Pharmacy Glossary

The actual price a pharmacy pays to purchase a drug from a wholesaler or manufacturer, including all discounts and rebates. Actual acquisition cost (AAC) is the most accurate measure of pharmacy drug costs and is increasingly used by state Medicaid programs for reimbursement.

Average Wholesale Price - a benchmark price for prescription drugs published by pricing compendia like Medi-Span and First Databank. Often called the 'sticker price' of drugs, AWP serves as the basis for many PBM reimbursement calculations (e.g., AWP minus a percentage discount).

The real-time process by which a PBM evaluates a pharmacy claim at the point of sale to determine coverage, copay amount, and reimbursement. Adjudication checks patient eligibility, formulary status, drug interactions, prior authorizations, and pricing in milliseconds.

Dispense As Written - a code on a prescription claim that indicates whether brand or generic substitution was requested. DAW 0 means substitution is allowed; DAW 1 means the prescriber requested brand only; DAW 2 means the patient requested brand. DAW codes affect reimbursement and patient cost.

The professional fee paid to a pharmacy for each prescription dispensed, separate from the drug ingredient cost. Dispensing fees cover the pharmacist's professional services, overhead, and operational costs. Typical dispensing fees range from $1 to $15 depending on the payer.

Electronic Remittance Advice - the electronic version of a payment explanation sent from a PBM or insurer to a pharmacy. ERAs detail each claim's reimbursement, adjustments, and denial reasons, enabling automated posting of payments to pharmacy management systems.

When the same medication is billed under different National Drug Code (NDC) numbers in billing versus purchasing data, typically caused by manufacturer changes, wholesaler substitutions, or repackaging. NDC swaps create phantom shortages and surpluses that silently drain revenue.

The process of comparing pharmacy dispensing and billing records against purchase invoices and PBM remittance data to verify every prescription was billed correctly, reimbursed at the right amount, and that purchasing costs align with dispensing records.

The payment a pharmacy receives from a PBM, insurer, or government program for dispensing a prescription. Reimbursement typically equals the ingredient cost (based on AWP, WAC, or MAC) plus a dispensing fee, minus the patient's copay. The difference between reimbursement and acquisition cost determines pharmacy margin.

The payment and associated documentation sent by a PBM or insurer to a pharmacy for processed claims. Remittance advice (RA) details each claim paid, the reimbursement amount, any adjustments, and the total payment. Comparing remittance data against billing records is essential for reconciliation.

Usual and Customary Price - the cash price a pharmacy charges to a customer without insurance. PBMs reimburse at the lower of the contracted rate or the U&C price. Pharmacies must report accurate U&C prices; inflated prices can trigger audits and penalties.

Wholesale Acquisition Cost - the manufacturer's list price to wholesalers, before any discounts or rebates. WAC is considered a more transparent benchmark than AWP and is increasingly used as the basis for drug pricing and reimbursement calculations.

Bank Identification Number - a 6-digit code on pharmacy benefit cards that identifies the PBM or claims processor responsible for adjudicating a prescription claim. Used to route claims to the correct payer during real-time adjudication.

The insurance company or entity that provides the pharmacy benefit to the patient. In claims processing, the carrier is identified by the BIN number on the benefit card. Multiple carriers may use the same PBM for claims processing.

When a PBM retroactively recovers money from a pharmacy after the point of sale. Clawbacks occur through DIR fees, audit recoveries, or pricing adjustments. They reduce the pharmacy's effective reimbursement below what appeared at the time of dispensing.

A percentage of the prescription drug cost that the patient pays out-of-pocket (e.g., 20% coinsurance means the patient pays 20% and the insurer pays 80%). More common for specialty drugs and higher formulary tiers than flat copays.

A fixed dollar amount a patient pays out-of-pocket for a prescription at the point of sale. Copay amounts are determined by the drug's formulary tier and the patient's health plan. Common copay structures: $10 for Tier 1 generics, $35 for Tier 2 preferred brands, $75+ for Tier 3 non-preferred.

The amount a patient must pay out-of-pocket for prescription drugs before their insurance coverage begins. During the deductible phase, the patient pays the full negotiated price. Common pharmacy deductibles range from $250 to $2,000 per year.

