Gross-to-Net Drug Pricing: Who Gets the Discount?

Gross-to-net drug pricing rebates reduce the revenue a manufacturer keeps from its list-price sales. Discounts and fees can widen that gap, while the patient still pays against a price before rebates. If you work in contracting, finance or government pricing, you may see the concession in the agreement and a different treatment in the report sent to the government. That is where the accounting becomes a whistleblower’s concern: who received the benefit, how the company classified it, and what Medicare or Medicaid paid as a result.

From List Price to Manufacturer Net Revenue

Gross-to-net follows the deductions between gross sales and the manufacturer’s net receipts. Wholesale acquisition cost is the manufacturer’s reported list price to wholesalers or direct purchasers, before prompt-pay discounts, rebates and other price reductions. The contract and subsequent payments determine what the manufacturer receives.

A negotiated rebate can buy preferred placement on a formulary, the list of drugs a plan covers. In its September 2023 report on Medicare Part D, the Government Accountability Office found that 92.7% of categorized manufacturer rebate dollars in 2021 were associated with formulary access and tier placement. The manufacturer was paying for a position in the market for covered prescriptions.

That explains why the largest rebate and the lowest price can be different selling points. A manufacturer can raise the gross price and compete by offering a larger rebate. If concessions shrink faster than the list price falls, the manufacturer can receive more.

The Patient Pays Before the Rebate Arrives

The person taking the medicine can pay more than the plan’s entire cost of that medicine after rebates. Deductibles and coinsurance can use the pharmacy price before the manufacturer rebate reaches the plan.

The Medicare Payment Advisory Commission’s July 2026 Data Book explains the incentive: large rebates help plans compete on premiums. It also describes the consequence for people using heavily rebated drugs. Their cost sharing can consume a substantial part of the plan’s net drug cost, and sometimes exceed it.

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

Pharmacy benefit managers negotiate drug access and reimbursement and administer prescription benefits for health care plans. Wholesalers handle inventory and distribution. The physical movement of the drug and the financial terms of the prescription run through different relationships.

The 2020 Oregon Law Review article Exposing the Middlemen in Rising Drug Costs: Modifying Safe Harbor Protections for Pharmacy Benefit Manager Rebates Under Federal Anti-Kickback Statutes describes the bargaining power in a PBM’s formulary: manufacturers compete to have their drugs covered and preferred. Its account separates the rebate sent to the plan sponsor after purchase from the patient’s payment at the pharmacy. That separation is central to understanding whose costs fell.

Rebates, Chargebacks and Service Fees Have Different Jobs

Government price calculations treat different concessions differently. The Medicare average-sales-price calculation includes qualifying rebates, chargebacks, volume discounts, prompt-pay discounts and purchase-linked free goods. A bona fide service fee receives different treatment. What a company calls the payment can change the reported price.

A wholesaler chargeback reimburses a wholesaler selling at a customer’s lower contract price for the difference from the wholesale acquisition price.

The service-fee distinction turns on the work behind the invoice. The fee must reflect fair market value for an itemized service actually performed for the manufacturer, work the manufacturer would otherwise perform or buy. The recipient must also keep the fee from passing through to its client or customer.

The effect runs in opposite directions across programs. Deducting a payment as a concession reduces average manufacturer price, which can reduce Medicaid rebates. Excluding a payment from concessions leaves average sales price higher, which can raise Medicare Part B reimbursement. The contract, actual service and flow of money explain which treatment belongs in the calculation.

Timing matters too. The average-sales-price rules account for late rebate and chargeback information through estimates. A report for a quarter can therefore incorporate an estimate before all the underlying concessions have settled.

A Sandia National Laboratories procurement statement for PBM services beginning in 2013 required quarterly rebate reports with claim counts, followed by an annual reconciliation. The prescription, rebate report and final reconciliation were separate records. For an insider, the useful connection is how the same payment moves through those records and into the government’s report.

Medicare, Medicaid and Commercial Prices Measure Different Things

The same drug can have different reported prices because each program counts different purchasers and concessions. The benchmark’s name tells us which transaction belongs in the comparison.

For single-source Part D brands from early 2015 through the end of 2024, the Medicare Payment Advisory Commission’s price index rose 63% before manufacturer rebates and 37% after them. Both prices rose, but the rebate changed how much of the increase reached the net side.

Gross-to-Net Rebate Changes Versus Pharmaceutical Fraud Evidence

Pharmaceutical fraud evidence connects a rebate change to a false price report or an underpaid government rebate. The cases below connect a contract or payment to a particular government calculation, and to allegations about how the company changed that calculation. That is the connection we examine with someone who knows the business from inside.

