Value of Annual Pricing Improvements in a 1-Year vs 3-Year Contract Savings

A lot of times in pharmacy benefits, there is talk about the length of a contract. The majority of arrangements are on three-year terms. The market, which is specifically driven by PBMs, has really been shifted in a way to where it’s in the PBMs’ benefit to have your clients sign a three-year arrangement. At RxBenefits, our number one value on the contract side is that we have a one-year contract. A one-year pharmacy benefit contract allows us to renegotiate pricing and drug rebates on behalf of your clients annually and help them keep pace with any changes in the market.

Comparing 3-Year vs 1-Year Contracts

A couple of different things to note about a three-year pharmacy benefit arrangement. Typically, in the first year, your clients will enter into an arrangement where pricing and rebate terms are somewhat competitive in the current market. But years two and three is where the margin begins to grow and where we find that your client is behind where they need to be in the current market.

By doing a one-year arrangement, you can ensure that your clients are always at the top of the market with pricing and that they’re keeping pace with the increase in rebates. One thing to always think about is you know average wholesale price is always rising. The average wholesale price of drugs is never declining; it’s going up. To keep pace with the average wholesale price increases every year, you need to be constantly pushing your pharmacy arrangement to improve your discounts on that average wholesale price.

Keeping Up With the Market

A question that always comes up about annual pricing improvements is, “Is there really any benefit to doing it on a one-year basis?” The answer is, “Yes.” We’ve seen it proven in our clients’ contracts over the last five or six years. At RxBenefits, we’ve averaged almost an 11% improvement year-over-year on our contracts. Now, that gives you an idea of what’s been going on in the market and how if you’re in a three-year arrangement, your clients may have had an improvement that first year, but if they have either no escalator on years two and three, or just a slight improvement of 2%-3%, they’re falling way behind the market.

From our point of view, renegotiating the pricing of these contracts does not mean that we’re taking a bigger margin away from the PBM. We’re just keeping up and keeping your clients at least even with any kind of inflation, increases in average wholesale price of the drugs, and also (really important in today’s market) keeping them where they should be on rebate returns. That’s where a lot of the pricing mechanism has transferred to – the rebates. In a three-year arrangement, if you think about it, your clients have year one rebates, a slight improvement (maybe) in year two, and another slight improvement in year three. But we’re seeing significant increases in the amount of rebates year-over-year. By doing a one-year arrangement, we’re able to improve the pricing and rebate terms each year for your clients and keep up with the market.

To learn more about these common pharmacy contract pitfalls that could be costing your clients money, check out our Top 5 Pharmacy Contract Best Practices e-book.

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