What are PBM rebates and how do they work?

PBM rebates are payments made by drug manufacturers to PBMs in exchange for favorable formulary placement — higher tier placement, fewer restrictions, or preferred status. Manufacturers pay rebates as a percentage of the drug's list price. Traditional PBMs retain a portion of these rebates as profit; pass-through contracts require 100% of rebates to be returned to the employer.

How much of my PBM rebates am I actually receiving?

In traditional PBM contracts, employers typically receive 50–80% of rebates, with the PBM retaining the rest. The exact split is often buried in contract language about "administrative fees" and "rebate guarantees." To determine your actual rebate retention rate, request a rebate reconciliation report showing total rebates collected versus total rebates passed through to your plan.

What is 100% rebate pass-through and how do I get it?

100% rebate pass-through means the PBM returns every dollar of manufacturer rebates to the employer, earning revenue only through transparent administrative fees. Transparent PBMs like Navitus, Capital Rx, and RxBenefits offer 100% pass-through as their standard model. Traditional PBMs can be negotiated to pass-through terms, but often resist full transparency. The most reliable path is including transparent PBMs in your next RFP.

Do rebates actually lower drug costs for employers?

Rebates reduce net drug costs but can create perverse incentives — PBMs may favor high-rebate branded drugs over lower-cost generics or biosimilars. A drug with a 40% rebate on a $500 list price ($300 net) may still cost more than a generic at $50 with no rebate. Employers should evaluate formulary decisions on net cost after rebates, not gross rebate dollars.

What should I look for in my PBM contract regarding rebates?

Key rebate contract terms include: rebate guarantee minimums (per-member-per-month or per-claim), rebate audit rights, timing of rebate payments, definition of which drugs qualify for rebate sharing, and whether administrative fees are netted against rebates. Demand a contract that defines "rebates" broadly to include all manufacturer payments — including administrative fees, data fees, and educational grants paid by manufacturers.

Rebates

PBM Rebate Pass-Through: How to Get 100% of Manufacturer Rebates

Drug manufacturers pay PBMs billions of dollars annually to favor their drugs on formularies. In a traditional PBM contract, the employer receives only a fraction of these rebates. A pass-through contract changes that — 100% of rebates flow to the employer.

How rebates work

Drug manufacturers pay PBMs "rebates" — essentially payments for favorable formulary placement. A drug on Tier 1 (lowest cost-sharing) gets used more than a drug on Tier 3. Manufacturers pay to be on Tier 1. These rebates can represent 20–40% of the drug's list price.

In a traditional PBM contract, the PBM passes some rebates to the employer — often 50–70% — and retains the rest as profit. In a pass-through contract, the employer receives 100% of rebates, and the PBM charges a flat administrative fee for rebate management.

The rebate pass-through checklist

Contract specifies 100% of all manufacturer rebates, administrative fees, and other payments pass to the employer

Rebate reporting is provided quarterly with drug-level detail

Audit rights allow employer to verify rebate calculations

PBM charges a flat PEPM or per-claim fee for rebate administration

No "rebate equivalent" language that allows PBM to substitute other forms of compensation

Rebates are credited within 30–60 days of receipt from manufacturer

Estimate rebate savings ← Back to hub