benchmark was originally developed for use   as the basis for pharmacy reimbursement (with an added dispensing fee) for drugs in Medicaid. Note NADAC does not reflect off-invoice rebates or discounts the pharmacies may receive on the drugs from wholesalers.

 

A not-for-profit standards development organization that creates and promotes consensus standards for the transfer of data related to medications, supplies, and services within the health care system. Pharmacy systems use NCPDP standards for claims processing, electronic prescribing, ePA, and other technology requirements.

A unique 11-digit, three-segment code assigned by the FDA that identifies the manufacturer, active ingredient with strength, and package size of a drug. The NDC is used to identify the medication in prescription drug claims.

A 10-digit unique identification number issued by CMS to providers, pharmacists, and others for HIPAA standard transactions (see HIPAA standard transactions).

 

(See Pharmacy Networks)

Established standards set by the government, a health plan accrediting body, or a plan sponsor that require a specific ratio of pharmacies per population and within a specific geographic radius. CMS pharmacy network adequacy standards build on TRICARE (the uniform services health care program for active-duty service members, family members, and others) standards for retail access for Medicare Part D. For more information, go to https://www.cms.gov/Medicare/Prescription-Drug-Coverage/PrescriptionDrugCovContra/downloads/HPMSMEMORetailHIAccess.pdf

 

When the sponsor of a new drug believes that it has obtained enough evidence on the drug’s safety and effectiveness to meet FDA’s requirements for marketing approval, the sponsor submits an NDA to FDA. The application must contain data from specific technical viewpoints for review, including chemistry, pharmacology, medical, biopharmaceutics, and statistics. If the NDA is approved, the product may be marketed in the United States. For internal tracking purposes, all NDAs are assigned an NDA number.

A publication by the FDA that identifies drugs approved on the basis of safety, effectiveness, and therapeutic equivalence under the Federal Food, Drug, and Cosmetic Act. It contains patent and exclusivity information. Biological products are not listed in the Orange Book, but are listed in the Purple Book (see Purple Book).

An orphan drug is a drug for a rare disease or condition. Some rare disease treatments have been “orphaned” or discontinued because there was not enough financial incentive to continue development or production. The Orphan Drug Act incentivizes drug development for rare diseases.

The OOP maximum is a predetermined amount that an individual pays during a plan year before their health plan sponsor pays 100% of their covered medical treatments and services.

OTC drug products are those drugs that are available to consumers without a prescription. There are more than 80 therapeutic categories of OTC drugs, ranging from acne drug products to weight control drug and birth control products. As with prescription drugs, the Center for Drug Evaluation and Research (CDER) within FDA oversees OTC drugs to ensure that they are properly labeled and that their benefits outweigh their risks.

(See Medicare)

A pass-through payment model passes through to the plan sponsor the rate paid by the PBM to the pharmacy, which will vary among pharmacies. The PBM typically receives an administrative fee for its services, and the plan experiences fluctuations in its costs among pharmacies. Pass-through models can result in higher and less predictable costs for plan sponsors than other payment models .

 

(See Drug Patent and Drug Patent Thicket)

An approach to reduce health care costs and improve quality of life for individuals with chronic conditions by preventing or minimizing the effects of the disease through integrated care. Disease management programs are a form of patient support program often used for specialty medications.

Typically, these arrangements, which are also known as “reverse payment” settlements, are the result of patent infringement litigation settlements. Brand manufacturers strike deals with potential generic drug competitors (e.g., generic drug manufacturers), paying them to keep their products off the market for a specified period.

A group of independent clinicians assembled by or on behalf of PBMs or health plan sponsors to evaluate the available scientific evidence on pharmaceutical treatment options. The basic objectives of a P&T committee are to review drugs for potential inclusion on the PBM’s or plan’s formulary for the full range of disease states, based on safety, efficacy, and other clinical attributes. In most cases clinical reviews occur first and are firewalled from other internal discussions on costs and rebates.

Health plan sponsors typically delegate authorization to the PBM that manages their drug benefits, to audit pharmacies by reviewing prescription claims made for payment through the PBM under the benefit plan. Pharmacy audits, which may be required by state or federal rules or by plan sponsors, allow PBMs to facilitate the ability of patients to receive high-quality, proficient services from network pharmacies. Audit protocols also encourage pharmacies to comply with rules set by state Boards of Pharmacy and help identify evidence of fraud, waste, and abuse (FWA) .

 

Contractually specifies the level of coverage and types of pharmacy services available to health plan sponsor enrollees. A sound pharmacy benefit design balances patient care outcomes, costs, quality, risk management, and provision of services expected by enrollees. The pharmacy benefit options can be integrated, carved out, or purchased by the sponsor on a service-by-service basis.

PBMs are companies that are contracted by health plans, employers, unions, and other plan sponsors to administer prescription drug benefits and negotiate with pharmacies and drug manufacturers to lower costs and improve quality.

PBMs, working on behalf of health plan sponsors, use selective contracting to create pharmacy networks (which are called preferred pharmacy networks under Medicare Part D). The use of pharmacy networks increases PBMs’ bargaining leverage with pharmacies, which helps lower the overall costs of enrollees’ prescriptions.

• Closed Network – An arrangement made by a plan sponsor that restricts prescription coverage to an exclusive list of pharmacies. This arrangement denies coverage and/or payment of prescriptions provided by a pharmacy not included in the exclusive list, with certain limited exceptions. These types of networks help control costs for a plan sponsor.


• In-Network – A licensed pharmacy that is under contract with a plan sponsor to provide negotiated prices and services to patients.


• Limited Distribution Network – A pharmaceutical company establishes a select network of specialty pharmacies authorized to distribute a particular specialty medication. When that medication is limited to certain specialty pharmacies by the manufacturer, it becomes a limited distribution drug (LDD).


• Open Network – Plan sponsors create a broad network open to virtually all pharmacies. Enrollees can use their prescription drug benefits at all network pharmacies for the same copay or cost share. These network offerings typically result in higher costs to the plan sponsor than a preferred network. Any Willing Pharmacy (AWP) policies protect pharmacies and allow a pharmacy to participate in any network if they agree to the participation terms and
  conditions. (see Any Willing Pharmacy)


• Out- of- Network – A licensed pharmacy that is not under contract with a plan sponsor to provide negotiated prices or services to patients


• Preferred Network – Medicare Part D establishes a framework for preferred networks. Plan sponsors create a select group of preferred pharmacies within a broader network of participating drugstores. Preferred pharmacies participate in plan sponsor offerings with better discounts in exchange for higher volume; however, the cost differential for a preferred network pharmacy cannot be so great that it disadvantages pharmacies not participating in a preferred network. Enrollees typically pay lower copays or cost shares at a preferred pharmacy. The use of preferred networks is growing and can lower prescription costs by an estimated 5% compared to open networks while meeting Medicare’s pharmacy access standards nationally. Many Medicare Advantage and Medicare Part D Prescription Drug Plans (PDPs) include preferred network pharmacies. These networks incentivize pharmacies to provide a high quality of care and promote improved health outcomes.

Reimbursement to the pharmacy of the total amount to fill a prescription, which is composed of the drug ingredient cost and professional dispensing fee.

An organization that represents independent pharmacies and provides access to pooled purchasing power for these pharmacies. PSAOs negotiate contracts with third-party payers, negotiate reimbursement rates with PBMs, including payment and audit terms, and provide inventory and administrative functions to assist pharmacy business. The largest PSAOs are owned by drug wholesalers. Physician-Administered Drugs (also see brown bagging and white bagging) – Prescription drugs that are administered by a health care provider to a patient through injection or infusion. These drugs, which are typically administered in