How PBM Rebates Affect What You Pay for Prescriptions

Drug rebates are supposed to lower costs. Instead, they create a system where everyone profits from higher list prices — except the patient at the pharmacy counter.

You might assume that when a drug manufacturer offers a rebate on a medication, the savings eventually reach you. That is how rebates work in most industries. But in the American prescription drug market, rebates often have the opposite effect: they push list prices higher, and patients end up paying more, not less.

To understand why, you need to understand how Pharmacy Benefit Managers (PBMs) negotiate behind the scenes — and who actually keeps the money.

What Is a Drug Rebate?

A rebate is a payment from a drug manufacturer to a PBM in exchange for favorable placement on a health plan's formulary — the list of covered medications. If a manufacturer wants its brand-name cholesterol drug to be the preferred option over a competitor, it offers the PBM a rebate. The bigger the rebate, the better the formulary position.

PBMs act as intermediaries between manufacturers, pharmacies, and health plans. Three companies — CVS Caremark, Express Scripts, and OptumRx — control roughly 80% of the market. That concentration gives them enormous leverage in rebate negotiations. Manufacturers essentially compete to pay the highest rebate in exchange for guaranteed patient volume.

On paper, this sounds like it should drive prices down. In practice, it does the opposite.

The Perverse Incentive: Higher Prices Mean Bigger Rebates

Here is the core problem: rebates are calculated as a percentage of a drug's list price. If a manufacturer offers a 30% rebate on a drug with a $100 list price, the PBM receives $30. If the list price rises to $200, the same 30% rebate generates $60. The PBM earns more when the list price goes up.

This creates a perverse incentive. Instead of pressuring manufacturers to lower prices, the rebate system encourages them to raise list prices and then offer larger percentage rebates. Research has documented this effect: a study found that every $1 increase in rebates was associated with a $1.17 increase in list price. The rebate does not offset the price hike — it actually amplifies it.

Manufacturers are not innocent bystanders. They raise list prices knowing that the higher rebate will secure formulary placement. The PBM benefits because its rebate revenue grows. The insurer may benefit because it receives a portion of the rebate. The only party consistently harmed is the patient.

Where Does the Rebate Money Go?

This is where transparency breaks down. PBMs negotiate rebates on behalf of health plans (insurers and employers), and in theory, most of that rebate money should flow back to the plan. In practice, PBMs in commercial markets have historically kept an estimated 10% to 20% of rebate revenue. Some contracts are structured so that PBMs retain even more through administrative fees, performance guarantees, and other arrangements that are difficult for plan sponsors to audit.

The exact split varies by contract, and PBM contracts are notoriously opaque. Employers and insurers who hire PBMs often cannot verify how much rebate money was collected or how much was passed through. This lack of transparency has drawn investigations from the FTC and hearings in Congress.

How This Hits Your Wallet

The impact on patients depends on their insurance structure. If you have a flat copay — say, $20 for a preferred brand — rebates may not directly affect your out-of-pocket cost. But if your plan uses coinsurance, the damage is real.

Coinsurance means you pay a percentage of the drug's cost. Many plans charge 20% to 40% coinsurance for brand-name drugs. That percentage is applied to the list price, not the net price after rebates. So if a drug's list price is $500 and your coinsurance is 30%, you pay $150 — even if the PBM negotiated a $200 rebate that brought the plan's actual cost down to $300. You are paying a percentage of a price that nobody actually pays.

Patients on high-deductible health plans face similar math. Until you hit your deductible, you are paying the full list price out of pocket. The rebate the PBM negotiated does not reduce the amount counted toward your deductible. You absorb the inflated list price in full.

Medicare Part D enrollees have historically been affected as well, particularly in the coverage gap (the "donut hole"), where patients paid a share of the list price for brand-name drugs.

Reform Is Coming — Slowly

The rebate system has drawn bipartisan criticism for years, and legislation is now catching up. In 2026, a law was signed requiring PBMs operating in Medicare Part D to pass 100% of manufacturer rebates directly to the health plans starting in January 2028. Under this law, PBM compensation in Medicare must shift away from percentage-based rebate retention and toward flat dollar service fees that are not tied to a drug's list price.

This is a significant structural change for Medicare. When PBM revenue is no longer linked to list prices, the incentive to tolerate or encourage price increases diminishes. Flat fees mean a PBM earns the same amount whether the drug costs $100 or $1,000.

However, these reforms apply only to Medicare Part D. The commercial insurance market — which covers most working-age Americans — is not yet subject to the same requirements. Some states have passed their own PBM transparency and rebate pass-through laws, but the patchwork of state regulations means protections vary widely depending on where you live and what kind of plan you have.

What You Can Do Right Now

While systemic reform moves forward, there are practical steps you can take to avoid paying inflated prices driven by the rebate system.

Ask about the cash price. For many drugs, especially generics, the cash price without insurance can be lower than your copay or coinsurance. Your pharmacist can check this for you, or you can compare prices yourself using a tool like RxGator.

Compare across sources. Different pharmacies, discount programs, and direct-to-consumer options price the same drug very differently. The variation exists in part because each source has a different relationship with PBMs and rebate structures. Shopping around can save you hundreds of dollars per year.

Ask your doctor about alternatives. If your plan's formulary steers you toward an expensive brand-name drug, ask your prescriber whether a generic or therapeutic alternative would work. The preferred brand on your formulary may be there because of a rebate deal, not because it is medically superior.

Look at your plan's formulary structure. If your plan uses coinsurance for brand-name drugs, understand that your cost is tied to the list price. Plans with flat copays insulate you from list price inflation. This is worth considering during open enrollment.

The rebate system is one of the most opaque and consequential features of American drug pricing. Understanding how it works is the first step toward not overpaying.