The Volatility of Rebate Management

Rebates Changing Due to Regulatory Pressure and Evolving Drug Market

Why does the model need to change?

The PBM market is in a state of tremendous fluctuation. We have:

  • payors looking to decouple pharmacy benefit management services (e.g. use of non-vertically
  • integrated big 3 PBM models and using claims processing, mail service, etc from varied vendors),
  • regulatory changes forcing price reductions in insulins with rebate impacts,
  • the launch of biosimilars impacting rebate availability and creating new multi-level price points,
  • upcoming regulatory changes in Medicare impacting specific high-cost medications to control price
  • inflation and ability to get them to critical patient populations,
  • manufacturers and PBMs creating new revenue lines which sit outside the scope of a rebate,
  • and finally, a PBM inserting themselves further into the supply chain by launching its own biosimilar.

Is it time for our models to change? We are seeing PBMs pulling forward their contract language to reduce their minimum guarantees in response to market events (citing the insulin price change and the influx of biosimilars) or creating a rebate credit arrangement to offset their losses if they pay at minimums as these market events occur. New procurement contracts are now trying to ‘right-size’ to ensure the appropriate application of market fluctuations and make certain that underwriting models appropriately account for these new changes.

With all of this volatility, it makes one wonder if the model of pricing and rebates is at a critical point where there needs to be a change in the way we manage the pharmacy benefit. In this white paper, we explore some of the changes in the market and some of the reactions to those changes being made by PBMs.

Legislation Imposed Average Manufacturer Price Cap

In 2010, the ACA (Affordable Care Act) created a statutory cap on Medicaid rebates at 100% of the Average Manufacturer Price (AMP). The legislation requires the cap regardless of manufacturer price increases relative to the rate of inflation. In 2021, the American Rescue Plan Act (ARPA) aimed at mitigation of the coronavirus pandemic through the availability of new funding; however, this also eliminated the rebate cap of 100% starting at the beginning of 2024. This means that manufacturers are required to pay rebates to the Medicaid program for any values that exceed the list price of the drug. This has created a new environment in which manufacturers could be in a position that would require them to pay the Medicaid program. However, the impacted pharmaceutical manufacturers have responded to reduce or eliminate their liability by lowering costs.

Manufacturers are trying to mitigate their liability through price changes, which brings down the rebate close to the 100% of AMP requirement. The reality of those price changes is that they impact all lines of business, Medicare, Medicaid, and commercial, and becomes the new price in national databases like First DataBank and Medi-Span.

The first manufacturers to announce price changes in reaction to the legislative environment change were Sanofi, Novo-Nordisk, and Eli-Lilly. Refer back to our white paper on these price changes on the Industry Insights section of our website at or via the link

Is it just these manufacturers and products? This is yet to be known as manufacturers decide how to handle the AMP cap removal. Two things we may see manufacturers do are; 1. reduce list price, as seen with these insulin products to date, or 2. reduce discounts such as commercial rebates associated with the products. PBMs have shared that they expect more public announcements on drug pricing changes from other manufacturers.

PBM reactions to expected Insulin market price adjustments

The PBMs are all actively engaging with their clients to react to the dynamic situation and legislative shakeup with expected 2024 price changes. A couple of main pathways are materializing as PBMs assert their contractual “market event” language to adjust the methodology in the calculation of rebate guarantees:

  1. Reset of Guarantees – PBMs are looking to reset the rebate guarantees to reduce risk and liability when their received rebates are less than what was previously available in the marketplace.
  2. Rebate Credit – for clients without a reset to rebate guarantees, and even for some that do reset rebate guarantees, PBMs are looking to insert a new process into the rebate guarantee reconciliation methodology in which claims related to the market event could be called out separately and used to calculate an offset credit against the rebate guarantee to reduce their liability and ensure that they meet their guarantees that were created at a time when pricing and available rebates on these products were very different.
  3. Price Change – in a more unexpected manner to react to the market event, one PBM seems to be trying to change the landscape by introducing a program in which the client pays more per claim on the medications associated with the price reduction just to secure a higher rebate price. There are multiple unknowns in this arrangement as the rebate value associated with these medications with a lower published price would assumedly be lower and it is not clear how they would account for the changes. Although the program is still being explained to clients, it appears the ask is to allow the client to pay cost plus at the claim level to allow the higher rebates - current mechanism behind this is unknown.

The known market event regarding the insulin price changes, however, is not the only manner in which these two methodologies will likely be applied. As stated earlier, it is expected that additional manufacturers will react to the AMP cap situation with additional price changes, and it also may be used to ward off liability with movement to the use of biosimilars and/or launch of formulary products that are reactionary to the biosimilar market changes. Those changes include the launch of the new price and rebate available versions of the first Humira biosimilar to market, Amjevita, which came out with high price, high rebate or low price, low rebate versions of the same medication.