Direct and Indirect Remuneration fees - retroactive charges imposed by PBMs on pharmacies, typically assessed after the point of sale based on performance metrics or contractual terms. DIR fees reduce the effective reimbursement pharmacies receive and can turn profitable prescriptions into losses.

A list of prescription drugs covered by a health plan or PBM, typically organized into tiers that determine patient copay amounts. Tier 1 (preferred generics) has the lowest copays, while higher tiers (specialty, non-preferred brands) have higher costs. Formulary placement significantly affects prescription volume.

An identifier on a pharmacy benefit card that specifies the employer group or plan under which the patient is covered. Used during claims adjudication to determine the correct formulary, copay structure, and network rules for the claim.

Maximum Allowable Cost - the highest reimbursement amount a PBM will pay for a generic or multi-source drug. MAC lists are created by PBMs and may not reflect actual pharmacy acquisition costs, often resulting in below-cost reimbursements for independent pharmacies.

A pharmacy network created by a PBM that limits the number of participating pharmacies, often excluding independent pharmacies in favor of chain or PBM-owned pharmacies. Narrow networks reduce patient choice but can lower costs for the plan sponsor.

A PBM pricing model where the health plan pays the pharmacy the exact same amount the PBM reimburses, plus a transparent administrative fee. Eliminates spread pricing. Increasingly demanded by employers and legislated by states seeking PBM transparency.

Pharmacy Benefit Manager - a third-party administrator that manages prescription drug benefits on behalf of health insurers, employer groups, and government programs. PBMs negotiate drug prices, process claims, and determine reimbursement rates for pharmacies.

Processor Control Number - an additional identifier on pharmacy benefit cards used alongside the BIN number to route claims to the correct processor or plan within a PBM. The BIN identifies the PBM, while the PCN identifies the specific processing path.

A requirement by the PBM or health plan that a prescriber obtain approval before a specific medication will be covered. Prior authorizations are used for high-cost drugs, non-preferred medications, and specialty therapies. They add administrative burden and can delay patient access.

A PBM practice where the PBM charges the health plan a higher price for a drug than it reimburses the pharmacy, keeping the difference (the 'spread') as profit. Spread pricing is increasingly criticized for lack of transparency and has been banned by several states.

A utilization management protocol requiring patients to try one or more lower-cost medications before the PBM will cover a higher-cost alternative. Also called 'fail first' policies. Common in managing high-cost therapeutic categories.

Any entity other than the patient that pays for prescription drug costs, including commercial insurers, PBMs, Medicare Part D plans, Medicaid, and employer-sponsored health plans. In the U.S., third-party payers cover approximately 90% of all prescription transactions.

The practice of dispensing a generic equivalent instead of a brand-name drug. State laws regulate when substitution is permitted. Generic substitution increases pharmacy margins (generics typically have higher markups) and reduces costs for patients and insurers.

The systematic process of ordering, storing, tracking, and dispensing pharmaceutical inventory. Effective inventory management minimizes carrying costs, reduces expired product waste, ensures adequate stock levels, and supports accurate reconciliation.

The extent to which patients take medications as prescribed by their healthcare providers. Measured by metrics like PDC (Proportion of Days Covered) and MPR (Medication Possession Ratio). PBMs use adherence metrics in quality programs and DIR fee calculations.

A drug available from multiple manufacturers, typically a generic drug produced by several generic companies. Multi-source drugs are subject to MAC pricing by PBMs and are a common source of NDC swaps because each manufacturer's version carries a different NDC.

Software used by pharmacies to manage dispensing operations, patient records, claims processing, inventory, and reporting. Common systems include PrimeRx, Liberty, Pioneer, Rx30, Computer-Rx, and BestRx. Data exported from these systems is used for billing reconciliation.

The moment when a prescription is processed and adjudicated in real time at the pharmacy counter. POS adjudication occurs via electronic communication between the pharmacy system and the PBM, determining coverage, copay, and reimbursement within seconds.

A widely-used pharmacy management system developed by Micro Merchant Systems, popular among independent pharmacies. PrimeRx handles dispensing, claims adjudication, inventory management, and reporting. Its CSV export format is commonly used for reconciliation workflows.

