Glossary

Understanding Complex Terms

Our glossary is your go-to resource for demystifying complex terms in the PBM industry. Easily find and understand the definitions you need to navigate the world of Pharmacy Benefits Management.

Glossary

Understanding Complex Terms

Our glossary is your go-to resource for demystifying complex terms in the PBM industry. Easily find and understand the definitions you need to navigate the world of Pharmacy Benefits Management.

Glossary

Understanding Complex Terms

Our glossary is your go-to resource for demystifying complex terms in the PBM industry. Easily find and understand the definitions you need to navigate the world of Pharmacy Benefits Management.

Glossary

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Average Wholesale Price (AWP)

A benchmark or "sticker price" that represents the average price at which wholesalers sell prescription drugs to pharmacies and other providers, often used in contracts between plan sponsors and pharmacy benefit managers (PBMs) for drug reimbursement.

Biosimilar

A biosimilar is a biological product that is highly similar to an already FDA-approved biologic, known as the reference product. While made with living organisms and not identical to the original drug, a biosimilar has no clinically meaningful differences in terms of safety, purity, and effectiveness. Biosimilars must meet rigorous FDA standards to be approved.

Benefits Broker

A consultant who helps employers design and manage their employee benefits packages, including pharmacy and medical benefits. They can serve as a liaison between the employer and benefit providers like pharmacy benefit managers (PBMs).

Benefit Design

The specific outline of benefit coverage, which determines what is covered under the pharmacy benefits.

Brand Name Drugs

Medications sold under a proprietary, trademarked name by the manufacturer. These drugs are approved by the FDA and undergo extensive testing for safety and effectiveness. The manufacturer typically holds exclusive marketing rights for a set period, during which time generic versions can't be marketed.

Co-Pay

The fixed amount a patient pays for a covered health care service, usually when receiving the service or product, such as a prescription medication.

Coverage Gap

A period in a Medicare drug plan where there is a temporary limit on what the drug plan will cover for drugs.

Claims Adjudication

The process that a pharmacy benefit manager (PBM) uses to evaluate a prescription drug claim that is typically sent by a pharmacy. This includes checking a member’s eligibility, determining coverage and reimbursement, calculating copays, reviewing for utilization management requirements (like quantity limits or prior authorization), and ensuring the prescription isn’t filled too soon. This ensures that claims are processed quickly, accurately, and according to plan design.


Deductible

The fixed amount that is paid out of pocket by a member before the plan begins to pay.

Drug class

A group of medications that have similar properities such as chemical structures, work in a similar way, and/or are used to treat the similar diseases.

Drug Tier

The categorization of prescription drugs on how much they cost within a particular drug benefit plan. Typically, higher drug tiers will have higher copays. Factors such as generic vs brand, preferred vs non-preferred and traditional vs specialty can impact a drug's tier placement.

Drug Utilization Review (DUR)

A review process used to evaluate whether a medication therapy is appropriate, medically necessary, and safe. DURs can happen before, during, or after a prescription is filled. They help flag issues like drug interactions, incorrect dosages, allergies, and other potential risks to ensure optimal patient outcomes.

Formulary

A formulary is a list of prescription drugs reviewed for safety and effectiveness, encouraging the use of cost-effective medications. Formularies can generally fall into two categories, an Open Formulary, which covers most drugs, and a Closed Formulary, which limits coverage to a more specific, cost-effective list.

Formulary Exception

A request made by a prescriber to cover a medication not listed on the plan's formulary or why cost-effective therapies can not be tried, typically based on medical necessity with supporting clinical documentation that has been reviewed.

Generic Drugs

Drugs that are chemically identical to their branded counterparts but generally have lower prices. Generics are reviewed and approved by the FDA and features the same safety, efficacy, quality, benefits, strength, and dosing as their brand-counterpart.

Generic Product Identifier (GPI)

A 14-character hierarchical drug classification system with each number representing different factors based on the drug such as therapeutic class down to the strength and package size.

Generic Substitution

Replacing a brand-name drug with it's checmically equivalent generic that has been reviewed and approved by the FDA. This typically does not require outreach and approval of prescriber, but is still subject to state laws and regulations.

MAC List (Maximum Allowable Cost)

A list that sets the upper reimbursement amount to the pharmacy for generic drugs and brand-name drugs that have a generic product available, helping control costs for plan sponsors. A MAC list encourages pharmacies to purchase the lower-priced drugs to prevent health plans and patients for overpaying.

Mail Order Pharmacy

A pharmacy service that offers the convenience of mailing prescriptions directly to the patient's mailing address.

Manufacturer Rebate

A post-sale discount paid by a drug manufacturer to a PBM or plan sponsor, usually in exchange for formulary placement or volume guarantees.

Market Check

A process where plan sponsors compare pharmacy benefit manager (PBM) pricing and terms against current market standards to ensure competitiveness.

