prescription drugs rebate legislation

Six Points of View on Drug Rebate Legislation

Co-authored by Paul Ashley and Cameron Troxell.

From the Indiana State House to Washington D.C. prescription drug prices are a hot topic. Given the use of everyday maintenance medications and the increase in life saving medications with exceptionally high expenses, this is an important topic for almost every household and employer in America.

The world of prescriptions in the United States is complex. In this blog we will review some of the legislation being drafted and observe them from the point of view of pharmacy benefit managers (PBMs), drug manufacturers, benefit plan sponsors, insurers, retail pharmacies and consumers.

This spring the Indiana legislature has considered and is taking up various bills that would impact those in the prescription drug ecosystem. The most interesting is SB 131. In summary the bill would do the following, beginning January 1, 2022:

  • Require the maximum allowable cost of a generic drug to be written on materials provided at the point of sale for state employee health plans, accident and sickness insurance policies, and health maintenance organization (HMO) contracts.
  • If a health plan and PBM contract is entered or renewed after December 31, 2021, then less than 85% of estimated drug rebates will be deducted from the cost of prescription drugs before the individual’s cost is determined.
  • Pharmacy benefit managers must provide policyholders with an annual notice that includes:
    • An explanation of what the rebate is
    • An explanation of how rebates accrue to the health plan from the manufacturer
    • The aggregate amount of rebates that accrued to the health plan for prescription dugs dispensed under the policyholder’s health plan for the previous year

Pharmacy Benefit Managers

To almost all consumers and even for many benefit plan sponsors, pharmacy benefit mangers (PBMs) are a mysterious and little understood middleman in the prescription drug and pharmacy world. They determine how much insurance companies pay for drugs and if they are covered by their policies, in addition to negotiating prices and discounts that get pass on to patients and employees. In simple terms, the goal of a PBM is to contain escalating costs of prescriptions drugs and to ensure patients are on the correct or most efficient drugs.

There are three types of PBMs:

  1. Traditional – Considered a ‘carved-in’ option, typically through one large prescription benefit plan providers like Express Scripts, Optum, Caremark or Ingenio.
  2. Transparent – The PBM’s revenue is generated through administrative and dispensing fees with full disclosure of each.
  3. Consortium – Companies like NFP’s Rx Solutions aggregate contracts with other PBMs to maximize rebates, reduce spread and provide better service.

If this legislation or something similar passes, PBMs will be in a difficult position. It will expose to more plans and consumers the true net cost of prescriptions. In doing so, PBMs will be forced to either make less money from the rebate revenue source or look for other ways to offset the lost revenue.

Drug Manufacturers

Historically, drug makers have been pointed to as the “boogie man” and the main cause of the prescription drug prices in America. While they play a key role, they are not the only ones to blame. As rebate legislation makes its way through many state legislatures and is considered in D.C., drug manufacturers are proponents for passing the rebates on directly to consumers. This would take some of the blame off drug makers by allowing them to show the net price (after rebates) for the medications the produce and sell.

Health Plan Sponsors

A plan sponsor is the organization (usually an employer) who sets up a health plan for their employees. For the purposes of this article, we will separate plan sponsors into the two primary funding types for health benefit plans as fully insured and self-funded.

Fully insured plan sponsors pay a bulk premium (comprised of both employer and employee monies) to insurers to cover the cost of administering the plan and any claims expenses incurred by the plan members in the group. Pharmacy expenses are part of the claims incurred by plan members. Part of the responsibility of a plan sponsor is to serve as a conduit for information sharing from the insurer to their plan members.

Should this bill be passed into law, fully-insured plan sponsors would potentially benefit by having their premiums reduced by the amount of rebate dollars recouped by their insurer. It remains unclear whether the final version of the bill would allow sufficient latitude for insurers to recoup lost revenue from rebates and another means. Lastly, given that parts of the bill require disclosures of information to plan members, the plan sponsors might be forced to share additional information with their employees.

