Benefits Strategy

Rethinking Prescription Drug Rebates: Moving Toward Transparent Pricing

A comprehensive look into prescription drug rebates, their unintended consequences and methods for evaluating their impact on price transparency and the strategic decisions of employers.

February 17, 2025

Pharmacy is a growing concern for employers given that prescription drugs purchased through health plans and pharmacy benefit managers (PBMs) now comprise 27% of employers’ overall health care spend.¹ On the surface, large rebate checks delivered to employers on a regular basis appear to bring relief to cost pressures and have become part of the health care cost budgeting cycle. However, employers are not satisfied with this status quo; 76% of employers report feeling concerned about the role rebates play in drug purchasing and formulary decisions.¹ Despite the level of support among employers for the elimination of rebates, progress toward this market shift has been slowed by unclear contractual provisions, lack of transparent reporting and the overall complexity of gross-to-net drug pricing.

As the level and influence of rebates continue to grow due to increased competition in the specialty drug category, how can employers make more data-driven strategic decisions about their drug purchasing while keeping the clinical needs of patients front and center? What steps can employers take in making the difficult and complex shift toward a world where rebates have a lesser influence on contractual provisions and transparency of pricing?

Key Takeaways

Rebates as a pricing feature cause unintended consequences when they are not transparently reported, comprise an outsized portion of employers’ budgets and perpetuate increases in spread between gross and net price. Transparent pricing is preferable for drug acquisition.
As long as rebates remain a market practice, employers must maintain the ability to both assess and control the level of rebates within their broader drug purchasing strategy. This right to choose requires transparent disclosure from their PBM partners on how rebates impact pricing, utilization strategies and trend guarantees under various models. Some employers are already exploring and implementing alternatives to rebate-driven models, and this trend is anticipated to increase in coming years.
Consulting partners need to continue to invest in evolving their assessment of the cost and value of a growing variety of models offered by existing and new PBMs. These new models aim to encompass all aspects of the contractual relationship, including total cost of care, while balancing needs for cost predictability and transparency. Consultants must also fully disclose to employers any business relationships in place with specific PBMs.
Group Purchasing Organizations (GPOs) and PBMs must work to disentangle manufacturer price negotiations (including rebate incentives) from coverage and formulary discussions that should instead be driven by clinical recommendations and lowest total cost of care. In order to make informed strategic decisions, employers require greater disclosure on how formulary choices made by PBMs are driven by rebates and their GPO relationships.
Manufacturers, GPOs, PBMs, health plans, provider systems and employers must take responsibility to improve their partnerships and collaborate more transparently to create more efficient drug purchasing and utilization management structures and fix the misalignment of financial incentives. Additionally, targeted policy and/or legislative change from the federal government may help support private sector action and empower innovation and fair dealing.

Background: How Rebates Became Central to PBM Practices, and Hence, Employer Budgets

Drug pricing is a complex process, one marked by “a web of rebates and discounts” negotiated by multiple parties.² Discounts operate as a negotiated percentage off a drug’s list price, which are then passed on directly to the insurer/PBM and member in the form of a less expensive product. Rebates are also calculated as a percentage of list price (an average of 20%, but some may be up to 60%), but instead involve the transfer of the calculated funds from the manufacturer to the GPO or rebate aggregator, who may retain some portion of the manufacturer-provided rebate before passing funds to a PBM. The PBM then passes the received rebate to the employer (in part or in whole, depending on the contract terms).³ It’s worth noting that the manufacturer may also pass funds to GPOs or PBMs under a variety of labels, such as market share incentives, which in turn may not be captured by employers who implement pass-through contracts that cover only rebates.

Both discounts and rebates are utilized by drug manufacturers in negotiations with intermediaries as a tool to receive better formulary placement and drive sales volume of their product, especially in the most competitive and profitable drug classes. While the intent of the rebate should be to improve drug value for customers in the form of lower costs, their effect on drug pricing is the inverse. The practice of rebating contributes to the fact that drug prices in the United States are the highest in the world, over 2.5 times the cost in comparable countries.⁴ Rebating also contributes to the opaqueness of pharmacy contracting and higher costs for patients. Finally, rebates contribute to the millions of dollars “held” within the system for months, as employers often receive their portion of rebates 180 days from the day they have paid for medication, creating cash flow benefits for intermediaries. Figure 1 explains the complex relationships and financial transactions among partners in the prescription drug system.

