Drug rebates are big business. According to life sciences analytics firm IQVIA, pharmaceutical manufacturers offered $153 billion in rebates and discounts in 2017. That’s double the amount in five years. Not surprisingly, many plan sponsors’ budgets have become dependent on these rebates, and it’s essential that they understand the financial impact they have.
Pharmaceutical manufacturers set a list price for their products, but rebates and discounts lower the true net price actually paid for the drug. Sounds simple enough. Truth is, there are numerous facets to the financial relationship between manufacturers and PBMs, and all of those components affect total drug cost. How those rebate savings are doled out along the drug supply chain is highly variable.
Some of these components may include:
From generics to specialty drugs: The changing drug management market
In the early 2000s, generic opportunities were effective in offsetting the rising trend. At the time, there was little variance between the gross cost trend and the net cost trend. Generic alternatives to blockbuster drugs such as Lipitor emerged on the market, forcing manufacturers to ramp up rebates. (One 2012 estimate suggested that at one point Pfizer gave up 35% of gross sales in rebates to keep Lipitor on insurance plan formularies.)
With generic opportunities drying up, we saw a period of hyperinflation on brand drugs begin in 2013. At this time, the gap between net price growth and list price growth for branded drugs widened significantly. Additionally, the utilization of higher-cost specialty drugs emerged, further increasing the reliance on rebates to lower overall drug trend.
Rebates have become highly controversial and a focus of the current administration; many feel that the rebate should go directly to the consumer. However, with the complicated delivery system in place today, it may not be that black and white. As we’ve seen, there are complex dependencies in place, where multiple parties might receive a rebate or a portion of the rebate.
The PBM serves as the intermediary between the drug manufacturer and plan sponsor, receiving the rebates and creating and managing the rebate contracts between themselves and the drug manufacturer. They also enter into a contractual agreement with the payer or employer group about how the rebate will be shared. Infinite sharing possibilities exist—a percentage, a set amount per script, etc. What’s more, the contracts vary by manufacturer, even by the drug. Any changes in this system will affect the financial relationship between the plan sponsor and the PBM.
Exercising your rights in the rebate economy
Plan sponsors are concerned. PBMs have contractual protections in place should rebates go away, but plan sponsors often rely on these rebates to meet their budgets and keep premiums low. Fortunately, there are steps you can take to gain some control in the tenuous rebate economy:
PSG helps its clients navigate the complexities of the rebate economy. We provide expert review and analysis of PBM contracts to identify the risk of changes with a rebate, determine how these changes affect your budget, and optimize your pharmacy benefit. Ready to learn more? Download our company overview today!