Medication Therapy Management Program

A service offered to patients, especially those with complex conditions or multiple medications, to optimize therapeutic outcomes through pharmacist-led review and consultation. While typically conducted by pharmacists, other healthcare professionals can provide MTM services as well.

Open Formulary

Provides coverage for a wide range of prescription medications, with minimal exclusions, giving patients and healthcare providers greater flexibility in treatment choices. Plan benefits and design may exclude some drug classes.

Out-of-Pocket Maximum

The maximum amount a member must pay out-of-pocket under a health insurance plan.

PBM (Pharmacy Benefit Manager)

A PBM manages prescription drug benefits for health insurers, employers, and other payers. Their primary functions include processing claims, creating and managing drug formularies, negotiating rebates with manufacturers and discounts with pharmacies, and implementing tools like prior authorization and disease management.

Performance Guarantee

A contractual agreement where the PBM commits to meeting certain service or cost-saving metrics, often with financial penalties for underperformance.

Pharmacy Network

A network of pharmacies that the PBM has contracted with where prescriptions may be filled for members.

PMPM (Per Member Per Month)

A cost metric used in healthcare to represent the average monthly expense for each enrolled member in a health or pharmacy plan. It's calculated by dividing the total cost of services and/or drug spend by the number of members, then by the number of months.

Premium

The amount that must be paid for your health insurance or plan.

Prior Authorization

A drug management tool that requires a provider obtain approval from a PBM or health plan before it will cover a specific medication. This process is designed to ensure the use of safe, evidence-based, and cost-efficient therapies. Guidelines and polices are developed by pharmacists and other healthcare professionals.

Rebate Management

The management of discounts or returns secured from pharmaceutical manufacturers which may or may not be shared with plan members.

Specialty Pharmacy

A pharmacy that dispenses high-cost and high-complexity medications used to treat rare, chronic, or complex conditions. Due to the challenging nature of these therapies, the pharmacy provides a high level of personalized patient care, which includes clinical monitoring, education, and comprehensive support to ensure proper drug adherence.

Step Therapy

A type of utilization management that requires a patient to try one or more lower-cost or safer medications first - often generics or preferred alternatives - before coverage is approved for a more expensive or higher-risk option. If the initial therapy is ineffective or fails, the next step in treatment may be covered.

Therapeutic Equivalence

A designation that two drugs are expected to have no clinical difference in efficacy and safety when administered to patients under the same conditions.

Quantity Limit

A restriction placed on the amount of medication a member can receive within a certain time period, often to ensure safe and appropriate use.

Wholesale Acquisition Cost (WAC)

The price paid by wholesalers and direct purchasers, such as distributors and pharmacies, when they purchase drugs from manufacturers. This does not include any discounts or rebates.

Average Wholesale Price (AWP)

A benchmark or "sticker price" that represents the average price at which wholesalers sell prescription drugs to pharmacies and other providers, often used in contracts between plan sponsors and pharmacy benefit managers (PBMs) for drug reimbursement.

Biosimilar

A biosimilar is a biological product that is highly similar to an already FDA-approved biologic, known as the reference product. While made with living organisms and not identical to the original drug, a biosimilar has no clinically meaningful differences in terms of safety, purity, and effectiveness. Biosimilars must meet rigorous FDA standards to be approved.

Benefits Broker

A consultant who helps employers design and manage their employee benefits packages, including pharmacy and medical benefits. They can serve as a liaison between the employer and benefit providers like pharmacy benefit managers (PBMs).

Benefit Design

The specific outline of benefit coverage, which determines what is covered under the pharmacy benefits.

Brand Name Drugs

Medications sold under a proprietary, trademarked name by the manufacturer. These drugs are approved by the FDA and undergo extensive testing for safety and effectiveness. The manufacturer typically holds exclusive marketing rights for a set period, during which time generic versions can't be marketed.

Co-Pay

The fixed amount a patient pays for a covered health care service, usually when receiving the service or product, such as a prescription medication.

Coverage Gap

A period in a Medicare drug plan where there is a temporary limit on what the drug plan will cover for drugs.

Claims Adjudication

The process that a pharmacy benefit manager (PBM) uses to evaluate a prescription drug claim that is typically sent by a pharmacy. This includes checking a member’s eligibility, determining coverage and reimbursement, calculating copays, reviewing for utilization management requirements (like quantity limits or prior authorization), and ensuring the prescription isn’t filled too soon. This ensures that claims are processed quickly, accurately, and according to plan design.


Deductible

The fixed amount that is paid out of pocket by a member before the plan begins to pay.

Drug class

A group of medications that have similar properities such as chemical structures, work in a similar way, and/or are used to treat the similar diseases.

Drug Tier

The categorization of prescription drugs on how much they cost within a particular drug benefit plan. Typically, higher drug tiers will have higher copays. Factors such as generic vs brand, preferred vs non-preferred and traditional vs specialty can impact a drug's tier placement.