Figure 1: The U.S. Pharmacy Distribution and Reimbursement System for Patient-Administered, Outpatient Prescription Drugs

Source: From “The 2024 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers,” by A. J. Fein, 2024, Drug Channels Institute (https://drugchannelsinstitute.com/files/2024-PharmacyPBM-DCI-Overview.pdf).

Rebates are typically associated with brand-name drugs that compete against competitor products in specific disease classes. Between the years 2019 and 2021, commercial payers experienced an increase of 90% for brand drugs and 56% for specialty drugs, which was accompanied by increases of 125% and 84% in rebates paid, respectively.⁵ Rebates clearly emerged as a key mechanism for manufacturers to compete for favorable placement on formularies despite high list prices. This cycle benefits the GPOs and PBMs, if they retain any rebates, and creates a dependency on rebates for the employers, as they often see financial modeling suggesting that abandoning their rebates would increase their pharmacy cost.

As a result of the growing significance of negotiated rebates in the competitive pricing environment and against the backdrop of calls for greater transparency of rebates and other manufacturer revenue retained by PBMs, new GPOs have emerged in partnership with traditional PBMs.⁶ These entities serve to negotiate and aggregate rebates with the manufacturers on behalf of PBMs. Their benefit as a third-party negotiator is not entirely clear, especially for those already using the services of the very large PBMs, yet GPOs affiliated with major PBMs had a tremendous impact on fees collected by PBMs (increasing from an estimated $3.8 billion in 2018 to $7.6 billion in 2022 after their creation).⁷ Some believe the creation of GPOs has further obscured an increasingly opaque landscape and has made employer-specific rebate data even less accessible at a time when the majority of employers already have concerns over transparency in pharmacy contracting.¹

The growing appetite for moving away from rebate-driven models is in part fueled by the creation of transparent models of pharmacy benefit management, which market their pass-through pricing, simpler contracts and transparent fees.⁸ While many alternative vendors are beginning to offer transparent models, CVS’s Caremark and Evernorth's Express Scripts have also announced their own transparent formularies.⁹ The advocates for these models argue that their administrative fee-based model removes misalignment of incentives that makes preferred formulary placement contingent on the size of the rebate rather than net price and clinical efficacy. However, the financial benefit of these models has proven difficult to forecast and demonstrate against the still more prevailing rebate-driven contractual arrangements.

The Employer Perspective

Though rebates have long been a part of PBM contracts, in recent years, the suite of drugs with significant monetary rebates, such as endocrine metabolic agents (including antidiabetic drugs), blood modifiers and respiratory agents (including anti-asthma drugs) has grown quickly.^2,10 Notably, rebate levels are also growing for GLP-1s, and rebate considerations and limitations may play an important role in decisions about coverage and complementary behavioral modification programs.

As a result of this evolving landscape, rebates now comprise a larger portion of an employer's projected health spend offset. This development has sparked a couple of key questions from benefit leaders and their finance teams:

Can we expect a reasonable level of predictability of trend from year to year with the help of rebates?
Can we expect comprehensive reporting on what drugs and conditions drive our rebate level, and what does that reflect about the cost drivers for our employee population?

These questions may be at odds with one another. Traditional (less transparent) contracting models allow the PBM to build in trend guarantees, which require a level of back-end flexibility. However, employers have a right to understand all elements of their drug pricing and utilization data, including rebate sources, the need for which is particularly acute as employers work to pass on the cost savings of plan rebates to consumers, either via point-of-sale (POS) rebates or an overall offsetting of pharmacy plan costs.

While there has been progress in this space, there is still work to be done, especially as GPOs play a growing role in price negotiation. Any progress made in the realm of rebate reporting is in danger of being set back by the creation of another intermediary for rebate negotiation. Employers must continue to partner with their consulting partners and PBMs to obtain satisfactory reporting on the sources and size of rebates and other manufacturer revenue impacting their net cost so that their strategic decisions can be made based on a complete cost picture in each drug category.

