Pharmaceutical rebates: A guide for employers.

Pharmaceutical rebates are one of the most influential—and least understood—forces behind drug pricing in the U.S. For employers managing rising pharmacy spend, understanding rebates is critical to knowing whether your pharmacy benefits manager (PBM) is actually working in your favor.

Employer pharmacy costs are projected to rise by up to 12% in 2026, according to the Business Group on Health, and rebates are often positioned as a solution to that trend. But depending on how they’re structured, they can either reduce net costs or quietly drive them higher.

This article breaks down how rebates work, the different structures used across the market and how PBM incentives shape what employers ultimately pay.

Key highlights:

• Pharmaceutical rebates are payments manufacturers make to PBMs for favorable formulary placement or increased utilization.
• When PBMs retain rebates instead of passing them back to the employer, they have a financial incentive to favor higher-cost drugs.
• When structured correctly, rebates can lower total drug spend and improve affordability for employers and members.
• Rightway passes through 100% of rebates and optimizes for the lowest net cost, not the highest rebate.

What are rebates in the pharmaceutical industry?

Pharmaceutical rebates are payments that drug manufacturers make to PBMs in exchange for preferred placement on a plan’s formulary.

When a manufacturer wants its drug placed on a preferred tier, it offers a rebate tied to the drug’s list price. In return, the PBM gives that drug better access and lower member cost-sharing, which drives utilization.

Rebates are designed to reduce net costs. But whether they actually do depends entirely on how they’re handled. That’s where most employers lose visibility and control.

How do pharmaceutical rebates work?

Rebates are part of a negotiated pricing system between manufacturers and PBMs. They don’t happen at the pharmacy counter. They happen behind the scenes, over time and with incentives that don’t always align with employers.

For employers, this structure makes it difficult to understand what they’re actually paying for prescription drugs. Costs are influenced by decisions made long before a prescription is filled, and savings are often realized months later if they’re passed through at all. Without full transparency, it becomes challenging to determine whether rebates are reducing total spend or simply reshaping it.

Here’s how the process works:

1. Manufacturer sets the list price.

Every rebate starts with the list price, also known as wholesale acquisition cost (WAC). This is the baseline price before discounts or rebates are applied. Manufacturers often build rebate expectations into this price. The higher the list price, the more room there is to offer a rebate without necessarily lowering the true cost.

For employers, this matters because list price becomes the foundation for everything that follows. Even if rebates reduce net cost later, higher starting prices can increase member cost-sharing and distort how savings are measured across the plan.

At a high level, this step sets the foundation for pricing:

• WAC is set by the manufacturer and anchors all pricing negotiations
• List price rarely reflects what is actually paid
• Higher list prices create larger rebate opportunities

2. PBM negotiates rebates.

PBMs negotiate directly with manufacturers to determine rebate amounts and terms. These agreements vary widely depending on competition within a drug class.

In highly competitive categories, manufacturers offer larger rebates to secure a formulary position. But that doesn’t mean the drug is the lowest-cost option. It just means it’s the most financially attractive under the rebate structure.

Here’s what defines how rebates are negotiated:

• More competition leads to higher rebate potential
• Rebate size does not equal the lowest net cost for employers
• Employers are not directly involved in negotiations

3. Drug receives formulary placement.

Once a rebate is agreed upon, the drug is placed on a formulary tier. Preferred placement means lower member cost-sharing and higher utilization. This is where incentives start to matter. If a PBM keeps part of the rebate, it has a reason to favor drugs with higher rebates even when lower-cost options exist.

For employers, formulary placement is one of the most important cost drivers in the pharmacy benefit. It determines which drugs are used, what members pay and whether the plan is optimized for net cost or rebate generation.

This step directly influences access and cost:

• Preferred placement increases utilization
• Formulary decisions shape member cost and access
• Financial incentives can influence drug selection

4. Claims are processed.

More than 1 in 4 prescriptions are abandoned due to cost, according to research by GoodRx. When a member goes to the pharmacy and fills a prescription, their cost is based on the list price, not the net price after rebates.

This means members often pay more out of pocket because rebates happen after the sale. The rebate benefit, if passed through, is realized later and typically flows to the employer.

Here’s what happens at the point of sale:

• Cost-sharing is based on the list price
• Rebates are not applied at the point of sale
• If rebate savings are passed through, the employer gets the savings

5. Rebates are paid retrospectively.

Rebates are paid months after the prescription is filled, usually on a quarterly or annual basis. This delay makes it difficult to understand real-time prescription drug costs. Without detailed reporting, employers are left trying to reconcile spend after the fact.

For employers, this lag creates a visibility gap between what is paid and what is ultimately recovered. Without transparent reporting, it becomes difficult to evaluate whether rebate-driven strategies are actually reducing total cost.

This delayed structure introduces complexity:

• Rebates are paid 90 to 180 days after utilization
• Timing creates visibility gaps
• Reporting quality determines cost clarity

Main types of pharmaceutical rebates explained.

Rebate structures vary based on utilization targets, market dynamics and manufacturer strategy. Understanding these structures helps explain why certain drugs appear on your formulary and whether those decisions are cost-driven or rebate-driven.

