In our last post, we looked at why specialty pharmacy negotiations are fundamentally conflicted: the organizations that employers rely on to reduce drug spending often profit from the very spending they’re supposed to control. Once you recognize that conflict, another question naturally follows: if the system is designed around financial incentives that reward complexity, why would rebate dollars ever be easy to track?
Adam Fein recently highlighted exactly that disconnect using PSG’s latest employer survey. PBMs routinely report passing through more than 95% of manufacturer rebates, yet employers tell a different story. According to PSG, only 66% of employers report receiving 100% of rebates on traditional drugs. For specialty drugs – where the largest dollars are at stake – that number drops to just 54%. Nearly half of employers are operating under “alternative” rebate arrangements they often can’t fully explain or independently verify.
Fein explored several possible explanations: maybe employers define “100%” differently than PBMs do. Maybe guaranteed rebate arrangements are muddying the picture. Maybe 340B is draining rebates. Maybe theConsolidated Appropriations Act’s transparency provisions will eventually close the gap.
We think there’s a simpler explanation – and it’s the one nobody in the rebate conversation wants to say out loud: the rebate model itself is the problem, not the measurement of it.
The Gap Isn’t a Mystery. It’s a Feature.
PBMs have spent two decades building payment architecture around rebates – guarantees, minimums, claw-backs, formulary tiers calibrated to manufacturer concessions – rather than clinical value. When 34% of employers report “other arrangements” for traditional drugs, and nearly half do for specialty drugs, that’s not noise in the data. That’s the system working as designed. Complexity isn’t a side effect of rebate-based contracting – it’s the mechanism. A plan sponsor who can’t audit what they’re owed is a plan sponsor who can’t negotiate from a position of knowledge.
The CAQH and CAA transparency requirements Fein references will help. Disclosure laws always help to a point. But disclosure tells you what happened after the fact. It doesn’t change the incentive that produced it. A PBM can be fully CAA-compliant and still be financially better off when a $10,000-per-month specialty drug stays on formulary, rebate intact, regardless of whether that drug is doing anything for the patient taking it.
We’re Asking the Wrong Question
The conversation Fein’s post sparked is entirely about follow the money: who’s getting what percentage of which rebate, under which contract structure, audited by whom. That’s a worthwhile fight, and employers should keep having it. But it’s a fight about splitting a pie that shouldn’t be the centerpiece of the meal in the first place.
Here’s the question we think plan sponsors should be asking instead: is this drug working for this patient?
Not “is this drug on formulary because it carries a favorable rebate.” Not “is this drug preferred because it helps us hit a guaranteed threshold.” Just “for the individual member taking it, is the medication achieving the clinical endpoint it was prescribed to achieve?”
That’s the foundation of what we call a Clinical Efficacy approach at Ethicos Health. Plans should pay for medications when they demonstrably work – measured against real clinical outcomes for real patients – not when they clear a financial threshold negotiated in a contract the employer can barely audit. Our platform lets payers certify and re-certify specialty medications based on whether they’re hitting their clinical goals for each member. Nothing about rebates. Nothing about formulary placement engineered around manufacturer concessions. Just outcomes.
Why This Matters More for Specialty Drugs
It’s worth sitting with why PSG’s specialty number (54%) is so much worse than the traditional number (66%). Specialty drugs are where rebate dollars are largest, where contract complexity is highest, and – not coincidentally – where the clinical stakes are highest too. These are often the drugs treating the most serious conditions, prescribed to patients who have the least ability to push back if a plan’s coverage decision is driven by something other than whether the drug is helping them.
If a plan can’t tell you with confidence what percentage of a specialty rebate it received, what confidence should it have that the specialty drug itself is delivering value to the member? Both questions point to the same underlying failure: a system that was never built to measure what actually matters.
Transparency Is Necessary. It Isn’t Sufficient.
We’re glad the CAA pushed transparency requirements into law, and we’re glad PSG keeps publishing data that makes the rebate gap impossible to ignore. Every bit of pressure on PBMs to disclose their arrangements is pressure plan sponsors should welcome.
But transparency about a flawed incentive structure just gives you a clearer picture of the flaw. It doesn’t fix it. The employers in PSG’s survey who can’t confirm they’re getting 100% of their specialty rebates aren’t suffering from a measurement problem. They’re suffering from having built their entire cost-management strategy around a number that was never supposed to be the point.
The point was always supposed to be “did the medication work.” We think it’s time plans started paying for that question directly.