To most consumers, a “rebate” is money back from a product manufacturer that the consumer receives after they purchase the product. To obtain the rebate, the consumer typically purchases a product, submits proof of purchase to the manufacturer, and receives a rebate in the form of a check or a credit towards future purchases.
Prescription drug rebates work differently, however. Patients usually cannot obtain rebates when they purchase prescription drugs at the pharmacy. What a patient spends at the pharmacy is based on the list price of the prescription drug and whether the patient has a health insurance plan that will pay for a portion or all of that prescription drug’s list price.
For example, let’s assume that a specialty prescription drug has a list price of $1,000, and a patient’s insurance covers 75% of the drug’s price. The patient will spend $250 on the drug, and the patient’s insurance will spend $750 on the drug. If the patient’s insurance plan is fully insured, the insurance carrier bears the $750 cost. If the patient’s insurance plan is self funded, the patient’s employer bears the $750 cost.
Behind the scenes of prescription drug purchases, rebates often are being paid, but not to the patient. For example, when an insured patient buys a prescription drug at the pharmacy, the drug manufacturer may pay a rebate to the pharmacy benefit manager (PBM), which manages the insurance plan’s pharmacy benefits. Drug manufacturers typically pay PBMs those rebates to obtain a place on the formularies, the list of drugs that a health insurance plan will cover, developed by the PBMs.
Continuing the example above, the specialty drug manufacturer might pay a $250 rebate to the PBM. What does the PBM do with the $250 rebate? Does it keep it, or share it with the employer or carrier? It depends!
Some PBMs keep the rebates as additional compensation for its services. Ideally, the PBM will disclose this to the employer and/or carrier, and in some states the law specifically requires such disclosures.
However, many employers with self-funded plans negotiate with the PBM to require the PBM to share rebates with the employer. Likewise, many carriers of fully insured plans require the PBM to share rebates with the carrier.
If you are an employer with a self-funded plan and do not know what your PBM does with the rebates it receives, be sure to consult with your PBM and/or benefits broker because rebates often involve significant amounts of money.
Let’s say an employer with a self-funded health plan receives part or all of rebates from a PBM. What does the employer do with the rebates it receives? You guessed it! It depends!
Often, an employer uses the rebate to lower premiums overall for plan participants or to lower the insurance plan’s overall drug costs. Less often, an employer gives or otherwise credits the rebate to the person who purchased the prescription drug generating the rebate.
The cost of prescription drugs is a major factor fueling dramatic increases in healthcare costs in the United States. Drug rebates have been identified as a factor in this increase and are being put under the microscope:
Employers with self-funded health plans should be aware of how drug rebates impact their plans. Many employers seek transparency from PBMs regarding how much in rebates are paid to the PBM and how the PBM uses those rebates. Many employers negotiate to receive part of or all of those rebates. Such employers must decide how to use those rebates in accordance with applicable laws, including the Employee Retirement Income Security Act (ERISA).
In the event that rebates are returned directly to an employer’s plan participants, employers will need to work with their tax advisers to determine if those rebates are considered taxable wages to the participants. On the one hand, the only reason the participants are receiving those rebates is their employment relationship and participation in the employer’s plan, which would tend to tip the scale towards taxable wages. On the other hand, the rebates might be considered a reduction of the purchase price, which typically is not a taxable event.
In addition, employers should consult with their benefits broker to determine the rebate’s impact on participants' progress towards their deductible and out-of-pocket maximum. Returning to our example above, if the $250 rebate is returned directly to the participant, is the participant treated as paying $0 towards their deductible and out-of-pocket maximum on the grounds that the participant’s payment was in effect cancelled out by the rebate? Or, is the participant treated as paying $250 towards their deductible and out of-pocket maximum on the grounds that $250 is the amount they were obligated by the plan to pay regardless of any rebate that they may receive?
As a practical matter, employers with fully insured plans typically won’t have much negotiating power over how rebates are used by the PBM and carrier. However, employers with fully insured plans should pay attention to any communications from their carrier about rebates to determine whether it has any impact on the employer from a tax perspective.
If you have questions about prescription drugs and their impact your health plan, please contact us.
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