Home News How Drug Rebates Make Consumers Pay more for Drugs

How Drug Rebates Make Consumers Pay more for Drugs


Most of the public is aware drug prices continue to rise each year. Fortune recently reported drug makers raised prices for 2019 by 6.3%. Drug prices have dramatically increased over the past few decades. The Peterson Center on Healthcare and the Kaiser Family Foundation  formed the Peterson-Kaiser Health System Tracker to monitor how well the U.S. healthcare system is performing in terms of quality and cost.  TrialSite News researchers refer to their work often. They provide clear, up-to-date information on trends, drivers and issues impacting the performance of the U.S. health system. The output illustrates how the U.S. health system fares compared to other countries.  The Peterson-Kaiser Health System Tracker includes drug price analysis over time.  They provide a number of comprehensive indicators as to just how high drug prices have become compared to inflation and other vital costs. From 1960 to 2017, retail prescription drug spending on a per capita, inflation-adjusted basis has increased in the U.S. from $90 in 1960 to $1,025 in 2017—see the graph under “Spending on Prescription Drugs has Risen Rapidly over the Past Decades.”  This represents a 1,039% increase in per capital, inflation-adjusted prescription drug prices from 1960 to 2017, striking given the levels of competition from generic producers; growth of pharmacy benefit manager (PBM) market; growing strength of payers (health insurers), etc.

Drug pricing in the United State is complex, dynamic and influenced by plethora of players and intermediaries.  TrialSite News recently reviewed an informative article on drug rebates and their influence on drug pricing in the United States.  Milliman is a leading international independent actuarial and consulting firm. Founded in 1947, the firm operates 50 offices worldwide with over 3,000 employees. Their clients include a spectrum of business, financial, government, union, education and nonprofit organizations.  The firm also provides data analysis, predictive analytics, and big data services.  Last year, they authored “A Primer on Prescription Drug Rebates: Insights into Why Rebates are a Target for Reducing Prices” authored by Gabriella Dieguez, Maggie Alston and Samantha Tomicki. TrialSite News reviewed the Milliman article and include an introductory summary of the complex, dynamic multi-stakeholder dynamic of rebate-based drug pricing in the United States. Provided is a link to the article in which a thorough review is recommended.  The Milliman authors do a great job summarizing and simplifying and incredibly complex drug pricing stakeholder ecosystem.

Rebates are often a deciding factor for payors (health insurers) to cover competitive brand name drugs.  While patients often interact only with their physician and pharmacy to obtain their prescription drug, the actual prescription drug supply chain is quite complex.  Several key players drive this system—and perhaps up the price as well!

Drug prescription supply chain players determine how much a payer will pay for prescription drugs and patient out of pocket costs.  A myriad of elements is incorporated into pricing algorithms and pharmaceutical manufacturer rebates represent a critical one.

The Trump Administration has targeted rebates as a critical factor in drug price inflation.  TrialSite News reviewed the May 2018 “American Patients First: The Trump Administration Blueprint to Lower Drug Prices and Reduce Out-of-Pocket Costs” from the U.S. Department of Health Human Services (HHS) targets rebates as part of its mandate to lower prescription drug prices.  TrialSite News includes a basic overview of rebates and their influence in the drug pricing ecosystem.

Who are the players?

Pharma:  They develop and distribute prescription drugs.   The top pharma wields incredible clout in the ecosystem.

Payers:  These are the health insurance companies that provide coverage products to patients. They range from self -insured companies, to commercial insurance products from companies such as United Healthcare and Blue Cross to public access products such as Medicare and Medicaid.

Pharmacy: Large retailers (“drug stores”) that dispense drug products.  Companies include CVS, Walgreens and Rite Aid.

Pharmacy Benefit Manager PBM):  This is the intermediary of “middle man” between the payer (insurance company) and the pharmacy.  They develop and maintain formularies for health payers in addition they negotiate rebates and discounts.  A formulary is a list of medicines the health payer has agreed to cover.  Example companies that serve as Pharmacy Benefit Management ( PBM)  include Express Scripts, CareMark (part of CVS) and Optum.

