Rethinking drug rebates
By Martin Fornataro, Pharm.D.
Drug rebates continue to be a hotly debated topic among plan sponsors and within the regulatory and consulting ecosystem, with significant questions remaining: what constitutes a drug rebate, who directly benefits from drug rebates, and do drug rebates result in lower net plan costs?
What is a drug rebate?
Traditionally, a drug rebate is defined as a payment or consideration from the pharmaceutical manufacturer to the Pharmacy Benefit Manager (PBM) for placement of their brand-name drug on a PBM formulary (list of covered drugs). Rebate payments are typically tied to the number of drug units dispensed, if the brand-name drug is placed in a preferred cost-sharing tier, and whether the drug is subject to plan design limitations such as prior authorization or benefit exclusions.
Where the problems lie
Drug rebates, when set responsibly, can be used to lower costs for plan sponsors and members. However, the rebate system is fraught with issues that can obscure the true cost of drugs and limit savings for plan sponsors and members alike:
- Pricing Arrangement. Not all brand-name drugs receive a rebate. There are two distinct rebate sharing models. One purportedly passes back 100% of the earned rebate revenue, and the other passes back a fixed rebate amount. Embedded within both models are exclusionary language that further dilutes total rebate revenue.
- Transparency. Drug rebates can incentivize drug manufacturers to inflate list prices and mask the actual cost of their drugs. This can lead to higher out-of-pocket costs for members with coinsurance or high-deductible health plans. In addition, since PBMs don’t typically disclose what percentage of the rebates they keep at the individual brand-name drug level, it can be difficult for plan sponsors to evaluate the savings they are receiving.
- Formulary Placement. When PBMs give higher-cost drugs with higher rebates preferred tier placement on the formulary, they end up prioritizing high-cost, rebate-eligible drugs over other drugs that are more cost-effective or clinically effective.
- Gaming. Rather than relying on drug rebates, many PBMs have shifted their revenue model to place a greater emphasis on undisclosed pharmaceutical manufacturer and data fees. These fees are excluded from the rebate payments sent to plan sponsors. Additionally, PBMs that work with Group Purchasing Organizations who aggregate rebate payments across multiple plan sponsors may further mask rebate revenue. In both scenarios, plan sponsors may see drug rebate revenue decline while net plan and member costs increase.
Rebates still matter—but transparency is key
Despite the flaws, drug rebates play a significant role in PBM financial analyses and can be a useful tool helping reduce plan sponsor prescription drug costs—but how much help depends on the PBM’s formulary management approach and the contract terms. PBMs that operate under opaque pricing models may keep a larger share of rebate revenue or simply reclassify rebates in ways that reduce plan sponsor savings and increase member out of pocket costs.
What plan sponsors should do
To effectively navigate the complex landscape of drug pricing and make informed decisions, plan sponsors need a clear understanding of how rebates are paid, who benefits, and how PBMs negotiate and return those rebates. Key areas to focus on include:
- Which drugs earn rebates and why
- The sources and types of revenue included in rebates
- When and how rebates are paid out
- Whether the PBM is acting in the plan sponsor’s best interest
Greater transparency in these areas allows plan sponsor’s to better assess whether their PBM is delivering true value—or simply maximizing its own profit.
Rael & Letson’s PBM Consulting team can shed light on your plan’s pharmaceutical costs and make sure you are receiving the greatest value from your PBM. Contact us.