Why it matters
Rebates are a large part of what a plan's drug benefit really costs. Milliman projects that in 2026, rebates will equal about 31% to 33% of allowed drug costs for an average person in the commercial large group market, and that if employers weren't receiving rebates, the average person's total healthcare cost in the index would be about $897, or 10.6%, higher (Milliman Medical Index, May 2026, p. 5).
That figure is an average across all allowed drug costs. Many drugs have little or no rebate, and some brand drugs have large ones, so it isn't a rebate rate for any one drug. It's also a projection for large groups: Milliman notes that rebates for self-insured employers aren't publicly available, and that, historically, the share of rebates passed through to employer plans has varied considerably, with smaller employers often at a disadvantage in negotiating favorable arrangements (p. 9).
Two things make rebates easy to miss. They arrive after the claim, often months later. And when a member's cost depends on the drug's price, through coinsurance or a deductible, it's usually based on the price before the rebate.
How a rebate moves, and when it arrives
A drugmaker pays rebates largely in exchange for favorable placement on a plan's formulary. The rebate is typically paid to the PBM, which may pass some or all of it to the insurer or the plan, depending on the contract.
Timing. When PBMs share rebates with employers, they typically pay them 90 to 180 days after claims are paid (Milliman, p. 5). So a January prescription's rebate may not show up until spring or summer, and a rebate can land in a different month, quarter or plan year than the claim it belongs to. If your plan receives rebates, that matters when you compare one year's net pharmacy cost with the next. See Why Did Our Pharmacy Spending Increase When Enrollment Barely Changed?
What's changing. The Consolidated Appropriations Act, 2026 requires PBMs serving ERISA-covered employer group health plans to pass through 100% of rebates, fees, alternative discounts and other remuneration related to the plan's drug use. The money goes to the plan or, for an insured plan, its insurer, quarterly and no later than 90 days after each quarter ends (Pub. L. 119-75, Sec. 6702). It applies for plan years beginning on or after August 3, 2028 (January 1, 2029 for calendar-year plans), to PBM contracts entered into, renewed or extended on or after that date. A contract already in place keeps its terms until it's renewed or extended. The PBM page covers the pass-through and audit rules.
Worked example: the price before the rebate
All amounts are hypothetical: a $1,000 brand drug, a $300 rebate and 20% coinsurance. The $300 rebate isn't derived from Milliman's average, which covers all drugs, including the many with little or no rebate.
| Measure | Rebate credited later | Rebate at the counter |
|---|---|---|
| Price before rebate | $1,000 | $1,000 |
| Price after the $300 rebate | $700 | $700 |
| Member pays (20% coinsurance) | $200 (20% of $1,000) | $140 (20% of $700) |
| Plan pays at the pharmacy | $800 | $560 |
| Plan gets back later | $300 | $0 |
| Plan net cost | $500 | $560 |
| Total net cost | $700 | $700 |
The total cost after the rebate is $700 either way. In practice, the pharmacy is usually still paid on the full price: the plan or PBM covers the rebate at the counter and collects it from the drugmaker later. The net amounts are the same.
Whichever way it's done, what changes is who gets the $60: applied at the counter, the rebate lowers the member's coinsurance by $60 ($200 − $140, or 20% of $300), and the plan's net cost rises by the same $60.
The example assumes the plan receives the full rebate and the member is past any deductible. Real plans differ:
- Copays. A flat copay doesn't depend on the drug's price, so rebates don't change it either way. The effect falls on coinsurance and deductibles.
- Deductibles. A member in the deductible, including in a high-deductible health plan, can pay the full price before the rebate.
- Most PPO plans. Milliman notes that in most employer-sponsored PPO plans, rebates don't affect an employee's out-of-pocket costs but could reduce employee premium contributions (p. 5).
- Point-of-sale programs. Some plans and PBMs apply rebates at the counter. A program may pass through only part of the rebate, or a set discount, rather than the full amount.
How often does it come up? In an IQVIA analysis commissioned by PhRMA, the drugmakers' trade group, fewer than one in five brand prescriptions for commercially insured patients in 2021 were filled in the deductible or with coinsurance, but those fills made up 60% of patients' out-of-pocket spending on brand drugs (IQVIA for PhRMA, November 2022).
Read the transcript
Say a prescription costs a thousand dollars in January. A three-hundred-dollar rebate may follow. Just not in January.
A pharmacy rebate is a discount a drugmaker pays after the fact, largely in exchange for preferred placement on a plan's formulary. It's typically paid to a PBM. Across all drugs, Milliman projects rebates at nearly a third of allowed drug costs in large employer plans. When PBMs share them with self-funded employers, they typically arrive ninety to one hundred eighty days after claims are paid.