Wholesaler Fees Allegedly Cut the Medicaid Rebate

AstraZeneca and Cephalon agreed to separate settlements in July 2015 over allegations that they improperly deducted wholesaler service fees from average manufacturer prices. The government alleged that the deductions lowered the quarterly rebates owed to state Medicaid programs, leaving taxpayers to cover more of the drug bill. A pharmacist brought the whistleblower case.

Bristol-Myers Squibb’s April 2021 settlement addressed the same alleged fee treatment and another source of value: price-appreciation provisions in wholesaler contracts. These provisions return value to the manufacturer when inventory held by the wholesaler becomes more valuable after a price increase. The government alleged that Bristol-Myers Squibb left that value out of average manufacturer price. It agreed to pay $75 million.

The purchase price alone misses that second transaction. The wholesaler’s contract can show money coming back to the manufacturer after the original sale.

A Part D Rebate Allegedly Recast as a Service Fee

Elixir Insurance’s July 2024 settlement with the Justice Department concerned the other side of the service-fee label. The government alleged that portions of manufacturer rebates were reported to the Centers for Medicare & Medicaid Services as bona fide service fees even though the manufacturers had not negotiated to pay those fees. It also alleged that Elixir knew the retained rebates failed the service-fee definition.

The report concerned Part D rebates and other remuneration, which affect Medicare’s reconciliation with the plan. The underlying manufacturer agreement could answer a plain question: what service had anyone agreed to buy?

A Distributor’s Discount Allegedly Kept Off the Manufacturer’s Price

A whistleblower complaint against Regeneron alleges that Eylea discounts traveled through distributor Besse Medical, with service fees subsidizing customer discounts. The complaint describes why the alleged route mattered:

The alleged benefit reached the customer while the manufacturer price report omitted it. The distribution-services agreement and the customer’s discount belong in the same examination, even though different companies issued the documents.

Hospital Discounts Allegedly Bought Business After Discharge

Wyeth and Pfizer agreed to a $784.6 million settlement in April 2016 over allegations that bundled discounts on oral and intravenous Protonix were hidden from Medicaid Best Price. The government’s account explains the commercial purpose: hospitals would start patients on oral Protonix, and those patients could continue using it after discharge, when Medicaid and other payers paid nearly full price.

Merck’s earlier Pepcid settlement in February 2008 involved a similar alleged pursuit of prescriptions after discharge. The government alleged that Merck improperly treated discounted hospital prices as nominal and excluded them from reported prices. In that alleged arrangement, the hospital concession bought access to later business, while the reporting treatment determined whether Medicaid received the benefit of the discount.

Product Classification and Starting Dates in Rebate Underpayment Cases

Mylan’s EpiPen settlement in August 2017 concerned allegations that the company reported the drug as a generic and avoided brand and inflation rebates. The product classification supplied the disputed input.

In its March 2022 Acthar settlement, Mallinckrodt admitted that Acthar was not a new drug in 2013 and agreed to correct its base-date average manufacturer price. The government alleged that using the later starting point avoided inflation rebates on earlier price increases. Here, the history used in the calculation mattered as much as the current price.

Across these cases, the evidence connects the deal, the benefit actually received, the reported treatment and the effect on government payment. Internal instructions and warnings can also show who understood the discrepancy. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

What the List-Price and Rebate Study Found

Rising rebates and rising list prices moved together in a study of 1,335 U.S. brand prescription drugs from 2015 through 2018. The USC Schaeffer Center’s February 2020 paper The Association Between Drug Rebates and List Prices used list prices and estimated net prices to examine that relationship.

The difference between drugs with and without generic competition was particularly telling:

The Contract Shows Where the Public Numbers Stop

Public data show parts of the money flow. A plan’s own agreement and payment records show what that plan was entitled to receive.

GAO’s 2019 study of Part D pharmacy benefit managers found that PBMs retained about 0.4% of the rebates they negotiated in 2016 and passed the rest to plan sponsors.

For healthcare insiders, this is the gap worth closing. A rebate ledger shows one flow. A service agreement can show another. A price-reporting calculation shows which of them reached the government. We connect those records to the particular underpayment or overpayment, including the decisions that produced it.

When You Know Where the Discount Went

If you know how a rebate, wholesaler payment or customer discount disappeared from a government price report, bring that discrepancy to our whistleblower experts. We work with you to build the case around the transactions and the people who directed their treatment, and bring in pharmaceutical pricing whistleblower lawyers who understand rebate calculations. We stay beside you as your partners through the case.