Here are the different types of rebates:

Access rebates.

Access rebates are the baseline of most rebate agreements. Manufacturers offer these payments to ensure their drug is included on a formulary at all. While they can offset costs, they don’t necessarily reflect the lowest-cost or most clinically appropriate option.

At a high level, access rebates are:

• Tied to basic formulary inclusion
• Typically structured as a percentage of the list price
• Used to ensure manufacturers gain access to plan populations

Positioning rebates.

Positioning rebates are tied to where a drug sits on the formulary. Manufacturers offer higher rebates to secure preferred placement, such as lower tiers or fewer restrictions.

This is where incentives start to shift utilization. Higher-cost branded drugs can be placed on preferred tiers ahead of lower-cost options or generic drugs simply because they generate larger rebates. That’s why understanding your PBM’s approach to generic drug costs matters. Generics often deliver the lowest net cost without relying on rebates, but can be deprioritized in favor of higher-cost brands that generate more rebate revenue.

Positioning rebates are structured to:

• Be linked to preferred tier placement and access conditions
• Drive higher utilization through lower member costs
• Include exclusivity or tier protection agreements

Performance‑based rebates.

Performance-based rebates tie payments to outcomes like adherence, refill rates or clinical improvements. These arrangements are designed to shift focus from volume to value.

While the intent is to align incentives with outcomes, execution is complex. Measuring performance accurately requires a strong data infrastructure, and results may take months or years to validate.

These rebate arrangements are typically:

• Based on clinical outcomes or adherence metrics
• More common in chronic conditions and specialty drugs
• Dependent on robust data collection and validation

Market-share and manufacturer rebates.

Market-share rebates reward PBMs for driving a specific drug’s share within a therapeutic class. The higher the market share, the higher the rebate.

These agreements create strong incentives to steer utilization. PBMs may use formulary design, step therapy or prior authorization to push members toward drugs that maximize rebate thresholds.

These rebate structures are characterized by:

• Being based on the percentage of prescriptions within a drug class
• Using threshold-based or “all-or-nothing” incentives
• Creating misalignment between cost, clinical value and utilization

Indication and outcomes-based rebates.

These rebate structures are tied to how a drug performs for specific conditions or patient populations. A drug may generate different rebates depending on the indication it’s used to treat or the outcomes achieved.

These models are more common in high-cost specialty therapies, where manufacturers take on some financial risk tied to real-world performance. While promising, they add complexity to pricing, reporting and contract management.

These arrangements are defined by:

• Being tied to specific diagnoses or treatment outcomes
• Being more common in specialty or high-cost therapies
• Introducing additional complexity into rebate tracking and validation

Role of PBMs in pharmaceutical rebate management.

PBMs sit in the middle of the rebate system, influencing how drugs are priced, accessed and reimbursed. Understanding the role of a pharmacy benefits manager is key to understanding where incentives can diverge.

Here’s how PBMs shape rebate flow and overall pharmacy costs:

• Negotiate rebates: PBMs negotiate rebate agreements with manufacturers tied to formulary placement and expected utilization. Larger PBMs can sometimes secure higher rebates, but size alone doesn’t determine value. What matters is how much of those rebates are actually passed through to employers.
• Manage drug formularies: PBMs design formularies that determine which drugs are covered, how they’re tiered and what members pay. These decisions directly influence utilization, rebate flow and total cost, shaping whether a plan is optimized for lowest net cost or rebate-driven outcomes.
• Influence drug utilization: Through tools like prior authorization, step therapy and tier placement, PBMs influence which drugs members ultimately use. These decisions drive prescribing patterns, impact member experience and determine whether utilization aligns with clinical value or maximizes rebate revenue.

This is where model design makes a measurable difference. At Rightway, every decision is structured around lowering total cost, not maximizing rebate volume. That means 100% rebate pass-through, formularies built on the lowest net cost and clinical guidance that supports better medication decisions.

Benefits of a 100% rebate pass-through model.

Traditional PBMs often retain a portion of the rebates they negotiate, creating a financial incentive to favor higher-cost drugs. Pass-through models remove that dynamic by returning 100% of rebates to the employer, aligning decisions with total cost—not rebate volume.

Here’s how a rebate pass-through model benefits your organization:

Full rebate visibility.

In traditional models, reporting on PBM rebates is often aggregated, delayed or difficult to validate. Employers may see high-level savings figures without clear visibility into which drugs generated rebates or how those dollars were applied.

With a pass-through model like Rightway, rebate data is fully transparent and auditable. Employers can track exactly what was negotiated, what was received and how it impacts total spend, creating a clearer understanding of performance across the formulary.

No retained rebate margin.

When PBMs retain a portion of rebates, they create a built-in incentive to favor drugs that generate higher rebate dollars. That can lead to formulary decisions that prioritize revenue over cost efficiency.

Solutions like Rightway’s SureSpend™ remove this conflict by eliminating rebate retention entirely. Without that margin, decisions can focus on the lowest net cost and clinical value, not which drugs generate the most revenue.

Fiduciary-aligned incentives.