Drug Utilization Review (DUR)

A review process used to evaluate whether a medication therapy is appropriate, medically necessary, and safe. DURs can happen before, during, or after a prescription is filled. They help flag issues like drug interactions, incorrect dosages, allergies, and other potential risks to ensure optimal patient outcomes.

Formulary

A formulary is a list of prescription drugs reviewed for safety and effectiveness, encouraging the use of cost-effective medications. Formularies can generally fall into two categories, an Open Formulary, which covers most drugs, and a Closed Formulary, which limits coverage to a more specific, cost-effective list.

Formulary Exception

A request made by a prescriber to cover a medication not listed on the plan's formulary or why cost-effective therapies can not be tried, typically based on medical necessity with supporting clinical documentation that has been reviewed.

Generic Drugs

Drugs that are chemically identical to their branded counterparts but generally have lower prices. Generics are reviewed and approved by the FDA and features the same safety, efficacy, quality, benefits, strength, and dosing as their brand-counterpart.

Generic Product Identifier (GPI)

A 14-character hierarchical drug classification system with each number representing different factors based on the drug such as therapeutic class down to the strength and package size.

Generic Substitution

Replacing a brand-name drug with it's checmically equivalent generic that has been reviewed and approved by the FDA. This typically does not require outreach and approval of prescriber, but is still subject to state laws and regulations.

MAC List (Maximum Allowable Cost)

A list that sets the upper reimbursement amount to the pharmacy for generic drugs and brand-name drugs that have a generic product available, helping control costs for plan sponsors. A MAC list encourages pharmacies to purchase the lower-priced drugs to prevent health plans and patients for overpaying.

Mail Order Pharmacy

A pharmacy service that offers the convenience of mailing prescriptions directly to the patient's mailing address.

Manufacturer Rebate

A post-sale discount paid by a drug manufacturer to a PBM or plan sponsor, usually in exchange for formulary placement or volume guarantees.

Market Check

A process where plan sponsors compare pharmacy benefit manager (PBM) pricing and terms against current market standards to ensure competitiveness.

Medication Therapy Management Program

A service offered to patients, especially those with complex conditions or multiple medications, to optimize therapeutic outcomes through pharmacist-led review and consultation. While typically conducted by pharmacists, other healthcare professionals can provide MTM services as well.

Open Formulary

Provides coverage for a wide range of prescription medications, with minimal exclusions, giving patients and healthcare providers greater flexibility in treatment choices. Plan benefits and design may exclude some drug classes.

Out-of-Pocket Maximum

The maximum amount a member must pay out-of-pocket under a health insurance plan.

PBM (Pharmacy Benefit Manager)

A PBM manages prescription drug benefits for health insurers, employers, and other payers. Their primary functions include processing claims, creating and managing drug formularies, negotiating rebates with manufacturers and discounts with pharmacies, and implementing tools like prior authorization and disease management.

Performance Guarantee

A contractual agreement where the PBM commits to meeting certain service or cost-saving metrics, often with financial penalties for underperformance.

Pharmacy Network

A network of pharmacies that the PBM has contracted with where prescriptions may be filled for members.

PMPM (Per Member Per Month)

A cost metric used in healthcare to represent the average monthly expense for each enrolled member in a health or pharmacy plan. It's calculated by dividing the total cost of services and/or drug spend by the number of members, then by the number of months.

Premium

The amount that must be paid for your health insurance or plan.

Prior Authorization

A drug management tool that requires a provider obtain approval from a PBM or health plan before it will cover a specific medication. This process is designed to ensure the use of safe, evidence-based, and cost-efficient therapies. Guidelines and polices are developed by pharmacists and other healthcare professionals.

Rebate Management

The management of discounts or returns secured from pharmaceutical manufacturers which may or may not be shared with plan members.

Specialty Pharmacy

A pharmacy that dispenses high-cost and high-complexity medications used to treat rare, chronic, or complex conditions. Due to the challenging nature of these therapies, the pharmacy provides a high level of personalized patient care, which includes clinical monitoring, education, and comprehensive support to ensure proper drug adherence.

Step Therapy

A type of utilization management that requires a patient to try one or more lower-cost or safer medications first - often generics or preferred alternatives - before coverage is approved for a more expensive or higher-risk option. If the initial therapy is ineffective or fails, the next step in treatment may be covered.

Therapeutic Equivalence

A designation that two drugs are expected to have no clinical difference in efficacy and safety when administered to patients under the same conditions.

Quantity Limit

A restriction placed on the amount of medication a member can receive within a certain time period, often to ensure safe and appropriate use.

Wholesale Acquisition Cost (WAC)

The price paid by wholesalers and direct purchasers, such as distributors and pharmacies, when they purchase drugs from manufacturers. This does not include any discounts or rebates.

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SmithRx is on a mission to reduce the complexity and costs of pharmacy benefits with radical transparency and cutting-edge technology.

© 2025 Smith Health, Inc
SmithRx Logo

SmithRx is on a mission to reduce the complexity and costs of pharmacy benefits with radical transparency and cutting-edge technology.

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