Discussion of prescription rebates comes up often in news about the strategies lawmakers propose to reduce the cost of prescription medications in the United States. But what are prescription rebates, do they affect the cost of your medications, and how do they save you money on healthcare?

What Are Prescription Rebates?

Most people are already familiar with manufacturer rebates that are sometimes available on the products we purchase. For example, you might buy a new set of tools from a retail store and then mail in a coupon for a rebate. When you send in the rebate request, the money you receive back comes from the product’s manufacturer — not the retailer from whom you purchased the product.

Prescription rebates work in a slightly similar way. However, the process is much more complicated and does not actually have a direct impact on the consumer, or the person purchasing the medication. Prescription rebates are more complex than other rebates because of the nature of the pharmaceutical industry and all the separate players that are involved in negotiating and covering prescription medication costs.

How Do Prescription Rebates Work?

To understand how prescription rebates work, you must first understand how prices for prescription medications are determined.

The Pharmaceutical Company and the List Price

Prescription medication pricing begins with the pharmaceutical company which is responsible for setting what’s called a list price on each medication they manufacture.

The pharmaceutical company’s list price determines the amount pharmacies charge customers for a medication. So, if a pharmaceutical company sets a list price of $100, then pharmacies usually charge $100 for that medication.

If an individual is uninsured or has not yet met their deductible, they typically pay the full list price for the prescriptions they fill. If an individual has insurance, then they would pay a certain percentage of the list price based on the terms of their individual health plans. For example, a patient with a 70/30 health plan would pay $30 of a medication’s $100 list price.

The Role of Pharmacy Benefit Managers

Behind the scenes, health insurance companies work with pharmacy benefit managers who work independently, negotiating with pharmaceutical companies and helping to manage health insurance companies’ health benefit plans.

Developing Formularies

Pharmacy benefit managers develop formularies for health insurance companies that outline the tiers of medications they cover and which medications they do not cover while defining how much they cover on those that are included in their health plans.

Negotiating Prescription Rebates

Additionally, pharmacy benefit managers negotiate with the pharmaceutical companies to obtain discounts or rebates on the medication list prices of covered medications. Pharmaceutical companies then offer rebates on the medications that they want pharmacy benefit managers to give priority placement to on the health insurance company’s formulary.

These usually include the pharmaceutical company’s name-brand medications, so that they receive preferred status on the formulary, encouraging patients to choose their brands at the pharmacy rather than purchasing products from competitors or generic prescription medications.

How Prescription Rebates Actually Work

When an individual fills a prescription for one of these preferred medications (usually called a Tier 1 medication), the pharmaceutical company pays the rebate to the pharmacy benefit manager – not to the pharmacy customer who fills the prescriptions.

This means that the consumer still pays the medication’s list price, and the pharmacy benefit manager pays less than the list price for the medication. For example, if a medication has a $100 list price and a pharmacy benefit manager negotiates a $50 rebate, then they pay $50 for a medication that the consumer purchases for $100.

Depending on the pharmacy benefit manager’s arrangement with the health insurance company, they either keep a percentage of the savings as a commission or pass all the savings along to the health insurance company.

How Do Prescription Rebates Affect Consumers?

Prescription rebates do not directly affect the out-of-pocket costs patients pay at pharmacies for prescription medications. Despite prescription rebates, the price patients pay for prescription medications is still always based on the list price.

Although people filling prescriptions see no benefit from prescription rebates at the pharmacy, they might benefit from some of the savings in overall lower health insurance premiums or improved benefits. The rebates received by health insurance companies reduce their overall costs and improve their profit margins, allowing them to charge lower premiums for their health insurance plans or to offer their customers better benefits.

Learn How to Lower Your Out-of-Pocket Healthcare Costs With ClearChain Health

Although prescription rebates don’t directly affect out-of-pocket prescription medication costs, choosing the right health insurance provider and plan can. If you think you currently pay too much for your prescription medications, we encourage you to contact a ClearChain Health representative to learn more about our prescription medication coverage and to find out how an open-access, network-free provider could lower your out-of-pocket healthcare costs.