Wondering Why Medication Costs are on the Rise? Watch out for the Rebates

Like most commodities, it’s no surprise the cost of medication rises some with inflation. As any grandparent who recalls the good old days when ice cream cones cost a nickel can tell you, most products become more expensive over time. But a recent report from the AARP showed that the prices of brand name prescription drugs used by millions of older Americans grew at over 3 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 pharmacist knows the importance of offering customers medication they can afford. It’s time we took a careful look at the common practices of some of the nation’s biggest drug manufacturers and pharmacy benefit managers (PBMs) to understand the role they play in driving up drug costs. One key factor is the PBMs’ use of manufacturer rebates. While it may sound counterintuitive, 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 budgets 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, PBMs 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 rebates. 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.

It’s important that we understand how rebates work and force PBMs toward greater transparency. Exactly how much of manufacturer rebates do the PBMs retain for themselves and how much is passed on to plan sponsors and consumers? That’s a question the PBMs have yet to answer.

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