When a PBM prices a brand-name drug, it bases the cost on the average wholesale price, Killilea says, while generic drug costs are based on a formula of the AWP minus a certain percentage, typically anywhere from 65 to 80 percent. The problem with this structure is it's a subjective pricing method. Brand-name drugs have only one manufacturer, making the AWP a commonly accepted price; however, generic drugs have multiple manufacturers, which can skew the AWP calculations.

"There's much more interpretative variability on a generic AWP," Killilea says. "If you talk about a single-source brand, which is a brand made by one manufacturer, the AWP is commonly accepted and easily referenced. With generic drugs, there are multiple manufacturers, and the reproducibility of an AWP tends to not be as consistent."

Because of this pricing methodology, it is important for an employer to negotiate generic drug costs on a fiscal basis that focuses on a line item strategy, rather than the traditional discount platform, Killilea says. This ensures an employer is receiving its generic drugs at the lowest possible cost.

"When subtracting a percentage from AWP, our findings very consistently show that health plan sponsors are not achieving the cost per pill, price per unit they can using a more line item strategy," Killilea says. "We don't show savings by a better discount; we show savings by less money spent with a line item strategy."

Determining a PBM contract based on a line item strategy takes a deep analysis, which is where an employer's broker or consultant can help, Killilea says. There are certain metrics that should be considered in a PBM contract, and having someone well versed those deals is helpful in negotiating the best agreement.

"Plan sponsors purchase their medications from PBMs; plan sponsors do not purchase their medications through drug stores," Killilea says. "That sounds so basic, but it's absolute. When they sign that PBM contract they're deciding what their pricing for drugs are going to be for the next two to three years, so that's why it's so critical to have a well-informed negotiating broker or consultant that has deep knowledge of financial aspect. If you don't, you end up with contracts that we tend to see, which are based on subjective pricing.

"There's a lot of group think that gets accepted as the standard, and it doesn't address the actual cost drivers. It's just unfortunate because I think predominantly health plan sponsors have been paying too much for their generics."