Ep. 4 - Cost-Plus Pricing: What Plan Sponsors Should Know

Cost‑plus pricing is re‑emerging as a focal point for plan sponsors, driven by state legislation and high‑profile entrants like Mark Cuban’s Cost Plus Drug Company. States such as Kentucky, Indiana, and West Virginia now require reimbursements based on the National Average Drug Acquisition Cost (NADAC) plus a dispensing fee, moving the conversation away from traditional Average Wholesale Price benchmarks. This shift forces benefits teams to reconsider how they evaluate pharmacy spend, especially for generic and specialty drugs, and highlights the growing relevance of transparent, drug‑level pricing in a fragmented market.

Proponents argue that cost‑plus models bring two key advantages: they edge closer to the true acquisition cost of a medication and they increase pricing transparency. By anchoring reimbursement to an actual cost figure and adding a predefined markup, sponsors can see dollars‑and‑cents pricing rather than opaque AWP discounts. However, the model’s effectiveness hinges on how “cost” is defined—whether it includes off‑invoice discounts, rebates, or only the purchase price from a leveraged supplier. Large PBMs and GPOs still command significant bargaining power, meaning a cost‑plus quote from a smaller pharmacy may not beat a PBM‑negotiated rate that incorporates hidden rebates. Audits and reconciliation clauses become essential tools for verifying that the agreed‑upon cost truly reflects market realities.

For plan sponsors, the practical impact is clear: state‑mandated cost‑plus rules remove a major negotiation lever from PBM contracts, shifting focus to compliance, specialty mail‑order pricing, and performance guarantees. The “lower‑of” logic remains intact, protecting participants when a copay or coinsurance is less than the reimbursement amount. While the FTC settlement mentions cost‑plus pricing, the decisive factor will be individual state requirements, which the 2020 Supreme Court confirmed are not preempted by ERISA. Sponsors should therefore prioritize robust audit processes, understand the source of cost benchmarks, and align PBM fee structures with state‑driven reimbursement models to optimize spend and maintain regulatory compliance.