How Pharmaceutical Rebates Impact Employees and Fiduciaries By: Michael MieleFSA, MAAA
There has been much discussion in the media about the high cost of drugs, the payments of rebates, and lots of other drama around the pharmaceutical supply chain.   This article will outline the basics around pharmaceutical rebates, the increased use of Consumer-Driven High-Deductible Plans (CDHPs) and how both of these topics are on a collision course with each other.   Both of these topics are complex, and this article will cover the major points on each of them, but will spare the reader some of the gory details.

The Drug Rebate Game

For the past 20 years, pharmaceutical manufacturers have used rebates as a negotiation tool with managed care organizations (MCOs) to gain access for their drug products on the formulary.  A formulary is an approved list of drugs that insurance will cover.  There is a whole industry around “market access.”  That is, pharmaceutical manufacturers working to get “access” on the formulary for their products.  During most of that 20-year period, rebates were relatively small payments: 5-15% of the cost of the drug.  Prescription Benefit Managers (PBMs) also received rebates but those payments were even less (2-5%).  In the past 5 years, MCOs  and PBMs have increased their willingness to “close” the formulary.   For example, let’s say there are four choices of a drug in a therapeutic class.  The MCOs and PBMs are now willing to limit employee choice to just one or two drugs.   Employers, faced with the rising cost of health care are now much more willing to go along with this strategy to limit access for better discounts on the drugs that make it on the list.  The pharmaceutical manufacturers, in response, have offered significantly higher rebates to be one of those two choices.  Rebates have become so pervasive in contracting that in total, they have become approximately 20% of a discount off of total drug spending.  Since rebates are not paid on generic drugs, the rebate payments are concentrated around branded drugs and specialty drugs.  If you are not getting 20% of your drug spending back in rebates, someone else in the supply chain is taking some of your money, but that discussion is for another day!

To provide some rough averages, brand drugs at retail are approximately $400 per prescription, and rebates are generally between $120-$150 per prescription.    Specialty drugs are approximately $3,000 per prescription, and rebates are $850-$1,200 per prescription.  These averages vary based on the “drug mix” in your population.  

There is talk about eliminating rebates in the future.  While I think this is unlikely, rebates are here today and for 2019. 

The Trend to CDHP

Changing gears for a moment, according to the Mercer National Health Survey, approximately 30% of employees are in CDHP plans.   These plans offer employees a lower up-front cost option (lower contributions) but often have a $2,000 - $3,000 individual deductible.   Employees can also contribute to a Health Spending Account (HSA) on a pretax basis to build a pool of funds when they do have a medical expense.   The goals of CDHP are many, but the primary one is to make employees more aware of the true cost of health care services, which should give them the incentive to shop for better deals.   Skeptics of these plan designs claim that this is just a cost shift to employees and the high deductible is a real impediment for employees and dependents seeking medical treatment.  I like CDHP plans when they are offered as a choice to employees.  If someone wants full coverage, let them pay more in contributions.  Again, choice is always a good thing for any consumer.

The Collision of Rebates and CDHP

Since prescription drugs are also subject to the deductible, how does a typical transaction work?   For example, a 30-day supply of Januvia (a diabetes drug) has an Average Wholesale Price (AWP) of $457.20.  After the PBM discount, but before the $120 rebate, the employee would have to pay $375 out of pocket before satisfying their deductible.   But what about the $120 rebate?  Where does it go?  In most cases, the employer keeps the rebate.   The employer will receive that rebate payment (or some percentage of that rebate after the PBM takes their cut)  from the PBM about 6 months after the drug is filled.  

That does not seem “fair” to many.  In that example, the employer actually makes $120 off of the employee needing a prescription!

Some employers are requesting “point of sale” rebates.  That is, the PBM is instructed to estimate the rebate and, at the point of sale, deduct what the PBM thinks the rebate will be when the PBM receives the rebate.  Most employers do not provide “point of sale” rebates.   Part of the reason is that since the PBM has to estimate the actual rebate it will receive 3 to 6 months after the claim is paid, the PBM “short pays” on the rebate payment.   Another reason is that employers have been getting rebate checks for over 10 years now, and back when the payments were very small, the employer probably developed a financial accounting practice that it keeps following today.  Anyone who knows the employee benefit space knows about the huge motivation to avoid change. 

Fiduciary Concerns

And now for the big question:  Does the fact that the employee pays the full discounted cost for a drug, during the deductible and coinsurance phase, and the rebate goes to the employer, does that create a fiduciary breach?  This is a question to ask your ERISA attorney.   Our ERISA attorneys feel that so long as the overall rebate revenue is used to offset overall health care costs, the employer is NOT in a fiduciary breach.  From a “fairness” perspective, there does seem to be a valid concern.  There are lots of things that are not “fair” in an employee benefits plan.  Group insurance, by its very nature has this same issue of fairness.  Is it “fair” that 20% of the employees don’t use the plan at all, yet they pay the same contributions as someone who has a major illness that year?  Is it “fair” that families receive more total benefits (net of contributions) than single employees?  If it “fair” that older employees consume more total benefits on average than younger employees yet the employee contributions are not age-based?

What are employers and employees to do?

Employees faced with a high-priced medication can ask their pharmacist for help.   Often times, there are pharmaceutical “coupons” available to help the employee offset the high cost of the drug before the deductible is met.  In the Januvia example, there may be a $200 or more coupon available.   Ask your pharmacist!

Employers need to do three things.  First, they should check their PBM contract.   You know, that 40-page document that spells everything out.  Look for the “rebateable scripts” portion of the contract.   It may exclude rebates in the high-deductible portion of the benefit.  Employers should receive rebates on all branded scripts, regardless of who pays for it.  Second, employers can ask their PBM to pay “point of sale” rebates.   That is, the PBM can estimate what the rebate will likely be at the point of sale, and the PBM will instruct the pharmacy to collect the discounted portion of the drug, less the estimated rebate.   In that scenario, the coupons would not apply.   Most employers do not do this, and, in my opinion, the coupon approach makes more sense.  Third, consider separating the pharmacy deductible from the medical deductible.  For example, instead of a $3,000 deductible for medical and drug expense, create a plan that has a $1,250 drug deductible and a $1,750 deductible for medical.   This is a question for your benefits advisor but this opens up much more flexibility in the program.

The Future

Based on all the media coverage about prescription drugs, one might think rebates are on their way out.  For the foreseeable future, rebates are here; they are a huge negotiation tool used by PBMs and pharmaceutical manufacturers, and employers will have to deal with rebates as they are, for at least next year and likely beyond.
Michael Miele

Mike is a health care actuary with significant experience in all aspects of employer health and welfare benefits with a specialty in Pharmacy Benefit Management (PBM), data analytics, and medical management. Mike held many senior leadership positions during the last 12 years at Arthur J. Gallagher including...

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