Employers have long understood the need for contracting due diligence, market evaluations and prudent decision-making relative to plan partners, and as such they often put their PBM services out to bid in order to achieve/maintain competitive pricing and favorable contractual terms, as well as to leverage newer innovations and plan features. In fact, nearly a third of employers plan to take their pharmacy services out to bid for the upcoming plan year, citing rebates and transparency as important elements for scrutiny while evaluating partnerships.¹

Though the PBM evaluation process will become more complex and labor-intensive as a function of the changing landscape, it is imperative for the procurement process and market checks to capture various models’ impact on total cost of care and clinical outcomes. Operationally, finance teams may have growing concerns over the timing of rebate payments. While some employers have implemented POS rebates, the portion of rebates attributed to patients and passed to them at the time of transaction is a fraction of rebate dollars. In reality, employers must wait 180 days for rebates. The lag in payment for these increasingly large sums of money has significant impact on an employer’s cash flow while benefiting the intermediaries (GPOs and PBMs).

Some employers and their partners who continue to leverage rebate-related models have set up various alternative features (e.g., POS rebates; lowest net-cost formularies) that may provide a lower out-of-pocket cost for employees at the time of the prescription fill. However, these features may not address underlying transparency and overall affordability challenges, may not be appropriate for all plan designs or circumstances, may limit formulary coverage and may result in higher overall premium costs to the entire plan.

Figure 2. Challenges and Barriers to Moving to an Alternative to a Rebate-driven Model, 2024

Note: N=121 | Respondents could select multiple responses.
Note: Other responses included: already moved to POS rebate model; maturity and long-term track record of vendors in this space; member of purchasing coalition and require agreement of member organizations.
Q: What challenges/barriers exist for your organization moving to alternatives to a rebate-driven contracting model? (Select all the apply)
Source: From “2025 Employer Health Care Strategy Survey,” by Business Group on Health, 2024.

Employers cite the difficulty of calculating the financial impact of the conversion and the number of stakeholders who benefit from the traditional model as key barriers to moving away from rebate-driven models (Figure 2). For each of the above reasons, securing leadership buy-in for fundamental changes to the rebate approach is an increasingly complex task. Communicating the benefit of transparency in the long term will be an important skill for employers and their consultant partners as new models emerge.

Rebates also play a role in drugs purchased through the medical plan, though they are less prevalent in scope and dollar impact. Since the medical pharmacy space is more specialized, there is less opportunity for manufacturers to deploy rebates as a mechanism of competition. This will also continue to be the case for the upcoming influx of cell and gene therapies. However, unless 100% rebate pass-through is established during procurement, health plans typically absorb any rebates provided and redirect those dollars toward site-of-care programs for medically administered drugs to capture more savings. Employers can and should request information on the use and level of medical rebates from their health plan and/or third-party administrator (TPA).

Key Questions for Employers in Evaluating Their Rebate Strategy

Employers can take the following steps and consider these key questions as they evaluate their approach to rebates.

1 | Gather data on the current state of rebates within your plan: What conditions/drug classes drive the highest rebates? Are current cost-containment strategies on the medical side aligned with your pharmacy cost drivers after accounting for rebates?
2 | Review your PBM contract for rebate guarantees: Do you have transparency into manufacturer payments to your PBM and a clear definition of what portion is included in your rebate guarantee? Are you comfortable with the level of rebates you receive and how they support your financial goals? Are the guarantees being consistently met or exceeded? What are the trade-offs for these guarantees?
3 | Understand the financial impact at the plan level: What proportion of your gross drug spend is offset by rebates? How does your finance team account for rebates? Are rebate payments from your PBM made in a timely fashion? Do you receive enough information to share with your finance team for their use in reliable forecasting of cost and cash flows?
4 | Evaluate transparent models, lowest net cost formularies and POS rebates when out to bid for pharmacy services: Has your consultant’s RFP process evolved to account for more than the “bottom line” when selecting a pharmacy benefit manager? How will you value transparency and clinical appropriateness vs. cost?
5 | Start the conversation with your finance and leadership teams: How will you communicate the trade-offs that come with changing the rebate strategy within your organization? If you hope to move away from rebates, what budgeting mechanisms and financial plan assumptions need to be adjusted to remove any internal barriers?
6 | Seek full transparency from your PBM partners: Have they provided satisfactory reporting of manufacturer revenue, including the impact on revenue pass-through resulting from the growing influence of GPOs?

