The debate over whether the rebate system that currently exists in the U.S. is beneficial for patients or payers or pharmacy benefit managers (PBMs) has been endless. Now, a new report from the Center for Medical Economics and Innovation at the Pacific Research Institute (PRI) argues for reforms that will pass drug rebates to the patient and that calculate patient out-of-pocket costs based on the ‘net’ price of the drug.

Health care reimbursement is an extremely complicated process that involves multiple parties in addition to the patient—pharmaceutical manufacturers, payers, PBMs, wholesalers, and pharmacies—and discrete contract arrangements among them (see infographic). While a rebate in health care is identical in concept to the consumer products industry—where the buyer gets a concession on the product’s purchase price from the manufacturer in the form of money back—it’s how this rebate is calculated that makes it complicated. In the consumer goods market, a rebate incentivizes the buyer to choose one product over another. With drug products, specifically high-cost prescription drugs, manufacturer rebates incentivize payers and PBMs to include a drug on their formulary, which is the list of drugs that are covered by the payer.    

View Infographic: Prescription Drug Distribution and Payment – How does it Work?


PBMs play a big role in contract negotiations with the drug manufacturers on behalf of the payers, and these contracts, which determine placement of drugs on specific tiers, are not made transparent. Tiers within formularies determine what a patient owes out of pocket for a prescription drug. Typically, the preferred drugs have lower copays, but this is an estimate since contract details are not shared. For instance, how much of the rebate amount is retained by the PBM and how much is passed along to the payer remains unknown These rebate savings should ideally translate into lower premium for patients; but do they?

The PRI report cites research conducted by IQVIA claiming that the list price of drugs saw a cumulative growth of 41.5% from 2014 to 2019, while the net price (minus the concessions) saw only a 8.9% increase during the same time. The authors claim that PBMs “are incentivized to encourage fast-growing list prices” because the growing rebates end up as revenue for the PBMs. Patients, on the other hand, pay their share of drug cost based on the list price, not the net price. That is how insurance benefit is designed. This can be a significant financial burden for patients, especially if they are on expensive prescription medications for chronic conditions.

A white paper collated by researchers at USC’s Schaffer Center for Health Policy & Economics supports these claims—the authors identified a positive relation between list prices and rebates and they conclude that rebates increase list prices of drugs and increase patient cost burden, which could be reduced by eliminating rebates.

The authors of the PRI report, one of whom is an employee of the drug manufacturer Pfizer, recommend that rebate reform that will tie patient cost-sharing to the net price, not the list price, is essential to address the issue. They also highlight the important role of patient adherence on clinical outcomes. Reducing the financial burden on patients would improve their medication adherence, result in better health, and lead to health care savings.

In July this year, President Trump signed an executive order to stop the rebate system in Medicare and to redirect the resulting savings to Medicare Part D enrollees. The order points to creating safe harbors that will allow discounts to be passed on to seniors at the pharmacy counter, while allowing PBMs to charge an official service fee. 

Additional Resources

  1.     Animation of how drug rebates work:
  2.     Targeting rebates to reduce drug prices:

The information in this article was researched and summarized by Surabhi Dangi-Garimella, Ph.D., Principal, SDG AdvoHealth, LLC. Improving patient access is our mission and we are happy to utilize a variety of experts to carry that out.