Are Drug Rebates Driving Up Your Rx 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 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.

Drug manufacturers and PBMs often tout prescription drug rebates as a significant way to lower pharmacy benefits costs – and they can, in fact, help reduce up to 25 – 30% of overall pharmacy plan spend. But just because rebates can reduce a big chunk of your overall pharmacy spend, doesn’t mean they always will.

Without understanding the complexities around rebates and how they factor in to the pharmaceutical supply chain, you may end up overpaying for prescription drugs.

Understanding rebate complexities

There are several different types of drug rebates, including, formulary, market share, and inflationary rebates. Without clear definitions and differentiators between the different rebate categories, it can be difficult to determine how much of your money is being spent and how money is flowing between manufacturers and PBMs. Employer contracts can be confusing and lack transparency, so while you may expect rebates to help lower overall costs, the opposite can 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, member rebates have recently caused drug prices to 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 reaching 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 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 coinsurance 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).

Multiple legislative efforts have been put forth to eliminate or cap drug rebates and improve PBM transparency. However, eliminating rebates would impact supply chain profitability, and efforts have thus been slow to materialize. The industry still has a long way to go to protect consumers, and it’s imperative to ensure you’re getting the best rebate value possible and help your members pay less out of pocket.

How can I get a good rebate value?

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

During the RFP process, it’s important that you understand the landscape, how a rebate is defined, and whether all inclusions are clearly explained within a contract. Most importantly, you should insist that your pharmacy plan is competitively bid by an expert who understands the complexities of the pharmacy benefits market. This will ensure that you have 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 you achieve sustainable savings.

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