May 15, 2020

The following is intended to provide a basic overview of rebates as well as considerations for employers who are looking to understand the steps and implications involved with passing them forward to members at the point of sale (POS).

The Rebate: A Quick Breakdown

A prescription drug rebate is a “price concession paid by a pharmaceutical manufacturer to the health plan sponsor or the PBM working on the plan’s behalf.” ¹  Typically, rebates are paid to the PBM, who then shares a portion with the plan sponsor. Rebates paid to a PBM or health plan are known to influence formulary tier placement for the pharmaceutical manufacturer’s product, which, in turn, may dictate copay and/or coinsurance amounts for patients. This practice leads to an escalation in gross drug prices, where manufacturers set high list prices to withstand offering higher rebates and maintain a profit.² Additionally, each stakeholder within the supply chain (i.e., manufacturer, wholesaler, PBM, health plan and pharmacy) is often paid based on a percentage of list price, meaning that the entire supply chain profits from, and thus contributes to, this price escalation. The rebate practice may also limit patients’ access to cheaper medications if the post-rebate net price of the drug falls below the list price of more affordable options (i.e., lower cost brands or even generics), keeping them off formulary altogether – yet another price escalation pressure point.³ The latter point also has concerning long-term pricing implications, given reduced market incentives for the continued development of generic products. 

Negotiated rebates are, on average, approximately 30% of the list price (or gross price); however, this often differs by drug type.⁴ Rebates are highest and most commonly associated with brand drugs in competitive therapeutic classes, where alternative, more affordable treatments are available.³ A Medicare Part D study revealed that rebates averaged 39% of gross drug price in cases of significant brand competition and a much lower 14% among protected class drugs.⁴ They are rarely associated with generic drugs.³ Reports indicate that, in general, Medicare Part D sees higher average rebates (31%) than private plans (16%) and that the highest rebates are seen on the Medicaid side (61%), where state governments can tap into “best price” requirements. These numbers and claims, however, have not gone unchallenged. Some sources, for instance, have found lower brand drug rebates on the Medicare side than in the private sector. Additional sources reveal that the average rebate on a branded drug can also vary based on whether the drug is administered under the medical benefit or through outpatient prescription drug coverage.⁴ For employers, the rebate’s impact on overall drug spend also varies depending on their drug mix and how their PBM approaches drug price negotiations (i.e., depending on whether the PBM prioritizes rebates over discounts).

A Shift in Status Quo?

Historically positioned as a mechanism to keep the overall cost of drugs low, rebates have become more widely viewed as a contributor to high and escalating drug prices. As noted at the outset, first, the rebate creates an incentive for manufacturers to set high upfront prices. Second, the perverse incentives within the supply chain contracting model continuously increase drug expenditures because stakeholders are often paid as a percentage of the gross price. Compounding this issue, the supply chain model has not kept pace with plan design changes, also resulting in increased patient out-of-pocket (OOP) expenses.¹

This increased focus on the inflationary effects of prescription drug rebates throughout the entire supply chain, both in terms of price setting and price inflation, has led to mounting pressure for change.

• Plan sponsors: In the Business Group’s 2019 Large Employers’ Health Care Strategy and Plan Design Survey, the majority (75%) of employers said they do not believe drug manufacturer rebates are an effective tool for helping to drive down pharmaceutical costs.
• Policymakers: The Trump Administration targeted rebates as part of its 2018 “American Patients First Blueprint to Lower Drug Prices and Reduce Out-of-Pocket Costs” with a proposal to exclude rebates from safe harbor protections and require that they be passed on to patients at the pharmacy counter. Although the proposal was withdrawn after the Congressional Budget Office estimated that it would increase federal (Medicare and Medicaid) spending by more than $177 billion dollars over the next decade, political pundits suspect that there will be similar future regulatory and legislative proposals.⁵

• Manufacturers. On the other end of the pharmaceutical supply chain, drug manufacturers maintain that PBMs and payers are not passing rebates along to patients and argue that OOP costs and retention of rebates by middlemen – not drug prices – are responsible for fueling the sticker shock that is taking place at pharmacy counters across the country.⁶

Point-of-Sale Debate

Historically, savings realized from manufacturer rebates have been used by plan sponsors to reduce total plan costs and lower employee premiums for all beneficiaries. In recent years, point-of-sale (POS) rebates were introduced by PBMs as a potential solution to member cost escalation. The POS model offers a way to share plan-negotiated rebates with members, treating rebates the same as discounts and recognizing the need to address spread pricing within the high deductible health plan (HDHP) construct.

However, as evidenced by our most recent 2020 Large Employer’s Health Care Strategy and Plan Design Survey, the majority of surveyed employers believes that the POS model fails to address market incentives that increase drug prices. Additionally, many plan sponsors have highlighted the potential for POS rebates to ultimately raise costs to members because total plan costs, and therefore premiums, will inevitably increase. 

• According to employers that already have a program in place, a variety of cost-sharing options have been adopted to address this challenge:
  • 29% of employers absorbed the increased costs;
  • 17% shared costs between the employer and the employee through premium increases; and
  • 10% shifted the costs through increased employee contributions, copays, coinsurance and deductibles.

Considerations

Recommendations

Employers should maintain an expectation that their plan partners will work toward more comprehensive solutions for managing drug prices, including assessing specialty pharmacy management options, site-of-care management and improved management of drugs administered through both the medical and pharmacy benefits. Employers should also continue to request information on enhanced approaches to transparency and alternative, more efficient, drug formulary, payment and delivery models. Specifically, employers should:

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A World Beyond Rebates?

While an effective mechanism for lowering patient OOP costs, POS rebates do little to solve the central issues – high and escalating drug prices and an outdated pharmaceutical supply chain contracting model that compounds high prices by incentivizing highly rebated drugs. An alternative model based on net price of medications with no rebates would be welcomed by many employers – two-thirds, according to our 2020 survey (67%). In a June 2018 Senate committee hearing, U.S. Secretary of Health and Human Services Alex Azar proclaimed that “right now, everybody in the system makes their money off a percentage of list price” and that “we may need to move toward a system without rebates.”

What would a world without rebates look like? The reality seems to be that plan costs in the short term would increase. Even in the long term, we’d find many of our drug pricing issues left unsolved. For instance, some of the most expensive drugs on the market are the ones that have little to no competition and were never rebated to begin with.²

In the meantime, while we work to transform the current model, the Administration and Congress are exploring additional drug pricing options, including, but not limited to, policies to bring more generic drugs to market, importing prescription drugs from other countries, establishing an international pricing index and allowing the federal government to negotiate drug prices under Medicare Part D.

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