Drug rebates under scrutiny: how prepared is your health plan?

Approximately 10% – 15% of the average U.S. health insurance plan is spent on prescription drug costs, while 85% – 90% is spent on major medical costs, such as emergency room visits and hospitalizations. 

Cutting costs out of that 10 – 15% will only go so far; cut too much, and patients who can’t afford their medication quickly find themselves in the ER.  

Containing costs requires addressing patient health comprehensively, particularly when it comes to chronic disease management, where continuity of care is critical. When employees are stable on their tried-and-true medications, their overall health care costs stabilize, too. 

Pharmacy Benefit Managers (PBMs) negotiate volume-based rebates from drug manufacturers in exchange for placement on health plan formularies. This process, however, is kept secret from other players, leading to conflicts of interest and warped financial incentives that are drawing increased scrutiny from payers and governmental authorities.

Working toward better transparency 

Unless an employer’s PBM contract requires full transparency and rebate pass through, they and their employees can be stuck paying higher prices for fewer covered drugs. Formularies may cover drugs with the highest rebate or spread, rather than drugs with the lowest overall cost to the plan and its participants. Billions of dollars are hidden in this pay-to-play system. Rebates average 48% for branded drugs and can exceed 80% in the case of short-acting insulin. 

Health plans that don’t share rebates with plan participants during the deductible period are substantially overcharging them and risk rising costs on the major medical side. When the plan design has the sick subsidizing the healthy, then the plan is not designed to help the sick get healthy. 

The top three PBMs control around 80% of the U.S. drug market, boasting larger profits than the drug companies themselves. PBM business practices are notoriously opaque, leading to investigations and litigation across the country. The U.S. Federal Trade Commission received over 24,000 comments from pharmacies, manufacturers, and patients, prompting a formal investigation into PBMs that is ongoing.  

Congress is conducting its own PBM investigations. The bipartisan PBM Transparency Act of 2023, currently under consideration in the  U.S. Senate, would prohibit unfair practices against pharmacies, requiring better rebate reporting and rebate pass through to plan sponsors. 

On the state level, Ohio’s attorney general announced antitrust litigation against Express Scripts, Prime Therapeutics and five  others, blaming exorbitant drug prices on their collusion and their Switzerland-based “rebate aggregator.” State legislators and governors are taking action, too. As of March 2023, West Virginia and Arkansas have enacted rebate patient pass-through laws. In 2023, 39 states have considered more than 100 PBM-related bills.

 How employers and brokers can create transparency in PBM contracts

The next course of action for employers and brokers is to construct transparent PBM contracts that ensure rebates are passed through to plan participants. The PBM is your vendor. They will pass rebates through to you and your employees if you ask. However, you do have to ask – they may not offer it. 

Also consider eliminating generic spread from your plan. Employees should be encouraged to use lower-cost generics. Make sure your plan doesn’t charge them $35 for a $4 prescription. 

The good news is that passing rebates through to participants will cost the plan next to nothing. Studies project premiums will increase by less than one percent before even considering the cost savings that result from having healthier plan participants.  

Chronic disease patients with disruptions in care are more likely to suffer painful and expensive complications. The cost of diabetes in the U.S. is $327 billion, including direct medical costs and productivity losses. Passing through rebates to plan participants improves health outcomes, workforce productivity and employee satisfaction and retention. It is simply good for business.

Ask your broker or third-party administrator how much of the total rebates available you’re actually getting. Then consider passing them through to your employees.