What is a drug rebate?

Drug rebates are discounts paid by drug manufacturers to health plans and pharmacy benefit managers (PBMs) who purchase their drug. Rebates are determined by terms set forth in contracts which are typically negotiated annually between pharma companies and payers. The most common type of rebate is volume-based, in which the rebate increases as the PBM or plan pays for more of the same drug.

Negotiations between a payer and a pharma company for specific rebate levels are determined through a dynamic process, particularly in markets that are competitive (having multiple therapeutic options at a particular place in therapy). Rebates can help payers offset their drug costs. In exchange, pharma companies may be able to receive or maintain favorable access conditions including in terms of formulary position and utilization management criteria.

Non-traditional rebates may include those which are part of value-based or outcomes-based contracts in which rebates may be determined by achievement of certain predefined clinical criteria.