Follow the Money: How to Make Drug Rebates Work for Your Rx Plan

This video is the first in a series on following the money to understand the flow of rebate dollars in pharmacy benefits management.See Part 2 here.

In recent years, there have been many questions and discussions in the marketplace about where prescription drug rebate dollars are going. The reality is drug rebates carry an economic value of about 20%-30% of the cost of an employer’s prescription drug program. These are real dollars that present a real opportunity for a pharmacy benefits cost offset. When rebates are generated, it’s important to understand where rebates are going.

The Process to Establish a Drug Rebate

Looking at this drug rebates diagram, start at the blue box at the top to understand how drug rebates are established. Drug manufacturers make the prescription drugs and have a service agreement with drug wholesalers to ship products to wholesalers. Following the line, the drug wholesaler ships the products to the pharmacy. The pharmacy dispenses the medication to the patient.

If the patient is using an insurance program, the pharmacy sends an electronic claim back to the pharmacy benefit manager (PBM). The PBM collects all of those prescription drug claims and periodically sends them back to each drug manufacturer to receive rebates. The PBM collects that rebate money and then has to make a decision, based on their contract with the individual employer, on what to do with that money.

Learn more about the roles of these key players in pharmacy benefits management.

The Purpose of Rebates for Employers

Focusing on the upper right of the diagram, we can see where the employer fits into this model. Again, the PBM adjudicates the prescription drug claims, collects and sorts all of the claims by drug manufacturer, creates invoices, and sends those to the pharmaceutical companies to collect on the drug rebates negotiated with each drug manufacturer. Through their contract with the PBM, those drug manufacturers eventually produce the rebate.

The rebate amount is based on different criteria, predominately market share of their drug products. The greater the market share for the drug manufacturer, the greater the opportunity is for the PBM to earn a rebate on that prescription drug. Generally, the pharmaceutical companies send the money to the PBMs, and the PBMs hold the contracts with their employer clients which determine how those rebate dollars will be dispersed.

It’s important to understand that when the PBM invoices the pharmaceutical company for their drug rebates, the PBM receives the pharma rebates money nine months in arrears. For example, for a prescription claim that was filled on January 1 of a given year that earned a rebate, the employer probably won’t see the dollars from that until October of that same year. This is because of the way the billing and accumulation system works for pharmacy drug rebates.

See what else employers should consider in their prescription drug rebate strategy.

How Rebates Lower Drug Costs

In this model, the PBM is sharing the rebates. Depending on the contract with the employer, it could be dollar-for-dollar for all of the rebates that the employer receives from the PBM. The employer can maximize their rebate value in this model by waiting for the PBM to receive their rebate money, waiting for their PBM rebate payment, and in turn pass it back to their members.

Find out how rebate yield plays into the employer’s pharmacy benefit management solution.

Historically, if the employer obtains the rebate dollars in aggregate, it is considered a cost offset in aggregate. Anything that is a cost offset in aggregate, like copays, allows the employer to set aside the appropriate dollars, after deductions for copays and rebates, that they need to fund the employee prescription drug program. The reality is that employers choose to keep the premiums reasonable and affordable – and they use rebate dollars to offset the cost of the program. That’s the decision the employer needs to understand and make.

Continue part 2 of  Follow the Money series on PBM rebates to learn about point-of-sale drug rebates.

Find out more about pharmacy benefit contract best practices in our free e-book, Top 5 Pharmacy Benefits Contract Best Practices.

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