The Rebate Game: How Consumers Lose and PBMs Win

How manufacturer-PBM rebates lead to limited options and inflated prices for consumers

Consumers overpay for both brand-name medications and generics, but the reason for the higher-than-necessary spending is different for each market. While the generic market isn’t functioning as it was intended in order to offer cheaper medications, the brand market faces a unique obstacle to affordability: the PBM rebate system.

PBMs’ prized tool: the rebate

Pharmacy benefit managers (PBMs) originally emerged to process pharmacy claims and negotiate discounts on medications on behalf of health insurance companies. One of the tools they began using to negotiate was the rebate. A PBM would go to two drug manufacturers that produced similar versions of a medication, and choose the manufacturer that offered the PBM the bigger rebate. That manufacturer’s drug would then be placed on a plan’s formulary (drug list).

While rebates sound like a good thing, the system has become warped. PBMs pass some of the rebate onto their clients, like health insurance companies, but then capture a percentage of the rebate and keep it for themselves. That leads to PBMs being motivated to include the drug that brings them the higher rebate (which often comes with a higher list price, too).

For example, let’s say you have two similar drugs and one manufacturer sets the list price at $1,000 and the other sets the list price at $500. Each provides a rebate so that the net price of the medication is $400. That means the first manufacturer will provide a $600 rebate and the PBM will make $60 (the PBM keeps 10% of the rebate in this example), whereas the second manufacturer will provide a rebate of $100 and the PBM will only make $10. Which drug do you think the PBM will put on its formulary?

This leads to a big problem: the drugs that a given patient has access to are not determined by which are the most clinically appropriate, but by which manufacturers gave the PBM the largest rebate. Every patient in that health plan can now only access the higher-rebated version of a drug, regardless of whether or not it’s clinically appropriate.

Leveraging the rebate, hurting the patient

With only two large PBMs doing almost all of the negotiating in the current landscape, if a manufacturer does not give the rebate the PBM demands, it can lose access to almost 50% of the patient population. In order to offer the larger rebate, manufacturers must increase their list prices, ultimately increasing the net costs for patients when they pick up their meds at the pharmacy counter.

We’re hearing about it now more than ever, as more and more of the population moves into high deductible health plans and are newly exposed to these outrageously high prices. We saw this first with the public outcry over price hikes to the EpiPen.

While the system is not only leading to higher prices for consumers and fatter profits for PBMs, it’s also antiquated from a practice-of-medicine standpoint. We now know that not all patients are the same and respond to different drugs differently. The drug a patient is taking should not be determined by which drug is in the best financial interest of a PBM, but rather by what is most clinically appropriate for the patient.

What is far more important to saving the overall healthcare system money is ensuring that the right patient gets on the right medication, leading to better patient outcomes — not saving 10% of a rebate.