What are pharmaceutical rebates, and why do they matter? The answer to the first piece of the puzzle is reasonably simple. Ben Schuster, Capital Rx’s Director of Rebate Administration, says, “Rebates are retrospective payments provided by a drug manufacturer to help reduce the cost of specific drugs.” The second piece is more complicated and important for plan sponsors to understand. Rebates may be a form of revenue for many traditional pharmacy benefit managers (PBMs), and not all the dollars pass-through all the time. We’ll cover that in more detail below.
First, there are some core concepts to review, and then there are a couple of recommendations that Ben stressed the importance of during a recent conversation about rebates. The following Q&A of my discussion with Ben highlights the key points and is lightly edited for length and clarity.
How do rebates flow through the pharmaceutical supply chain?
I created a chart illustrating the flow of drugs, rebates, and payments in the pharmaceutical supply chain. The supply chain is complicated because there are so many participants. You start with the drug manufacturer, there’s the wholesale distributor, and then there’s the pharmacy, the payer (employer or municipality, for example)/health plan, and the PBM. But there are also rebate aggregators, group purchasing organizations (GPOs), and of course, plan members! It’s interesting when you think about what must happen for a patient to get their medication and for the plan sponsor to receive the associated rebate.
Why do drug manufacturers offer rebates?
Good question. It depends on whom you ask. If we go back in time, rebates started as a way for drug manufacturers to maintain or improve market share for their products. The goal was for the manufacturer’s drug(s) to have a preferred status on a formulary to drive utilization of their products or even to keep competitors off the formulary.
Are rebates offered on all classes of drugs?
We generally don’t see rebates on generics. It’s mostly brand and specialty drug manufacturers that offer rebates on their drugs, but not all PBMs collect rebates on all brand and specialty drugs.
How does paying drug rebates get more complicated?
Historically, most PBMs contracted directly with pharmaceutical manufacturers for rebate arrangements. Over time, the larger PBMs started aggregating the drug volume of small and mid-sized PBMs to consolidate market share and negotiate more favorable terms with pharmaceutical manufacturers. As a result, today, most PBMs now contract directly with a Rebate Aggregator or a GPO to secure rebates on behalf of their plan sponsor clients.
It’s an oversimplification, but the rebate dollars that a plan sponsor receives after a plan member’s prescription is filled may be based on a rebate guarantee, which is an average of the rebates across the channels defined in the contract, and that’s based on the utilization of the drugs that plan members fill. And while some PBMs pay plan sponsors rebates based on a guarantee, others offer their clients a pass-through arrangement where rebates are paid based on the amount of rebates received from manufacturers on a drug-by-drug basis. And then there’s a guaranteed minimum payment with 100% of rebates collected offering that PBMs may also provide.
So the contract definitions are important?
Yes. As Josh Golden, our SVP of Strategy, described in Will Biosimilar Rebates Pass-Through?, the contract language matters. If your contact doesn’t have clear definitions, you may not receive all the rebate dollars associated with the drugs that plan members are taking.
A good example is manufacturer administrative fees, or MAFs, which are other fees paid for services performed on the manufacturer’s behalf. Does your PBM include MAFs in the definition of rebate? If not, your PBM may pass through the rebate associated with the drug use but not the additional fees they collect on that plan sponsor’s utilization – it's been re-bucketed so as not to be referred to as a “rebate.”
What can plan sponsors do? Or what should they watch out for with rebates and MAFs?
One thing plan sponsors can request is a pass-through arrangement with minimum guarantees. Rebates are often offered on a per-brand basis, and a lot of wordplay is involved there. As I mentioned earlier, the definitions matter.
To simplify the math, a plan sponsor can request that their PBM provide per-Rx rebates across all prescriptions. A “per AllRx” rebate guarantee reduces the games that can be played (e.g., brand/generic definitions or specialty at retail vs. specialty pharmacy). However, a PBM may still be able to change the denominator (number of claims) based on what’s considered a prescription. Ideally, plan sponsors can avoid being surprised by what is “rebatable” or what is excluded using a per AllRx guarantee.
MAFs are usually paid as a percentage of the wholesale average cost (WAC), and if the price of a particular brand drug increases, the MAF increases, and total rebates also increase. If a PBM retains a portion of rebates in an environment of rising drug prices, plan sponsors should ask, “What’s the motive for this clinical product to be on the formulary? What are the product costs vs. net costs?” I think people in the industry have gotten used to rebates, which can be large dollar amounts, coming back to them. But that may not result in the best financial outcome.
In this table, you can see how the same product with different quantities can have a different net cost (after rebates and MAFs are backed out). If a PBM is keeping a portion of the difference - for example, the MAF - it can meaningfully impact how much money the plan receives in the future.
How do we handle rebates here at Capital Rx?
We pass 100% of all pharmaceutical manufacturer revenue through to our clients. I think everyone knows that most employers in the U.S. – over 90% of larger employers and ~75% of smaller employers – receive rebates.1 As an administrator, we’re not playing any games with the rebate dollars or making money on fulfillment, which means we are in alignment with our customers and transparent in our discussions around clinical programs, including the impact that rebates and total costs have on overall plan spending, and that creates peace of mind for our clients that we are acting in their best interests – not ours.
1 Pharmaceutical Strategies Group. 2023 Trends in Drug Benefit Design Report. Dallas, TX: PSG. Available from www.psgconsults.com.