FREE REFERENCE
PBM Glossary
A PBM glossary is a plain-English reference for the terms inside a pharmacy benefit manager contract. This one defines the words that decide what a self-funded plan actually pays: spread pricing, the effective rates, rebate definitions, the rebate aggregator layer, and the clinical programs that move spend. Each term is defined the way Prescription Benefit Solutions explains it across hundreds of PBM contract reviews a year.
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By Ginny Crisp, PharmD · Reviews hundreds of PBM contracts a year
Published June 2026 · Updated June 2026
Pricing & Cost terms
Spread pricing
Spread pricing is when a PBM charges the plan more for a drug than it pays the dispensing pharmacy and keeps the difference. It often hides inside aggregate pricing guarantees that are not broken out per claim. Aggregate guarantees typically permit spread; pass-through guarantees prohibit it. The contract's pricing-methodology section decides which model applies.
GER Generic Effective Rate
The GER is the negotiated minimum percentage discount off AWP for generic dispensing, measured across the whole plan in aggregate over a period (usually quarterly or annually). The contract states a floor (for example, "AWP minus 87%") the PBM must hit. If actual performance falls short, remediation only happens when the contract carries true-up language.
MAC Maximum Allowable Cost
A MAC is a PBM-set ceiling price for what the plan pays on a generic. The PBM publishes the MAC list, updates it, and controls which generics make the list. Two PBMs can set different MAC prices for the same generic drug.
AWP Average Wholesale Price
AWP is a published reference price maintained by data sources such as Medi-Span or First Databank. PBM pricing guarantees are usually expressed as a percentage discount off AWP. It is a reference rate, not a real transaction price, so the actual cost to the plan depends on which AWP source the contract names and how often it updates.
WAC Wholesale Acquisition Cost
WAC is the manufacturer's published list price to wholesalers, before any rebates or discounts. It sits closer to a real market reference than AWP but is still not a final transaction price.
Net cost per script
Net cost is what the plan actually pays for a single prescription after the AWP discount, the dispensing fee, and any rebate allocation. It is not the AWP list price the PBM may quote. Net cost is the figure that drives annual plan spend.
Dispensing fee
A dispensing fee is a flat fee the PBM charges the plan per script, on top of the drug's ingredient cost. Typical ranges run roughly $0.50 to $3.00 per retail script, $0 to $1.00 per mail-order script, and a separate methodology for specialty.
Ingredient cost
Ingredient cost is the PBM's charge to the plan for the drug itself, before the dispensing fee. It is calculated as AWP minus the contracted discount percentage for that drug category and channel.
Rebates & Revenue Terms
Rebate passthrough
Rebate passthrough is the percentage of manufacturer rebates the contract requires the PBM to pass through to the plan. The amount the plan actually receives depends on how the contract defines eligible rebate revenue. Many contracts exclude administrative fees, market-share payments, and other manufacturer compensation categories from the passthrough definition.
Rebate aggregator
A rebate aggregator is an entity, frequently PBM-affiliated and in several cases domiciled offshore, that contracts with manufacturers to collect rebates on behalf of one or more PBMs. Because the aggregator sits between the manufacturer and the PBM, dollars and fees can be retained at the aggregator level before the PBM's stated pass-through to the plan even begins, often outside the plan's contractual visibility. Entities operating in this layer include Ascent, Emisar, and Zinc.
DIR Direct and Indirect Remuneration
DIR began as a Medicare Part D term and is now used more broadly for retroactive fees or rebates that move between the PBM, pharmacies, and the plan after the claim. Because DIR can change the effective price of a script weeks or months after dispensing, it makes transparent net-cost calculation difficult.
Clinical & Utilization Management
Prior authorization PA
Prior authorization is a utilization-management protocol that requires the prescriber to submit clinical justification and receive PBM approval before the plan covers a specific drug. Criteria may follow published clinical guidelines or PBM-proprietary rules, and the contract typically gives the PBM authority over which criteria apply.
Step therapy
Step therapy requires a member to try and fail one or more lower-cost or preferred drugs before the PBM approves a higher-cost or non-preferred drug. The contract specifies which drug classes are subject to it and the override criteria.
Formulary tier
A formulary tier is the coverage level the PBM assigns to a drug (commonly Tier 1 generic, Tier 2 preferred brand, Tier 3 non-preferred, Tier 4 specialty). Tier placement sets member cost-share and shapes utilization. Drugs move between tiers, usually under PBM authority with limited plan-sponsor approval rights.
Specialty pharmacy
A specialty pharmacy dispenses high-cost specialty drugs such as injectables, biologics, and oral oncology. Most PBM contracts route specialty claims to a PBM-owned or affiliated specialty pharmacy, and the plan may have little visibility into the spread between what that pharmacy pays for the drug and what the plan pays.
Biosimilar
A biosimilar is a drug highly similar to, and potentially interchangeable with, an already-approved biologic. Biosimilars enter after the reference biologic's exclusivity expires, usually at meaningful list-price discounts. Whether one saves the plan money depends on the PBM's formulary placement, the rebate structure on the reference biologic, and the channel routing.
Plan Structures
Accumulator and maximizer
Accumulators and maximizers are PBM-administered programs that change how manufacturer copay card payments apply. An accumulator stops copay card dollars from counting toward the member's deductible or out-of-pocket maximum. A maximizer raises the copay to capture the full annual copay card value and routes those dollars to the PBM or plan rather than toward the member's cost-share progress. Both affect plan economics and member experience.
Carve-out and carve-in
A carve-out is when the plan sponsor contracts directly with a PBM for pharmacy benefits, separate from the medical plan. A carve-in bundles pharmacy benefits into the medical plan contract. Each model trades off pricing transparency, data access, and administrative complexity.
Fiduciary
Under ERISA, a plan sponsor that exercises discretionary authority or control over plan management is a fiduciary held to a prudent-expert standard. Pharmacy-benefit decisions such as PBM selection, contract negotiation, and ongoing oversight are fiduciary acts. Documented process (what was reviewed, who was consulted, what was decided and why) is the protection against breach claims.
Audit rights
Audit rights are the contract clauses that govern whether and how a plan sponsor can inspect the PBM's books: the scope of records covered, how often an audit may run, who is allowed to conduct it, and who pays for it. Weak audit-rights language (a short window, one audit a year, a PBM-approved auditor list) can make independent verification practically impossible, which is why protective language names claims, pricing, rebate, and manufacturer-payment records explicitly.
Termination and transition
Termination and transition clauses decide whether a plan can actually leave its PBM: the notice window, any termination fees, the PBM's obligation to return claims and eligibility data, and how run-out claims are handled after the switch. Weak termination language turns a bad audit finding into leverage the plan cannot use, because the cost and friction of leaving outweigh the finding.
Regulatory & Coding
340B
340B is a federal program that requires manufacturers to provide outpatient drugs at reduced prices to certain safety-net providers. For plan sponsors, the relevance is that when 340B claims route through the plan's PBM, the pricing economics differ from non-340B dispensing, and the PBM may or may not pass the 340B discount through to the plan.
DAW code Dispense As Written
A DAW code on a prescription indicates whether the prescriber required the brand drug or permitted generic substitution. DAW codes 0 through 9 each carry different reimbursement implications, and they can be a source of plan-cost leakage when the PBM reimburses brand prices on scripts that could have been filled generically.
NDC National Drug Code
An NDC is the FDA's unique identifier for a specific drug product (manufacturer, strength, dosage form, and package size). PBM pricing guarantees and exclusion lists are typically expressed by NDC, and NDC-level specificity in a contract is more protective than category-level specificity.