Updated: Mar 4, 2021
There are six significant stakeholders in the complex drug distribution system: pharmaceutical manufacturer, plan sponsor, pharmacy, PBM, wholesaler, and patient.
Whether paying for prescriptions or determining the price of medications, each stakeholder plays an important role. Doing away with drug rebates has become a rallying cry in the battle to contain drug costs. Proponents suggest eliminating rebates would force price equity between brand-name and generic medications, thus providing lower prices at the pharmacy counter for patients. Critics claim that eliminating rebates would restrict research and development, thus limiting patient access to new medications.
This begs the question: would plan sponsors and patients, two of the more vulnerable stakeholders, be best served by increased rebate transparency rather than rebate elimination?
What is a rebate?
Drug rebates are the return of a portion of the drug purchase price to the buyer. The pharmaceutical manufacturer returns a part of the sales price to the pharmacy benefit manager (PBM), who, in turn, gives some of the money back to the plan sponsor.
Average rebates are around 20%, but exact contract terms are heavily guarded trade secrets. The effect of rebates on drug costs and insurance premiums is dependent on multiple factors such as formulary decisions or pass-through rebate structure. However, a recent study showed that, on average, a $1 increase in rebates led to a $1.17 increase in drug list price. This correlation could drive up costs for plan sponsors and patients.
Rebates are typically given to brand-name single-source drugs. Because these medications lack generic or biosimilar competition, rebates add incentive for PBMs to include these high-cost medications in their formulary.
How are patients and plan sponsors affected by drug rebates?
Plan formularies are built on tiers that require patient cost-sharing through coinsurance or a copay. For example, a three-tier formulary may include:
Tier One: Low-cost generic drugs covered with a $5 copay.
Tier Two: Preferred brand-name drugs with rebates covered by a $20 copay.
Tier Three: Non-preferred brand-name drugs without rebates covered at 20% coinsurance.
When high-cost, brand-name drugs have substantial rebates, they are more likely to be included in a lower cost tier. Inclusion on the formulary provides savings for patients who would have to pay full price for these medications without insurance coverage. However, copays and coinsurance are typically based on the drug list price before rebates are applied. At this price-point, patients and plan sponsors pay a larger portion of the actual drug cost than the lower net cost. High-cost brand-name drugs are replacing generic alternatives in formularies due to the potential generated by rebates.
Rebates also limit plan sponsors' flexibility in creating a formulary driven by clinical effectiveness and plan efficacy rather than misaligned financial incentives. This model results in opaque lowest net-cost, inaccessible drug rebate detail, automated prior-auth processes, and limited cost containment integrations.
A call for rebate transparency
Introducing rebate transparency throughout the drug distribution system would ensure that coverage and formulary decisions are made based on value-added activities rather than financial incentives.
Achieving transparency begins with uncovering the actual rebate rates of high spend medications to evaluate actual costs versus average sales prices. This data allows plan sponsors to assess the lowest net cost of covered drugs versus less expensive alternatives.
For example, 123Group covers Drug A, a common respiratory medication. Drug A costs $90,000 but has a rebate of $50,000. An alternative to Drug A, Drug B, costs only $18,000 and has no rebates. When considering the difference in ingredient cost versus the loss of rebate, Drug B provides net-savings of $21,000.
Once net-cost is visible, plan sponsors can work with their PBM to craft a “client-specific” formulary, which will optimize drug savings opportunities when combined with other supplemental programs.
When utilized judiciously, rebates allow plan sponsors to contain pharmacy spend by investing in cost-efficient drugs. With rebate transparency and continual rebate analysis at the individual drug level, plan sponsors can control the drug distribution system and gain ownership of crucial plan components to build a healthy rebate management program.