Drug Manufacturer Rebates to PBMs: The Discount Is on a Different Drug

Drug manufacturer rebates to a PBM are payments made after the sale, often in exchange for formulary access, preferred tiers or limits on competing drugs. The payment can also turn up somewhere an access team might not expect: in discounts on other products. In the AstraZeneca and Medco case, the government alleged that concessions on Prilosec, Toprol XL and Plendil bought Nexium’s exclusive position. When a concession disappears from government price reporting, taxpayers lose the benefit of the lower price. If you know what the access agreement promised and where the company put the concession, you may see the connection that a product-by-product review misses.

Do Pharmacy Benefit Managers Have a Role in the Prescription Drug Supply Chain?

Pharmacy benefit managers sit between the manufacturer’s access agreement and the pharmacy’s payment for dispensing the drug. They negotiate manufacturer rebates, help develop formularies, process prescription claims and contract with pharmacies for health care plans.

A formulary is the plan’s list of covered drugs. Preferred tiers can give patients lower cost sharing, while prior authorization, step therapy and quantity limits shape access after a drug makes the list. A manufacturer can offer a concession for preferred placement or for an arrangement that limits competing products. Rebate terms can also track price-inflation thresholds, market-share targets or volume targets. The access terms explain what the manufacturer expects to gain from the payment.

The scale of that bargain is clear in the Government Accountability Office’s analysis of Medicare Part D rebates: 92.7% of categorized rebate dollars in 2021 were associated with formulary access and tier placement.

The pharmacy’s reimbursement follows a separate agreement. Spread pricing is the difference between what a PBM charges the plan for a drug and what it pays the pharmacy. Manufacturer rebates, the pharmacy spread and fees for services can all contribute to revenue. Examining the Value of Pharmacy Benefit Management Companies, published in the American Journal of Health-System Pharmacy in 2004, described additional revenue from mail-order operations and selling data, alongside rebates and spread pricing. The contract and the recipient matter as much as the payment’s label.

What the Rebate Bought and What Was Reported

Disclosure connects the commercial bargain to the government’s payment. In Part D, plan sponsors report manufacturer rebate amounts to the Centers for Medicare & Medicaid Services, which uses rebates and other concessions when reconciling what the program should pay. In Medicaid, reported Best Price helps determine the manufacturer’s rebate obligation.

The Government Accountability Office’s July 2019 report found that PBMs passed through 99.6% of the manufacturer rebates they negotiated for Part D plans in 2016. Separately invoiced services and revenue at a pharmacy under the same ownership require their own accounting.

Rite Aid and Elixir Insurance Company agreed to a $101 million settlement in July 2024 over allegations that retained manufacturer rebates were reported to Medicare as bona fide service fees. The alleged service fees had never been negotiated with the manufacturers. Medicare’s reconciliation used a report in which a rebate had become a different kind of revenue.

PBM-affiliated group purchasing organizations, also called rebate aggregators, add another recipient to the payment trail. The Federal Trade Commission described them as negotiating manufacturer rebates and fees that PBMs previously negotiated directly. Its staff report also described the aim of creating fees that could be retained instead of passed to clients. We examine what the intermediary received alongside what the plan was told.

Drug Formulary Exclusivity Paid Through Discounts on Other Drugs

Drug formulary exclusivity paid through discounts on other drugs was the alleged arrangement behind AstraZeneca’s February 2015 settlement over Nexium. The company agreed to pay $7.9 million over allegations that it paid Medco Health Solutions for Nexium’s sole and exclusive status on certain formularies through concessions on other drugs.

According to the government, some or all of the payment arrived through price concessions on Prilosec, Toprol XL and Plendil. The government tied the alleged arrangement to claims under the Retiree Drug Subsidy Program.

A review confined to Nexium’s price would miss the concessions the government identified elsewhere in AstraZeneca’s portfolio. The formulary promise and the discounted products belonged to the same alleged bargain, even though their product names did not match.

Former AstraZeneca employees brought the False Claims Act case. Medco later settled the recipient side of the arrangement. Someone who understands why a concession moved across products can explain more than a ledger entry alone.

Who Decides Which Drugs Get Formulary Access?

In Medicare Part D, the plan sponsor submits its formulary to the Centers for Medicare & Medicaid Services for approval, and a pharmacy and therapeutics committee develops and reviews it. A PBM can provide formulary services, but the negotiation, the clinical review and the government approval are distinct decisions.

The committee also reviews clinical prior authorization criteria, step therapy protocols and quantity limits. For someone inside market access, the committee presentation and the commercial agreement describe different parts of how the drug obtained its position.

Protected classes constrain that bargaining. Part D requires access to all or substantially all drugs in six classes, including antidepressants, antipsychotics, anticonvulsants, cancer drugs, antiretrovirals and immunosuppressants for transplant rejection. The Centers for Medicare & Medicaid Services has explained that this broad coverage limits the ability to negotiate concessions in exchange for placement. A manufacturer has less reason to pay for admission to a list that must already include its drug.

Consolidation gives the negotiations another dimension. The Medicare Payment Advisory Commission describes large insurers with their own PBMs and specialty or mail-order pharmacies gaining bargaining power from their share of enrollment and dispensing. The entity receiving a payment, the entity recommending placement and the plan submitting the government report can sit within the same corporate group. We connect those roles to the actual agreement and decision.

