PBM Contract Red Flags

PBM contracts are complex documents that can contain provisions significantly affecting plan economics and employer leverage. Identifying problematic language before signing is far easier than renegotiating after implementation.

Amendment and Modification Clauses

Some PBM contracts include broad unilateral amendment provisions that allow the PBM to modify formulary, network, or pricing terms with limited notice. A clause permitting the PBM to "update the formulary from time to time in its discretion" gives the PBM the ability to make material changes to your benefit without your approval. Require mutual consent for any changes that affect pricing, formulary structure, or network composition.

Rebate Definition Limitations

Contracts that define "rebates" narrowly may exclude significant manufacturer payment categories. If your contract guarantees pass-through of "formulary rebates" but the PBM also receives manufacturer administrative fees, data fees, and clinical program payments that fall outside the rebate definition, the effective pass-through rate is lower than the contract percentage suggests. Insist on a broad definition that includes all manufacturer price concessions.

Restrictive Audit Rights

Audit rights that limit scope to pricing guarantees, restrict the frequency of audits, cap the look-back period, or exclude specialty pharmacy and rebate operations significantly reduce your ability to monitor PBM performance. Negotiate comprehensive audit rights with no limitations on scope, reasonable frequency provisions, and the right to use an independent auditor of your choosing.

Auto-Renewal and Termination

Evergreen contracts that auto-renew for multi-year terms can lock you into unfavorable economics. Ensure your contract includes clear termination provisions, reasonable notice periods, and no penalties for termination at the end of the initial term or any renewal period. Data portability provisions should guarantee that your claims data is returned in a usable format within a defined timeframe after termination.