Are Drug Rebates Driving Up Your Drug Costs?

Top 3 Things You’ll Learn

  1. How rebates produce competition during the pharmacy benefits RFP process
  2. Why rebates don’t always lower overall costs despite PBM claims
  3. Ways you can help your clients achieve better rebate value

Prescription drug costs have become increasingly troublesome for both employers and consumers. In fact, they represent the fastest rising healthcare expense in the U.S.

Prescription drug rebates are often touted by drug manufacturers and PBMs as a significant way to reduce pharmacy benefits costs – and they can, in fact, help reduce up to 25 – 30% of overall pharmacy plan spend. However, this isn’t always the case. Complexities around rebates can lead to employers overpaying for drugs.

Understanding competition within the pharmaceutical supply chain and how rebates factor in can help you negotiate better contracts and pricing for your clients.

Understanding rebate complexities

Traditionally, drug rebates are provided from drug manufacturers to pharmacy benefit manager (PBM) then shared with the plan sponsor to determine how to best use those dollars to offset plan costs.

However, there are several different types of drug rebates including formulary, market share, and inflationary rebates. Without clear definitions and differentiators between the different types, it can be difficult for employers to determine how much is being spent and how money is flowing between manufacturers and PBMs. Employer contracts can be confusing and lack transparency. Thus, while employers expect rebates to help lower overall costs, the opposite can in fact be true.

How do rebates affect drug prices?

Rebates produce much-needed competition and are not fundamentally negative. They are typically designed to align the incentives of buyers and sellers, and PBMs may use them as an incentive to win customers. However, recently, member rebates have caused drug prices to artificially inflate and costs to rise. In fact, patients with commercial insurance are spending an average of $6 more out of pocket due to rebates.

This price increase begins on the back end. The process works like this: Pharmaceutical companies work with PBMs to negotiate overall contracts before they reach benefits consultants. Because there’s no central or standardized value for rebates, PBMs push for higher rebates from the drug companies and then charge a manufacturer admin fee (which do not get shared with plan sponsors) within their benefits contracts to increase their profits. If pharmaceutical manufacturers can pay higher rebates, PBMs are more likely to include them on their drug formularies for employers. In turn, pharmaceutical companies raise drug prices to match payment demands.

Thus, the list price of pharmaceutical drugs goes up, and rebates increase, but the actual net cost of drugs remains relatively flat due to backend exchange. This cycle leads to a rise in drug prices that ultimately impacts the consumer – especially when co-insurance is involved. For example, if a drug has a list price of $1,000 with a $500 rebate to the plan sponsor, the net cost of the drug is $500.  However, if the member has a 50% coinsurance, they actually pay $500 (50% of the $1,000 price before rebates) rather than $250 (50% of the $500 cost of the drug after factoring in rebates).

There have been multiple legislative efforts put forth to eliminate or cap drug rebates and improve PBM transparency. Eliminating rebates would impact supply chain profitability, however, and efforts have thus been slow to materialize. Our industry still has a long way to go to protect consumers, and it’s imperative to ensure clients are getting the best rebate value possible and help members pay less out of pocket.

How can I help my clients get a good rebate value?

The PBM marketplace is highly competitive. The competition can open the doors to lower costs – but when shopping around, there are a few key things to look for. First and foremost, making prescription drug programs more affordable to maintain starts with obtaining a clean contract.

During the RFP process, plan sponsors need to understand the landscape, how a rebate is defined, and whether all inclusions are clearly explained within a contract. Most importantly, the plan sponsor should insist that their pharmacy plan be competitively bid by an expert who understands the complexities of the pharmacy benefits market.  This will ensure that the plan sponsor has the opportunity to evaluate multiple offers from different pharmacy benefits providers.

To better manage these complexities and get a more transparent contract, a third-party PBO can help clearly define terms and improve plan pricing terms, discounts, and rebates.

Download our Definitive Guide to Optimizing Pharmacy Benefits to learn how a comprehensive solution can help achieve sustainable savings for your self-funded clients.

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