What Evidence Is Needed to Prove Fraud?

We work with insiders to connect the access promise, the value delivered, the government payment or price report, and what the people involved knew. For this subject, a rebate schedule becomes more informative when it sits beside the formulary terms and the transactions that fulfilled them.

An access team may know the promised tier or exclusivity. Finance may see the credit on another product. The reporting team may see how a rebate became a service fee or how a concession was left out of Medicaid Best Price. Those are the connections illustrated by the AstraZeneca and Elixir cases above and the formulary cases below.

Communications can explain the purpose behind the transaction. In the Endo complaint, the whistleblowers described employee emails arranging free drug samples for a pharmacy executive’s mother and alleged that those deliveries bought preferred formulary status. The delivery record showed what was supplied. The messages explained why.

A Formulary Position Can Be Bought in Different Ways

The alleged benefit can be free product for a decision-maker’s family or a grant to the organization choosing the drug. Misleading statements to a formulary committee raise a separate question about how the company obtained access.

Endo and Free Drugs for a Decision-Maker’s Mother

Whistleblowers alleged that Endo supplied free Lidoderm samples to a pharmacy director’s mother at his request, with an understanding that he would use his influence at Coventry and later HealthSpring to secure preferred brand status. Their complaint connected that influence to prescriptions for Medicare and Medicaid beneficiaries.

The allegation then followed the free product into Medicaid price reporting:

The complaint connected a personal favor to a government pricing report.

Warner-Lambert and the Educational Grant

The Health and Human Services Inspector General described allegations that Warner-Lambert paid unrestricted educational grants to a managed care organization to obtain unrestricted formulary status for Lipitor, then omitted the grants’ value from reported Best Price. The payment was called an educational grant, but the alleged purchase was a place on the formulary. Pfizer paid $49 million in the October 2002 settlement.

Someone responsible for a grant budget and someone responsible for government pricing could be looking at different descriptions of the same payment.

Shire and Statements to Formulary Committees

Shire’s September 2014 settlement announcement described allegations about improper drug marketing. One part concerned allegedly false and misleading statements about Vyvanse’s efficacy and potential for abuse, made to state Medicaid formulary committees as well as physicians.

Here the alleged means of influencing access was the information given to the decision-maker. The committee presentation, its supporting evidence and the messages approved for the sales team become central to understanding the allegation.

Amgen and Discounts Passed Through Intermediaries

An Amgen whistleblower complaint alleged that the company concealed rebates and discounts by passing them through group purchasing organizations and wholesalers to the end customer. The allegation concerned concealment for government price reporting.

That payment path extends the comparison beyond the manufacturer and its immediate counterparty. The intermediary’s credit and the benefit reaching the customer can explain what a manufacturer-level report left out.

Rebates and List Prices Can Rise Together

A larger rebate can accompany a higher starting price. The USC Schaeffer Center’s 2020 white paper, The Association Between Drug Rebates and List Prices, examined branded-drug list prices and estimated net prices from 2015 through 2018. The paper explains how competition for placement can pull the decision away from net cost:

For an insider, the starting price and the net result belong in the same comparison.

The patient’s price adds another comparison. GAO explains that a manufacturer rebate paid after the pharmacy transaction does not directly reduce the patient’s cost sharing for that transaction, although a preferred tier can reduce it. A concession that improves the plan’s economics can leave the patient paying against a price before that concession.

Why Are Insulin Drug Costs So High?

Competition to offer larger rebates for better formulary placement can push insulin list prices higher, according to the 2020 Oregon Law Review analysis Exposing the Middlemen in Rising Drug Costs. It used Humalog to illustrate how a higher list price could coexist with lower manufacturer revenue after rebates, while patients’ payments and the plan’s later rebate followed different paths.

What Does the FTC Say About Pharmacy Benefit Managers?

The Federal Trade Commission alleged that PBMs designed a reimbursement system that generated rebates and fees while encouraging manufacturers to raise list prices. Its administrative complaint, announced in September 2024, pursued that competition theory against Caremark, Express Scripts, OptumRx and other named entities.

The FTC announced an Express Scripts agreement in February 2026 and a Caremark and Zinc Health Services agreement in July 2026.

The Contract Period Matters to the Reporting Question

Congress delayed implementation of the 2020 federal rebate rule until January 1, 2032. Separately, the Centers for Medicare & Medicaid Services described new Part D requirements beginning in 2028 that restrict PBM service compensation and require reporting of revenue retained by PBMs and their affiliates.

The reporting reaches revenue retained by rebate aggregators, bringing the extra payment recipient into the same picture. When we examine a manufacturer’s access agreement, its period, payment terms and reporting treatment belong together.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. The starting point here is inside knowledge of what the formulary bargain actually bought.

You Know What the Concession Was For

If you work in market access, contracting, finance or government pricing and know which payment secured a drug’s position, speak with our whistleblower experts about the arrangement. We build the healthcare fraud case around what the access bargain bought and what the government was told. We bring in pharmaceutical whistleblower lawyers who understand formulary contracting and price reporting, and stay beside you through the case.