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Increase in Drug Spending Largely Attributed to Rebates Pocketed by Pharmacy Benefit Managers

September 2016, Vol 7, No 8
Robert Goldberg, PhD
President and Co-Founder
Center for Medicine in the Public Interest
Springfield, NJ

Total drug spending in the United States, based on invoice prices, reached $425 billion in 2015, according to the IMS Institute for Healthcare Informatics report, “Medicines Use and Spending in the U.S.: A Review of 2015 and Outlook to 2020.” When adjusted for net price spending, $310 billion went to drug and biotech companies, but where the other $115 billion went is often omitted from media coverage.1

This portion, which has gotten larger in total dollars and as a percentage of the increase in drug spending, flows ­directly to insurers, pharmacy benefit managers (PBMs), hospitals, and employers—not to patients. In fact, the health insurance company Anthem sued Express Scripts for nearly $15 billion, alleging that it is not benefiting from rebates, which it is contractually entitled to receive.2

Follow the Money

The Anthem lawsuit provides a rare glimpse into how rebates have become a major source of revenue for organizations paying for and delivering healthcare.

To understand why such rebates are not going directly to the consumer, we have to follow the money and the difference in the net price and the invoice price. The amount of prescription drug revenue pouring into “stakeholders” has increased since the 2010 Affordable Care Act was enacted. The net price growth has dropped by half since 2011, and, as the IMS report found, “The average net price for brands already in the market is estimated to have increased by 2.8% in 2015, down from 5.1% in 2014 and significantly lower than seen in prior years.”1

Meanwhile, the increase in rebates as a share of price growth has surged. Rebates, as a percentage of the total price growth, increased 10-fold since 2011.1

Further analysis showed that rebates accounted for 40% ($10.8 billion) of the total increase in specialty drug spending between 2014 and 2015. As a percentage of spending on branded medicine, rebates accounted for 71% of the total increase in specialty drug spending between 2014 and 2015, which indicates that much of the price increase imposed on patients reflects the cost of rebates that PBMs and others say help to make medicines affordable.1

Patient Cost-Sharing Increases as Rebate Revenue Soars

Even as the share of drug spending as a percentage of rebates has soared, and the contribution of net price increases to spending has declined, PBMs and insurers have increased patient cost exposure for branded drugs by more than 25% since 2010 because of the increased use of health plans with pharmacy deductibles, copayments, and coinsurance.1

Patient cost-sharing is a percentage of the invoice price, not the net or rebated price. This suggests that rebate dollars are not passed through directly to patients.

As the IMS report highlights, “In response to this rising level of patient cost exposure, brand manufacturers are steadily increasing their use of ‘buy-downs’ through patient savings programs such as coupons or vouchers, to help patients offset these costs….Even after coupons are applied, patients with pharmacy deductible plans are still facing high cost exposure.”1

The percentage of patients facing cost-sharing of up to 40% of retail pricing has soared despite increases in rebate revenue. The number of drugs with the highest cost-sharing amount also generate the most rebates.1

A 2015 study by the healthcare consulting firm Avalere Health found that many insurers, with help from the PBMs that design drug formularies and cost—sharing, placed all drugs used to treat complex diseases (eg, HIV, cancer) on the highest drug formulary cost-sharing tier; that is, in 5 of the 20 drug classes analyzed, all drugs were placed on the specialty tier.3 An analysis of a subset of plans in 10 drug classes found that in 8 of the 10 drug classes, 2015 exchange plans were more likely than 2014 plans to place all single-source branded drugs on the specialty tier; this was most common for some cancer drugs and multiple sclerosis drugs.3

The Real Source of High Drug Costs

The real story behind drug pricing is how PBMs, such as Express Scripts, and health insurers are pocketing a bigger share of drug revenue while increasing what patients—especially those with the greatest need for the newest drugs generating the biggest rebates—are seeing as their share of the invoice price of a medicine surge.

The outrage over high drug prices is often directed toward the biopharmaceutical industry, but the IMS report suggests that the $100 billion in rebates and discounts that could reduce the out-of-pocket cost of consumers is taken by PBMs, insurers, and hospitals.1 To add insult to injury, these organizations charge consumers retail prices and require them to pay an increasingly greater share of that cost.

The fact that such practices not only increase PBM and insurer revenue but also hinder patient access to new medicines, which, in turn, increases their risk for staying sick or getting sicker, should be a big story, so why aren’t media outlets and policymakers focusing on the real source of high drug costs?


  1. IMS Institute for Healthcare Informatics. Medicines use and spending in the U.S.: a review of 2015 and outlook to 2020. April 2016. Accessed August 4, 2016.
  2. Anthem, Inc v Express Scripts, Inc, 1:16-cv-02048 (SD NY 2016).
  3. Avalere Health. Avalere analysis: exchange benefit designs increasingly place all medications for some conditions on specialty drug tier. February 11, 2015. Accessed August 4, 2016.

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