PBM contracts are written by PBM lawyers, for PBM benefit. The language is dense, the definitions matter more than the numbers, and the most expensive clauses are the ones that look innocuous on first read. After reviewing dozens of these contracts at TeliosRx, here are the 12 red-flag clauses we look for first, and what to ask for instead.
1. Vague AWP definition
What it looks like: "Pricing shall be based on Average Wholesale Price as published by a recognized industry source."
Why it's bad: "Recognized industry source" can mean MediSpan, First Databank, or RedBook, and the prices differ. Without a specific source and a specific update frequency at the NDC-11 level, the PBM can choose whichever benchmark is most favorable to them on any given day.
Ask for: "AWP shall be MediSpan, NDC-11 level, updated weekly minimum."
2. MAC list "updated frequently at PBM's discretion"
What it looks like: "Maximum Allowable Cost list shall be updated on a frequency determined by the PBM."
Why it's bad: This is the single most common red flag in modern PBM contracts. The MAC list determines what generics actually cost the plan. With no minimum update frequency, the PBM can leave inflated prices on the list for months, and pocket the difference.
Ask for: "MAC list shall be updated no less than weekly. PBM shall disclose the MAC methodology and the source data used. Plan Sponsor or its consultant has unrestricted right to audit the MAC list."
3. Rebate guarantees that exclude biosimilars, authorized generics, or specialty
What it looks like: "Rebate guarantees apply to brand drugs only. Biosimilars, authorized generics, OTC, vaccines, and Specialty Limited Distribution drugs are excluded."
Why it's bad: Exclusions creep over time. A rebate guarantee that excluded "specialty limited distribution" in year one becomes a guarantee that excludes "all specialty" by year three through definition expansion. Biosimilars now represent meaningful spend in oncology and immunology, excluding them eliminates rebate dollars on a fast-growing category.
Ask for: "Rebate guarantees apply to all brand drugs and to all specialty drugs unless specifically named on the Excluded Drug Schedule attached as Exhibit X. The Excluded Drug Schedule may not be modified without Plan Sponsor's written consent."
4. Channel-netting using "sum-of-positive" only
What it looks like: "Reconciliation will net per-Drug-Category amounts within each Channel (Retail, Mail, Specialty); only positive (under-performing) channel subtotals count toward Net Amount Owed."
Why it's bad: This is the most expensive single clause in most PBM contracts. It means the PBM only owes the plan money when a channel underperforms. If the Retail channel underperforms by $200,000 but the Mail channel overperforms by $300,000, the plan is owed $200,000, the overperformance is not credited back to the plan. The PBM keeps the overperformance dollars in every other channel.
Ask for: True net reconciliation: all channels combined, single net amount owed. This is hard to win in negotiation but always worth asking.
5. Liability caps on guarantee recovery
What it looks like: "Aggregate Guarantees due to Plan Sponsor in any contract year shall not exceed the aggregate Core Administrative Fee paid to PBM by Plan Sponsor for that contract year."
Why it's bad: This puts a hard ceiling on what you can recover even if the PBM massively underperformed. If a plan paid $15,000 in admin fees but the PBM owes $200,000 in missed guarantees, the plan only gets $15,000. The remaining $185,000 stays with the PBM.
Ask for: Removal of the cap, or at minimum a 5× admin fee cap. If the PBM refuses to remove the cap, treat it as a major red flag and negotiate the underlying guarantees harder.
6. Excessive cure periods on performance penalties
What it looks like: "PBM shall have 90 days to cure any performance failure before guarantee penalties apply. Penalties applied during the cure period shall be refunded if performance is restored."
Why it's bad: Long cure periods mean the PBM can underperform for a quarter, half a year, or longer without consequences. Combined with annual reconciliation, this can stretch effective accountability windows to 18+ months.
Ask for: Cure periods of 30 days maximum, with no refund of penalties already accrued.
7. Missing "lowest of" logic in generic pricing
What it looks like: The contract specifies a generic discount (AWP minus X%) but doesn't include language saying the plan pays "the lowest of" AWP discount, MAC, U&C, or contracted dispensing fee.
Why it's bad: Without "lowest of" logic, the PBM can charge the AWP-discount price even when the MAC or U&C price is lower. This is a structural overcharge on every generic claim.
Ask for: "For generics, plan reimbursement shall be the lower of (a) AWP minus the negotiated discount, (b) Maximum Allowable Cost, (c) Usual & Customary, or (d) Submitted Cost."
8. Audit rights with onerous notice periods or PBM-defined methodology
What it looks like: "Plan Sponsor may audit the PBM's books and records relating to this Agreement no more frequently than once per contract year, upon ninety (90) days' prior written notice, using a mutually agreed-upon auditor and methodology to be determined by PBM."
Why it's bad: Ninety-day notice gives the PBM time to "prepare." Mutually agreed-upon auditor means the PBM can block independent auditors. PBM-determined methodology means the PBM controls what gets audited.
Ask for: "Plan Sponsor may audit upon 30 days' written notice using an auditor of Plan Sponsor's choosing, with full access to claims data, pharmacy reimbursement detail, and rebate aggregator records. PBM shall cooperate in good faith with reasonable audit requests."
9. Rebate reconciliation timelines exceeding 180 days
What it looks like: "Rebate reconciliation shall be completed no later than 270 days after the end of the contract year."
Why it's bad: Long reconciliation timelines compound the cure-period problem. The plan can't enforce rebate guarantees until reconciliation is complete. If you find a problem in month 9 of reconciliation, the next contract year is already underway.
Ask for: 180-day reconciliation for rebates, 120-day for discount and dispensing fees.
10. Termination clauses without claim-runout cooperation
What it looks like: "Upon termination, PBM shall have no obligation to provide claims data or rebate data after the termination date."
Why it's bad: Final-year rebates often arrive 6–12 months after the contract year ends. Without runout cooperation, the outgoing PBM can withhold those dollars or fail to provide the data needed to verify them.
Ask for: "PBM shall cooperate with claim runout for 18 months following termination, including timely delivery of all rebate data, claim detail, and any other records necessary for Plan Sponsor to reconcile guarantees and rebates."
11. Specialty definition controlled by the PBM
What it looks like: "Specialty drugs shall be those drugs designated as Specialty on the PBM's Exclusive Specialty Drug List, as updated from time to time."
Why it's bad: When the PBM controls the list, the PBM moves drugs onto and off of "Specialty" status to optimize their own economics. A drug that moves from "Brand Retail" to "Specialty" can shift from a 19% discount to a 23% discount, but the PBM's rebate captures may also shift in their favor.
Ask for: Specialty definition tied to a published, third-party Specialty Drug List (CMS's specialty list, AAHP, or similar) with limited PBM discretion to add drugs not on the third-party list.
12. Connect-program prerequisites buried in guarantee qualifications
What it looks like: "Guarantees apply only if Plan Sponsor maintains enrollment in PBM's Connect Programs at the contracted level throughout the contract year."
Why it's bad: This ties your guarantee recovery to your willingness to keep paying for ancillary services. If you opt out of a Connect Program mid-year, you may lose your right to guarantee recovery for the entire year, including months when you were enrolled.
Ask for: Decoupling guarantees from Connect Program enrollment. If decoupling isn't possible, at minimum prorate guarantees to months of enrollment.
What to do with this list
Print it. Take it into your next PBM contract review. Have your consultant (or your in-house counsel) check every clause against these 12. If your contract has 4 or more of these red flags, you have a remediation conversation to have with your PBM, and a strong case for an outside audit before the next renewal.