Follow the Money Part 1: The Flow of Drug Rebates

This video is the first in a series on following the flow of rebate dollars. See Part 2 here.

In recent years, there have been many questions and discussions in the marketplace about where prescription drug rebate dollars are going. The reality is drug rebates carry an economic value of about 20%-30% of the cost of an employer’s prescription drug program. These are real dollars that present a real opportunity for a pharmacy benefits cost offset. When rebates are generated, it’s important to understand where rebates are going.

The Economic Model

Looking at this diagram, we’ll start at the blue box at the top. Drug manufacturers make the prescription drugs and have a service agreement with drug wholesalers to ship products to wholesalers. The drug wholesaler, if you follow the line, ships the products to the pharmacy. The pharmacy dispenses the medication to the patient.

If the patient is using an insurance program, the pharmacy sends an electronic claim back to the pharmacy benefit manager. The pharmacy benefit manager (PBM) collects all of those claims and periodically sends them back to each drug manufacturer to receive rebates. The PBM collects that rebate money and then has to make a decision, based on their contract with the individual employer, on what to do with that money.

The Rebate Arrangement

Focusing in on the upper right of the diagram, we can see where the employer fits into this model. Again, the pharmacy benefit manager adjudicates the claim. They collect all of the claims by drug manufacturer, create invoices, and send those to the pharmaceutical companies. Those manufacturers eventually, through their contract with the PBM, produce the rebate.

The rebate amount is based on different criteria, predominately market share of their drug products. The greater the market share, the greater the opportunity is to earn a rebate. Generally, the pharma companies send the money to the PBMs. The PBMs have contracts with their employer clients that determine how those rebates will be dispersed.

What happens is that when the PBM is invoicing the pharma company, they receive the rebates nine months in arrears. For example, for a prescription claim that was filled on January 1 of a given year that earned a rebate, the employer probably won’t see the dollars from that until October of that same year. This is because of the way the billing and accumulation system works.

The Employer’s Role

In that model, the PBM is sharing the rebates. Depending on the contract with the employer, it could be dollar-for-dollar for all of the rebates that it receives. An employer can maximize their rebate value in this model by waiting for their payment, and waiting for the PBM to receive their rebate money and in turn pass it back.

My experience has been that if the employer obtains the rebate dollars in aggregate, it is considered a cost offset in aggregate. Anything that is a cost offset in aggregate, like copays, allows the employer to set aside the appropriate dollars, after deductions for copays and rebates, that they need to fund the employee prescription drug program. The reality is that employers choose to keep the premiums reasonable and affordable – and they use rebate dollars to offset the cost of the program. That’s the decision the employer needs to understand and make.

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