There’s no doubt that across the country, prescription drug costs are on the rise. A recent report from the AARP showed that brand name prescription drugs used by millions of older Americans grew at nearly four times the rate of inflation from 2005 to 2009 – and the trend didn’t stop in 2009. According to independent pharmacists, brand name drug prices are as high as they have ever been.
Every benefits manager knows the importance of offering employees a plan that makes prescription drug prices affordable. Benefits managers should take a careful look at the common practices of their pharmacy benefit manager to understand the PBM’s use of manufacturer rebates. While it may sound counter-intuitive, the use of rebates is actually an important factor in rising drug costs.
While it would be reasonable to think that rising ingredient costs or increased research and development might justify a price increase to important medications, the real reason for price increases is much less palatable. Manufacturer rebates paid to PBMs for preferential formulary placement ultimately drive drug costs up while contributing to PBM and manufacturer profits.
Here’s how it works: Typically, pharmacy benefit managers keep the majority of the rebate dollars from manufacturers while passing on small “discounts” to plan sponsors. To avoid losing money through rebates, drug manufacturers simply raise the price of a drug year after year to recoup the cost of the previous year’s rebate. That rise in cost is often much higher than any “discount” PBMs passed on to plan sponsors the year before. So the rebates that are supposedly saving consumers’ money are instead lining the pockets of the PBMs and increasing drug costs year after year.
If the plan sponsors are going to pay higher and higher drugs cost each year, they should be getting every penny of the manufacturer’s rebates and incentives paid to the PBM.
For benefits managers, it’s important to understand how rebates work and talk to your PBM to find out exactly how big a portion of manufacturer rebates the PBM retains and how much is passed on to plan sponsors and consumers.