Policy Perspective: Intersection of Rebates and Government Policy Interventions

In recent years, the growing uncertainty, confusion and challenges in achieving robust, reliable and actionable transparency into prescription drug pricing has not gone unnoticed by federal agencies and the U.S. Congress. In fact, they view lack of transparency as an area applicable for regulatory and legislative reforms. In addition to regulatory requirements under the Final Transparency in Coverage (TiC) regulations issued in October 2020 and provisions of the Consolidated Appropriations Act of 2021 (CAA) enacted in December 2020, the agencies and Congress continue to consider new interventions focused on transparency and cost containment.^11,12

To some extent, the complexity of pharmaceutical pricing, including rebate structures and limited information and consistency on how to ascertain gross-to-net pricing has, itself, seemingly contributed to the delay and challenges in developing a feasible file specification for the TiC prescription Machine Readable Files (MRF), intended to display clear and usable cost information. It is expected that the prescription drug TiC MRF file specification will eventually be provided, and the reporting requirement will eventually be implemented, which will be a helpful next step.

However, federal-level discussions and efforts will not stop there. There are additional federal legislative proposals to mandate certain disclosures and transparency, as well as potentially rebate pass-through or other mandatory compensation, pricing and contractual arrangements for plans. In some cases, new proposals are in line with employers’ general desire to increase transparency to better understand and negotiate for pharmaceuticals on preferred terms. Certain proposed reforms, however, may have undesirable consequences, such as reducing employer flexibility and control or increasing the administrative burden without worthwhile benefit to employer plans.

Ultimately, any new federal requirements need to strike the right balance—avoiding overregulation and harm to employer plans but helping to ensure meaningful transparency and comparability. Implementing appropriate federal requirements will also empower employer plans in their effort to gain actionable insights into cost drivers and craft innovative plan structures that reduce participation in opaque rebate arrangements.

The Path Forward

As some employers seek to eliminate rebates and others look to reduce their impact on contracts and pricing, greater access to comprehensive data on rebate practices is a vital step in reaching a solution that realigns the best interests of manufacturers, PBMs, employers and consumers. Employers can approach this issue in several different ways. For example, some employers might consider incremental strategies such as POS rebates and lowest net-cost formularies, while others may make the move to fully transparent, financially viable pricing models. However, given the level of entrenchment of rebates in every facet of the supply chain, the process of rebate reduction and elimination and its downstream consequences need to be considered.

Each stakeholder in the supply chain plays a key role. PBMs will need to evaluate how to reverse the cash flow benefits created by the lag in rebate payments. Employers will need to restructure budgets to ensure programs that might have been “funded” by rebates are financed via other mechanisms, which may create transition challenges requiring a strong partnership with their internal finance team while the longer-term savings under transparent pricing models accumulate. On the manufacturer side, reducing the use of rebates may create challenges for market consistency and competition. Despite these challenges, manufacturers should strive to provide better upfront pricing that reflects a drug’s clinical effectiveness, and all stakeholders should commit to greater pricing and rebate transparency. Within the current system, any rebates that remain must be transparently bargained and dispersed based on true price while protecting member health, access and affordability.

The elimination of rebates as a market practice is vital in enabling employers to hold their pharmacy vendors accountable for transparency at all levels of the supply chain, take control of their clinical strategy and ensure affordability for both their plan and their members. However, given the complexity of the pharmacy space and its growing share of overall health care cost, no one-size-fits-all solution exists. Even with complete elimination of rebates, drug costs may continue to present patient and plan affordability challenges.