Pharmacies are beginning to receive proposed contracts from major pharmacy benefit managers (PBMs) that carry a deceptively attractive headline: reimbursement based on actual “acquisition cost” rather than opaque benchmark pricing indices. At a glance, a cost-plus model may sound like a welcome departure from the reimbursement uncertainty that has plagued pharmacies for years. However, as details of these new contract structures come into focus, it is becoming clear that what is being marketed as “cost-plus” may in practice quickly become “cost-minus,” and pharmacies that sign these agreements without careful legal review may find themselves locked into a framework that systematically erodes their margins year after year. The provisions contained in these contracts may raise serious concerns that every pharmacy owner, chain operator, and buying group member must understand before executing such agreements.
The Promise of “Cost-Plus” and Its Hidden Traps
Under the emerging cost-plus model, a pharmacy’s reimbursement for dispensed medications is tied directly to the pharmacy’s “acquisition cost,” which is intended to be the actual, net per-unit price the pharmacy paid to purchase the drug from a manufacturer or wholesaler. A modest dispensing fee is added on top. The concept sounds straightforward: if a pharmacy pays $X for a bottle of pills, the PBM reimburses $X plus a fee.
But the devil is in the details. If contract language defines acquisition cost as the pharmacy’s per-unit cost to purchase drug products, explicitly inclusive of all negotiated discounts, rebates, or other price adjustments whether allocated at the unit level or tied to volume or aggregate purchasing commitments, then the value of supplier negotiations and group purchasing, among other cost-saving measures, will be destroyed. In short, to the extent PBMs want the pharmacy’s fully netted, bottom-line cost, this means a pharmacy’s carefully negotiated purchasing agreements and wise business practices will suddenly become worthless.
Demanding Cost Data May Breach Your Confidentiality Obligations
To implement this model, PBMs would have to require pharmacies to submit detailed pricing files reflecting the pharmacy’s actual, net purchase cost for every drug in their inventory and will likely implement procedures to regularly capture updates to this data. Pharmacies’ data files may even be subject to audit by third parties or the PBMs themselves.
Here lies a significant and frequently overlooked legal risk: many pharmacies’ agreements with their wholesalers and group purchasing organizations (GPOs) contain strict confidentiality provisions governing their negotiated pricing. These provisions typically prohibit the pharmacy from disclosing contract pricing, including discounts, rebates, and other negotiated concessions to any third parties such as PBMs. Even more concerning, the largest PBMs (Caremark, Express Scripts, and OptumRx) all own competing pharmacy providers to whom this confidential cost data would be extremely valuable. A pharmacy that turns over its acquisition cost data to a PBM may be in direct breach of its wholesaler or GPO agreement and could create additional liabilities.
The consequences of such a breach could be severe. A wholesaler or GPO may have the contractual right to terminate favorable pricing arrangements, demand indemnification, or pursue other remedies. Before any pharmacy submits acquisition cost data to a PBM, it must review its supplier and GPO agreements and consult with legal counsel.
Stripping Pharmacies of the Benefit of Good Purchasing Practices
Independent and chain pharmacies alike have invested significant time, resources, and expertise in building purchasing programs that deliver real savings. Membership in GPOs, volume-based wholesaler agreements, prompt-pay discounts, and other commercial arrangements are tools that pharmacies use to manage their inventory costs and remain competitive.
By demanding acquisition cost net of all discounts, rebates, and other price offsets, PBMs are, in effect, seeking to appropriate the entire benefit of these purchasing arrangements for themselves. Under a cost-plus model defined this way, every dollar a pharmacy saves through better purchasing becomes a dollar by which the PBM reduces its reimbursement obligation. The pharmacy bears all the operational work of optimizing its supply chain, but the PBM captures the financial reward.
This structure fundamentally inverts the incentive to be a savvy purchaser. Certain cost-plus models would not reward pharmacy efficiency, but rather exploit it.
Beware of the “Improvement Guarantee,” A Cost-Minus Clause in Disguise
The most insidious provision in these new contracts will be, if they exist, any kind of cost reduction guarantee clause. Under this type of clause, a pharmacy commits to reducing its overall acquisition cost year over year by a specified percentage. If the pharmacy fails to achieve that reduction, it may owe the PBM a penalty payment based on the shortfall.
Pharmacies may be required to guarantee that the cost of their medications will decline every year without consideration for inflation or other forces that drive up drug acquisition costs. This is a guarantee that pharmacies fundamentally cannot make because pharmacies have little control over the cost of the drugs they purchase. Drug pricing is set by manufacturers, influenced by market dynamics, shaped by federal policy, and subject to inflation and supply chain volatility. Pharmaceutical prices have, by any objective measure, trended upward over time, not downward.
For many pharmacies, a cost reduction guarantee is therefore not truly a “cost-plus” feature at all. It is a mechanism that, as drug prices inevitably rise, will transform the contract into a cost-minus arrangement where the pharmacy is paid acquisition cost minus a penalty it owes the PBM for failing to reduce prices it does not control. Beginning as early as the first contract year, pharmacies could find themselves paying money out of pocket to participate in a PBM’s network, rather than earning a profit on the medications they dispense.
Do Not Sign Contracts or Disclose Cost Data Without Legal Review
The pressure to sign and return PBM contracts quickly is real. PBMs often present these documents as “standard” network participation agreements with firm deadlines and the implicit threat of network exclusion if the pharmacy does not timely comply. Pharmacies should push back on unreasonable contracts and negotiate terms with the assistance of legal counsel.
A contract that looks like a routine administrative update to a reimbursement schedule may in fact contain provisions with significant financial and legal consequences that will unfold over multiple contract years. Before executing any agreement that includes an acquisition cost-based reimbursement structure, pharmacies should:
- Review all existing wholesaler and GPO agreements for confidentiality obligations before submitting any acquisition cost data to a PBM;
- Identify and carefully analyze any acquisition cost improvement guarantee, including how the baseline is calculated and how penalties are triggered and assessed;
- Model the financial impact of the guarantee across multiple contract years using realistic drug price trend assumptions;
- Understand the scope of audit and verification rights being granted to the PBM and its designees over your confidential pricing data; and
- Consult with an experienced attorney in PBM contract negotiation before signing any agreement or transmitting any cost data.
The stakes are high. Once a pharmacy submits its acquisition cost data to a PBM, that information cannot be unsubmitted. If a pharmacy executes a contract containing an improvement guarantee, it may be bound by its terms.
How Frier Levitt Can Help
Frier Levitt has represented pharmacies in disputes with PBMs for decades. Our attorneys have counseled independent pharmacies, regional chains, supermarket chains, specialty pharmacies, hospital pharmacies, and pharmacy associations in connection with PBM audits, network terminations, reimbursement disputes, contract and reimbursement negotiations, and regulatory matters at the state and federal level. We have litigated cases against the nation’s largest PBMs, negotiated contract terms that protect pharmacy interests, and developed strategies that help pharmacies preserve their network participation while safeguarding their legal and financial rights.
If your pharmacy has received a cost-plus contract or any new PBM reimbursement agreement for the coming contract year, contact Frier Levitt immediately. Our team can review the contract, assess its risk profile, advise on whether your existing wholesaler and GPO agreements restrict your disclosure obligations, and help you negotiate terms that do not expose your pharmacy to the cost-minus trap.
In a reimbursement environment where PBMs continue to shift financial risk onto pharmacies through increasingly complex contract structures, having knowledgeable healthcare legal counsel is a necessity.
Senior Associate