Same Drug - Different Price

In the past, we have run into’ same drug different price’ based on provider type, but not within a provider type.

For differing provider types, it has been part of the economics of the pharmaceutical market that the price of a medication is lower if purchased by a medical provider of service intended for billing to the medical benefit than if purchased by a pharmacy intended for billing to the pharmacy benefit. Based on “class of trade”, manufacturers have been willing to sell drug products at a cheaper price to medical providers of service as there is limited or no rebate associated with the transaction, whereas, with a sale of the same product to the pharmacy, the price tag is higher as the transaction will likely go through the PBM and be subject to a rebate.

Within a provider type, ‘same drug different price’ is a bit of a new phenomenon. For the pharmacy benefit, we now have Amjevita with two price tags – not for a different strength or volume of drug, just two price tags available for the same product. Amgen is trying to create an environment in which they can have an answer to both – those who want a lower-price product and those who want higher higher-price and preserve rebates. With multiple entities in the supply chain, but mostly PBMs, profiting off rebates, it is no wonder that the high-price, high rebate is winning the race. One PBM has stated it will have a formulary offering for the low-price product in 2024, however, clients will have to agree to a reset to their rebate guarantees.

PBMS are holding onto the rebates as long as they can

The PBMs are focused on strategies to mitigate the risk from any loss of their rebate models. It’s well known that rebate revenue has been a primary driver of their economic success for many years. With the pressure of the price volatility within the regulatory landscape, the entrance of biosimilars, and even the soon-to-be impacts of the Medicare Drug Price Negotiation Program, the PBMs are holding on with both hands to maintain their revenue streams from pharma.

PBMs are not only changing rebate methodology as previously discussed, they are also finding new ways to drive revenue to mitigate the loss of revenue risk from the rebate contracts of the past. One example is the creation of new programs which bear a name that is not ‘rebate’ yet still feels very much like a rebate; for example, a program to manage ‘adherence’ or ‘utilization management’. Some of these programs previously were built on administrative fee models and have now become more ambiguous into calculating the savings for the clients and the revenue for the PBM. These disguised adherence programs can pack a powerful punch, helping PBMs maintain pharma value. In a class where multiple medications exists and rebate models are already set by formularies and contracts, pharma is paying money for adherence programs, which drive market-share to their product. Also, in a more recent attempt to capture and maintain pharmaceutical manufacturer revenue, we now have a PBM pretending to be a manufacturer and distributor through nothing more than a tie to a manufacturer with a white labeled biosimilar.

PBM Enters The Supply Chain In Yet Another Way

As PBMs react to the potential loss in revenue from the originator products as biosimilars come to market, they continue to conjure up mechanisms to increase their revenue capture from pharmaceutical manufacturers. One PBM, CVS Health, has further inserted themselves into the supply chain with the most recent announcement from CVS Health stating that they were launching a wholly owned subsidiary, Cordavis, that will work to commercialize and co-produce biosimilars.

CVS Health has now stated that they plan to launch a biosimilar to Humira named Hyrimoz. Can’t we just leave manufacturer and distributor off the list of what PBMs believe they should control? So, while the other PBMs added biosimilars to their formularies, CVS Health has chosen to enter the market as placing themselves as the owner of their formulary alternative. This allows the PBM to control the formulary position and stocking of the biosimilar at their owned pharmacies.

This further solidifies their position to remain in the driver’s seat of holding on to the value they have previously generated through Humira and rebates. They had already announced that they were focused on the high WAC/high rebate products with the Choice Formulary demonstrating an effort on holding onto rebates where they can make more margin.

We have substituted making revenue on rebates to making revenue as a manufacturer/distributor. Instead of using the current biosimilar market competition to drive client value, the value will continue to be limited as the PBM shares in the revenue and keeps the biosimilar cost elevated.

Do We Rip Of The Band-Aid?

So is it time for a reset on the rebate modeling of today in light of the volatility of the marketplace? Do we consider the band-aid approach to allowing a new process of rebate credits to enter into the management of the pharmacy benefit? Do we just reset the rebate guarantees?

We know the importance of reviewing the strategies being deployed by PBMs; whether it be understanding the calculation of a reset to guarantees, rebate credits, the exclusion of medications like insulins, biosimilars, and those impacted by MFP negotiations.

While some clients remain in a rebate mode with flat rebate values, other payers are largely on models with pass-through rebates and minimum rebate guarantees. However, with the extreme volatility to market pricing and rebate impacts, should rebate guarantees, especially minimum rebate guarantees, be a thing of the past?

These are the questions that need to be answered, the financial models that need to be developed, and the support that is necessary for all those payers impacted by these changes.

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About PayerAlly

PayerAlly’s mission is to provide cutting-edge support for our clients as they look to better manage prescription medication costs. We offer best-in-class consulting around the areas of PBM vendor management, clinical, financial, and strategic consulting to help clients better manage costs and improve the performance of their pharmacy benefit.