Who are the Wholesalers? These players distribute pharmaceutical drugs from the manufacturer to the pharmacy.  Examples include McKesson, Cardinal Health and CareMark (part of CVS).

What is a Rebate?  In a rebate, part of the purchase price would be returned from the seller to the buyer. Providing rebates is a common practice.  Pharma typically pays for the rebate to the PBM who then shares a piece of the savings pie with the Payer.

When are Rebates Used?  They are often used for name brand, costly prescription drugs in competitive therapeutic classes where there are interchangeable products. They are used to incentivize PBMs and Payers to include the Pharma’s products on their formularies, securing preferred tier placement.

What is a Formulary?  A list of prescription drugs the Payer will pay for or “cover;” the formulary allocates specific drug products to one of several tiers or rankings. Commercial formularies typically include 2 to 4 tiers.  Each tier represents a different member cost sharing.  The formularies are designed by the PBM.

Who Designs the Formulary? Once the PBM develops the formulary, they negotiate contracted prescription drug prices and rebates with Pharma on behalf of their Payer clients.

What are the Formulary Tiers?  They are designed to promote low-cost prescription drugs.  For example a low-cost generic drug will include a lower co-pay than an alternative high-cost branded drug with a rebate; a high-cost branded drug without a rebate will include an even larger co-pay for the patient.

Are Rebate Contract Terms Transparent?  No.  They are often trade secret and will differ among drug brand and type; therapeutic classes and among Pharma’s and Payers.  The lack of transparency in the rebate process and in contracting make drug cost comparisons of competing drug brands on price basis alone nearly impossible to assess.  Rebates represent the “black box” in prescription drug pricing. The patient and the Payer do not know how much Pharma is paying in rebates to the PBM; consumers don’t know how much the PBMs keep prior to passing on whatever money is left to the Payer. Some estimates on average rebates are around 20% of drug price, in some cases there are no rebates and in other cases rebates could be over 60%.

What is Rebate Economics?  Rebates combined with contract prices form the core calculus whether to include a particular drug on the Payer’s formulary and if so in which tier.  Rebates are a major influencer in the drug price food chain—impacting all players.  What follows is a brief summary of each participating player in the drug pricing ecosystem and how rebate economics impacts them.

Follow this link to read the articles from Allston, Dieguez and Tomicki carefully. They provide a generic drug price example and how the various participants in the drug pricing ecosystem take a slice of the pie. They demonstrate how the patient pays disproportionately more.  They introduce scenarios such as if there is a change to rebates; how Medicare Part D is different and an introduction to what the world could look like without rebates.

PBMs influence drug pricing by designing discounts on drugs for Payers and Patients through the negotiation and administration of Pharma purchase and rebate agreements.  PBMs can lower drug spending by negotiating price discounts from Pharmacies and Wholesalers and by negotiating directly with Pharma for purchase discounts. Competition among drug products can influence PBM and rebate economics.  The competition among drug products varies based on a number of alternative therapies available within each therapeutic class.  In classes where a number of products may be considered therapeutically equivalent, PBMs can negotiate with Pharma for higher rebates which can potentially benefit Patients and Payers.  However due to secrecy and “black box” effect other benefits may be allocated to the PBM directly as well as to Payer and potentially Pharma. Ultimately as the Payer trade association recently articulated in an editorial opinion, Pharma sets drug prices.  The lack of competition in the prescription drug market, particularly for new life saving or extending therapies, are the basis for Pharma leverage.  By developing “patent thickets” or “fortresses” Pharma can block generic alternatives.  This same group refers to an analysis  that PBMs may save Payers and Patients 40-50 % of their annual prescription drug and related medical costs compared to what they would pay without PBMs. From this point of view, PBMs represent a vital player in the drug prescription price ecosystem—rebates or not.

Drug pricing is a complex matter. TrialSite News staff will continue to include articles, news and relevant information in our quest for transparency.  Although our primary focus is clinical trials and research sites, the ultimate output are drug products. Drug pricing can literally be a matter of life and death.


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