Traditional PBM contracts don’t require alignment with employer outcomes. Financial incentives often sit with the PBM, not the plan sponsor, which can influence how formularies and utilization strategies are designed.

A fiduciary-aligned PBM changes that structure. With contractual accountability, decisions are made to reduce total cost and improve outcomes, not maximize internal margins. In practice, that means pricing is fully transparent, rebates are passed through and clinical and formulary decisions are guided by the lowest net cost.

For employers, it creates a clearer line of sight into what they’re paying for and ensures the pharmacy benefit is consistently working toward measurable savings and better member outcomes.

Clearer understanding of net drug costs.

List prices and rebate totals alone don’t tell the full story. Without transparency into net cost, employers are left evaluating performance based on incomplete or misleading data.

Pass-through models like Rightway make net cost visible. By aligning reporting with true cost after rebates and discounts, employers can better understand drug pricing models and assess whether their formulary is actually delivering value.

Direct tie-in to employer goals.

In non-pass-through models, rebate incentives are often disconnected from employer outcomes. They don’t consistently translate into lower total costs or a better member experience, and savings can be diluted through retained margins or unclear allocation.

With full pass-through, rebates directly reduce plan costs. This approach reflects how fiduciary- and value-based PBMs that align with employers operate, where success is measured by total cost, outcomes and member experience—and all savings are returned to the employer, not retained by the PBM.

Achieve 100% pass-through with Rightway’s neutral PBM.

Most employers don’t have full visibility into how rebates are negotiated, retained or applied. What looks like savings on paper can still result in higher total costs if decisions are driven by rebate volume instead of net cost.

Rightway PBM is built to change that. As a neutral, fiduciary-aligned PBM, we pass through 100% of rebates and design every part of the pharmacy benefit around one goal: lowering total cost while improving the member experience.

Here’s what that looks like in practice:

• Every rebate dollar negotiated from manufacturers is returned to the employer with no retention or hidden fees.
• Formularies are designed around the lowest net cost, not rebate value.
• Employers have full visibility into pricing, rebates and total drug spend.
• Members receive clinical guidance that helps them access the most effective, affordable medications.

Book a demo today and see how Rightway’s neutral PBM brings transparency and control to pharmaceutical rebates.

Frequently asked questions.

How do pharmaceutical rebates affect drug pricing?

Pharmaceutical rebates are designed to lower net costs, but they also contribute to higher list prices. Manufacturers often increase prices to fund rebate payments, which raises the baseline price that everyone negotiates from.

For members, this matters because cost-sharing is typically based on list price, not net price. That means employees often pay more at the pharmacy counter, even if rebates reduce costs later for the employer.

How do rebates differ from drug discounts?

Rebates and discounts both reduce drug costs, but they operate very differently. Discounts are applied at the point of sale, lowering the price a member or plan pays immediately. Rebates, on the other hand, are paid retrospectively—often months later—and are tied to formulary placement and utilization.

For employers, this distinction matters because discounts directly reduce real-time costs, while rebates can obscure them. A drug with a large rebate may still have a higher upfront cost than a lower-priced alternative with no rebate. Focusing on net cost, not rebate size, is what ultimately determines savings.

Does a pharmaceutical rebate always lead to cost savings?

No. A higher rebate does not automatically mean a lower total cost. A drug with a large rebate can still be more expensive overall than a lower-priced alternative with no rebate.

This happens because rebates are often tied to higher list prices. A drug may appear more attractive due to the rebate it generates, even if the net cost remains higher than other options. In some cases, formulary decisions are influenced by rebate potential rather than lowest cost, which can increase overall spend.

That’s why optimizing employer pharmacy benefits requires focusing on total net cost. The goal should be reducing total spend, not maximizing rebate volume. Employers need clear visibility into pricing and incentives to ensure rebate strategies are actually delivering real savings.

How can employers evaluate whether rebates are actually reducing costs?

The most important metric is total net cost, not total rebate volume. Employers should evaluate what they are paying after all discounts, rebates and fees are applied and compare that against alternative drug options or formulary strategies.

This requires full transparency into pricing, rebate pass-through and formulary decision-making. Employers should look for detailed reporting, audit rights and a clear understanding of how their PBM is incentivized. If higher rebates consistently align with higher overall spend, it’s a sign the model may be driving higher costs, not reducing them.

How difficult is it to transition to a pass-through or neutral PBM?

Transitions require planning, but with the right partner, they are far more manageable than most employers expect. At Rightway, transitions are structured, proactive and designed to protect the member experience—especially for those on ongoing or specialty medications.

Our implementation process typically takes 90 to 120 days and includes formulary alignment, proactive member outreach and pharmacist-led support to prevent disruptions. By the time go-live happens, members are already supported and employers have full visibility into how the transition will perform from day one.

What should employers look for in a rebate pass-through PBM model?

A true pass-through model should clearly define how rebates are calculated, reported and returned, with no carve-outs, retention or pricing structures that obscure where dollars are going.

Beyond that, employers should look for full transparency, net cost reporting and fiduciary alignment. At Rightway, that means 100% rebate pass-through, auditable reporting and formulary decisions driven by lowest net cost—not rebate volume—so the model consistently delivers measurable savings and better member outcomes.