The Rebate

The drug costs $500 a month. This is the list price. The list price is on the box, on the manufacturer's website, on the insurance company's portal, and in the pharmacy's system. Everyone has agreed on the number.

The insurance company does not pay $500.

The pharmacy benefit manager — which is the company that your insurance company hired to manage its drug coverage — negotiated a rebate with the manufacturer. The rebate is a cash payment. The manufacturer pays it. After the rebate, the drug costs around $200 to the insurer. The drug still costs $500 to you, at least in the sense that your copay is calculated from $500.

(I want to be clear that I am describing a real system. This is the drug pricing system in the United States. I am not describing a hypothetical. I checked.)

The rebate is confidential. This is written into the contracts. The terms under which your drug arrived at the pharmacy counter are not required to be disclosed to you. What is disclosed to you is the list price, which is the number that was set before the negotiation that you were not part of.

The Federal Trade Commission investigated this in 2024. Their report found that the three largest pharmacy benefit managers — which are, as it happens, owned by the three largest health insurance companies — received a combined $89 billion in rebates in 2022. The report found that a "meaningful portion" of these rebates was retained by the PBMs rather than passed to patients or employers. The report used the phrase "meaningful portion." The report did not define meaningful.

You are probably asking: who set the $500 price?

The manufacturer set the $500 price. They set it high enough that after paying the $300 rebate, the economics still work. The PBM set the rebate terms. The insurer accepted the contract. Your employer accepted the insurance plan. Your HR department explained the plan during onboarding using a PDF. You clicked Enroll by October 15th.

Everyone in this system made a decision. The decision you got to make was: click Enroll, or do not click Enroll, which in this context means do not have health coverage, which means your next decision is a different kind of problem.

Several proposals exist to fix this. One proposal is to ban rebates entirely and lower list prices instead. Drug manufacturers have said this would raise prices. Insurance companies have said this would raise premiums. Pharmacy benefit managers have said this would undermine their ability to negotiate. All three of these companies are in the Fortune 50. Their ability to negotiate appears to be functioning.

The $500 is still on the box.