• Dr. David Merritt PharmD, RPh

Transparency Brings Balance to Drug Rebates

In the complex drug distribution system, there are six significant stakeholders: pharmaceutical manufacturer, plan sponsor, pharmacy benefit manager, pharmacy, wholesaler, and end 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 the brand and the 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.


Plan sponsors and patients, two of the more vulnerable stakeholders, would be best served by increased rebate transparency rather than rebate elimination. Rebate transparency would encourage better balance in the drug distribution system.


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 portion 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.[1] The effect of rebates on drug costs and insurance premiums is dependent on multiple factors such as formulary decisions or rebate pass-through structure. However, a recent study showed that, on average, a $1 increase in rebates led to a $1.17 increase in drug list price.[2] This correlation may 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 drugs with rebates covered by a $20 copay

  • Tier Three: Non-preferred brand 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.[3] 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 passed on to the consumer.


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 evaluate the lowest net cost of drugs they cover 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 formulary driven by improved clinical outcomes and cost-savings rather than financial incentives.


When utilized judiciously, rebates allow plan sponsors to contain pharmacy spend by investing in cost-efficient drugs. Balancing positive rebates with lower-cost alternatives allows plan sponsors to take more control of the drug distribution system and gain ownership of crucial plan components to build a healthy rebate management program.

[1] https://www.milliman.com/en/insight/A-primer-on-prescription-drug-rebates-Insights-into-why-rebates-are-a-target-for-reducing [2] https://healthpolicy.usc.edu/research/the-association-between-drug-rebates-and-list-prices/ [3] https://www.statnews.com/2020/09/04/dont-eliminate-drug-rebates-use-average-sales-price-setting-co-insurance/

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