At the pharmacy, coinsurance and deductibles are usually based on the price before the rebate. In this hypothetical, with twenty percent coinsurance, that's two hundred dollars. With the full rebate applied at the counter, it would be one hundred forty. Milliman notes that in most employer PPO plans, rebates don't lower out-of-pocket costs, but can lower premium contributions. Applying them at the counter lowers out-of-pocket costs, but the plan gets less back.
Drugmakers may also pay administrative fees, price protection payments and other incentives. Those payments aren't always treated the same way as rebates. A new Department of Labor rule will require more disclosure of these payments for self-insured plans at employers with a hundred or more employees. That matters, because how contracts define a rebate can affect how much gets credited back.
Ask your broker: Who receives our rebates, and how are they credited back to us? Are member costs calculated before or after rebates? And which drugmaker payments are passed through, and which are retained? Find out more at actuariallysound dot com.
A bigger rebate doesn't mean a cheaper drug
Two hypothetical drugs for the same condition, both fully passed through to the plan:
| Measure | Drug A | Drug B |
|---|---|---|
| Price before rebate | $1,000 | $700 |
| Rebate | $300 | $100 |
| Net cost after rebate | $700 | $600 |
Drug A has the bigger rebate, but Drug B costs $100 less after rebates. A formulary that prefers the drug with the biggest rebate isn't necessarily preferring the lowest net cost, which is why it helps to ask how tier placement is decided (Formulary) and who keeps the rebates (PBM). A member paying coinsurance on Drug A also pays based on its higher price before the rebate.
What counts as a rebate
Drugmakers can pay PBMs in more ways than rebates. In its November 2026 PBM fee-disclosure rule, the Department of Labor describes manufacturer payments as including rebates, administrative fees and price protection fees, and says plan fiduciaries may need clearer disclosures to confirm these amounts are passed through as the contract promises, "in part due to evolving terminology used in the contracts" and "re-routing or recharacterizing of the amounts" (Federal Register, November 2, 2026).
- Rebates. Usually tied to formulary placement and the volume of a drug dispensed.
- Administrative fees. Fees drugmakers pay the PBM, or a rebate aggregator or group purchasing organization it works with, nominally for services such as administering rebates. They're often tied to a drug's list price and use. Under many current contracts, they may not count as rebates that are passed through.
- Price protection. Payments when a drug's list price rises faster than an agreed rate. DOL describes these as an additional rebate; whether your plan shares in them depends on the contract.
A contract that passes through "100% of rebates" can still let the PBM keep payments it doesn't define as rebates. For ERISA plans, once the CAA 2026 applies to the contract, the pass-through rule reaches beyond rebates to fees, alternative discounts and other remuneration, with an exception for bona fide service fees.
Fully insured plans
In a fully insured plan, the insurer and its PBM usually receive the rebates, and they show up in the premium, if at all, through the insurer's rating. For plans subject to the ACA's medical loss ratio rules, rebates and other price concessions that the insurer or its PBM receives and retains must be deducted from incurred claims, so they reduce the claims side of the ratio (45 CFR 158.140). MLR is calculated across an insurer's business in each state and market, not for a single employer.
What the new DOL rule requires
The Department of Labor's final rule covers self-insured ERISA group health plans of employers averaging 100 or more employees, and multiemployer or multiple-employer plans with 100 or more participants. It doesn't apply to fully insured plans.
Covered PBMs must report to the plan fiduciary, twice a year (quarterly on request), the rebates, fees and other payments they receive or reasonably expect to receive from drugmakers, wholesalers and rebate aggregators, in total and for each drug on the formulary, with how much went to the plan and how much the PBM kept. Reports are due within 30 days after each period. The rule takes effect January 4, 2027, for plan years beginning on or after July 1, 2027.
Common misunderstandings
Questions to ask your broker
- Who receives our rebates, and how are they credited back to us? If you're fully insured, ask how the carrier's rebates are reflected in your premium. If you're self-funded or level-funded, ask how much is passed through, how it's paid (an invoice credit or a separate payment), when it arrives, and whether it's guaranteed or actual.
- Are member costs calculated before or after rebates? Ask whether coinsurance and deductibles are based on the price before the rebate, and whether the plan or PBM offers a point-of-sale program, and what it would cost the plan.
- Which drugmaker payments are passed through, and which are retained? Ask for the contract's definition of a rebate, and whether administrative fees, price protection and other payments are included. If your plan is covered by the new DOL rule, ask when you'll get the first report.