Self-funded plan sponsors bear financial risk for the claims incurred by their plan members. They pay insurers and/or plan administrators to handle the execution of their plans, such as processing claims and tracking each member’s deductibles, etc. These plan sponsors have some degree of flexibility in choosing their insurer, administrator and/or PBM. Many plan sponsors are already receiving a significant portion or all the manufacturer’s rebates from their PBM, typically in one of the following forms:

  • Administrative fee credits
  • Fixed rebate amounts depending on drug classes
  • Full pass-through of rebates from PBM to plan sponsor
  • Point-of-sale rebates deducted from the cost of the medication at the time of the fill

Plan sponsors who already receive rebates are commonly using them to keep plan member premiums and the total cost of coverage as low as they can.

If this bill passes into law, it would provide an opportunity for more self-funded plan sponsors to get rebates from their PBM/insurer. It could also reduce the overall plan costs (provided that PBM/insurers aren’t able to make the earnings up in another area). Lastly, and similar to fully insured plan sponsors, there could be a need to provide additional information to plan members to disclose the required pieces of information regarding pharmacy rebates.

Health Insurers

Most large health insurers have their own PBMs or partner with a single PBM. PBM revenue makes up a significant amount of revenue for insurers. Drug manufacturers offer rebates on their medications for placement on the PBM’s formulary (list of covered medications). Manufacturer’s rebates make up a very large piece of revenue that PBM’s are retaining. Insurers are not transparent with plan members regarding drug prices (this is a reason that solutions like OneRx and GoodRx exist).

If this bill passes into law, the insurers will have to communicate more frequently with members as drug prices and subsequent rebates change constantly. The insurer will be forced to share more information with consumers regarding pharmacy rebates. If a portion of rebates are forced to be paid back to plan members, the insurers will likely find other areas to recoup the lost revenue.

Retail Pharmacies

Small, independent retail pharmacies rely on partnerships with pharmacy benefit managers. PBMs help pharmacies get access to contracts with hundreds of insurance companies. This allows them to reach consumers more effectively. Pharmacies also receive a payment for each prescription filled under health insurance, so this partnership becomes a valuable revenue source. The challenge for pharmacies with PBMs is the lack of transparency and regulation.

In this relationship between pharmacies and PBMs, the pharmacy must source the drug from a distributor or supplier. It’s up to the pharmacy to find the best distributor and the lowest cost for the drug. The PBM negotiates the final retail price to the consumer by working with the drug manufacturer and the health insurer. Where this can be harmful for pharmacies is if the negotiated price by the PBM is lower than the amount the pharmacy paid for the drug from the distributor. In this scenario, the pharmacy would take a loss on the prescription. The details of the negotiation between the PBM, health insurer and drug manufacturer are important for the pharmacy’s profit margin, even though they don’t have a seat at the table.

As mentioned above, PBMs negotiate the terms on the retail price of drugs between the pharmacy and drug manufacturer on behalf of insurance plans. The details of these negotiations are not always visible and there is a growing concern within the retail pharmacy industry on the lack of transparency in these negotiations.

Senate Bill 143 would create a positive outcome for retail pharmacies. It would allow for pharmacies to file a complaint about a drug’s price to the state insurance commissioner. Often, a dispute in drug price can be resolved by the pharmacy and PBM. As of today, pharmacies are not able to escalate these disputes, whereas Senate Bill 143 would provide pharmacies with more leverage.


Ultimately for consumers, the best outcome is to allow for transparent and fair competition between PBMs, retail pharmacies, drug manufacturers and health insurers. If multiple aspects of the drug supply channel do not have the leverage or control to drive better outcomes, it drives up the costs. Those that are losing control must build in profit margin to sustain, which leads to higher costs for the consumer.

There is not one aspect of the supply chain at fault. However, it is easy to highlight opportunities for improvement when transparency is clearly lacking. Senate Bill 143 doesn’t directly impact consumers but will allow for more transparent information and competition within the supply chain, thus helping reduce the cost trend.

While change can be scary, this legislation could bring advantages – at least to some of these groups. However, the cost savings could be debatable. More transparency will be helpful to consumers and pharmacies, but profit loss in prescription drugs could mean insurers and PBMs will look elsewhere to make up for it.

We’ll update this blog as more becomes known about this proposed bill. If you have any questions about what it could mean for your organization and employees, don’t hesitate to send me, Paul or Cameron a note. You can also drop a line here or tweet at us.

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