A pharmacy that dispenses high-cost, complex medications requiring special handling, storage, or patient monitoring. Specialty drugs often cost $1,000+ per month and treat conditions like cancer, rheumatoid arthritis, and multiple sclerosis. Specialty pharmacy represents over 50% of total drug spending.

A pharmaceutical distributor that purchases drugs from manufacturers and sells them to pharmacies, hospitals, and other healthcare facilities. The three largest wholesalers (McKesson, AmerisourceBergen/Cencora, Cardinal Health) distribute approximately 90% of all pharmaceuticals in the U.S.

A federal drug pricing program (Section 340B of the Public Health Service Act) that requires drug manufacturers to provide outpatient drugs at significantly reduced prices to eligible healthcare organizations (covered entities). 340B pricing can be 25-50% below AWP.

A program that evaluates prescription drug use to ensure medications are appropriate, medically necessary, and unlikely to cause adverse effects. DUR checks occur during claims adjudication (prospective DUR) and through retrospective analysis of claims data.

The first 5 digits of a National Drug Code (NDC) that identify the manufacturer, repackager, or distributor of the drug. Assigned by the FDA. Each labeler receives a unique code; changes in labeler codes are a primary cause of NDC swaps during reconciliation.

A unique 11-digit identifier assigned to each medication in the United States, following the 5-4-2 format: 5 digits for the labeler (manufacturer), 4 digits for the product (strength, dosage form), and 2 digits for the package size. Required on all prescription drug labels by the FDA.

National Council for Prescription Drug Programs - the standards organization that creates and maintains the electronic data interchange standards used in pharmacy claims processing. The NCPDP Telecommunication Standard (D.0) is the universal format for real-time pharmacy claims.

A review of pharmacy records conducted by or on behalf of a PBM to verify the accuracy of claims submitted. Audits check prescription validity, dispensing records, pricing accuracy, and regulatory compliance. Failed audits can result in financial recoupments and network termination.

CMS (Centers for Medicare and Medicaid Services) quality ratings for Medicare Part D plans, scored 1-5 stars. Pharmacy performance metrics like medication adherence and generic dispensing rates contribute to plan Star Ratings. Higher ratings result in bonuses; lower ratings can trigger penalties.

The FDA designation that two drug products contain the same active ingredient, dosage form, strength, and route of administration, and are expected to produce the same clinical effect. Therapeutically equivalent drugs may have different NDC codes, which can cause NDC swap issues in reconciliation.

The process of reconciling pharmacy billing data in bulk, typically covering a specific time period (weekly, monthly, or quarterly). Batch reconciliation compares aggregate billing and purchasing data rather than individual transactions, identifying patterns and trends across thousands of claims simultaneously.

Generic Effective Rate - a metric that measures the average reimbursement a pharmacy receives for generic drugs as a percentage of a benchmark price (usually AWP). Used to evaluate PBM contract competitiveness. A GER of AWP-85% means the pharmacy is reimbursed at 15% of AWP.

A reconciliation result where the purchased quantity for a drug exceeds the billed quantity, meaning more was bought than dispensed. Overages may indicate unbilled prescriptions, data entry errors, or inventory accumulation. Significant overages represent tied-up capital.

The electronic records generated when prescriptions are adjudicated, containing the drug NDC, quantity, days supply, prescriber, patient, payer, reimbursement amount, and copay. Claims data is the foundation of pharmacy billing reconciliation and analytics.

Revenue that a pharmacy should have collected but didn't due to billing errors, PBM underpayments, undetected NDC swaps, missed claims, or uncollected copays. Revenue leakage is often invisible without systematic reconciliation and typically represents 2-5% of prescription revenue for independent pharmacies.

A reconciliation result where the billed quantity for a drug exceeds the purchased quantity, indicating more was dispensed than acquired. Shortages may result from unrecorded purchases, NDC swaps, theft, or billing errors. Persistent shortages signal revenue leakage.

The numerical difference between expected and actual values in pharmacy billing reconciliation. A positive variance (surplus) means more units were purchased than billed; a negative variance (shortage) means more units were billed than purchased. Variances indicate potential billing errors, theft, or data entry mistakes.