Recently, I was having a conversation with a large auto dealership employer about pharmacy benefits and prescription drug rebates when he made an observation that really stuck with me.
He said, “You know, in the auto industry, when someone purchases a new vehicle and there’s a manufacturer’s rebate, that rebate comes directly off the purchase price. Everyone can see it.”
Then he compared that to his company’s fully insured health insurance plan.
“When it comes to our pharmacy benefits, we don’t see those rebates. We don’t know how much they are or where they’re going.”
He ended our conversation with a statement that I haven’t stopped thinking about.
“The health insurance business model just doesn’t make sense.”
Let that sink in for a minute. Who does it make sense for?
From his perspective, certainly not the employer paying for the coverage or the employees depending on it. But for the insurance companies and other organizations managing these financial arrangements, the business model can be quite profitable.
He wasn’t asking for a complicated explanation of pharmacy contracts. He was asking a simple business question. If there’s a rebate associated with something his company is paying for, shouldn’t he understand where that money goes?
In healthcare, the answer isn’t always straightforward.
Under a fully insured arrangement, pharmacy rebates may be factored into the insurance company’s overall pricing rather than appearing as a separate credit to the employer. Other funding arrangements may provide more transparency, allowing employers to see some or all of those rebates. But visibility alone doesn’t establish whether the plan is getting the lowest net cost.
It’s one of the reasons I continue to emphasize the importance of understanding how healthcare dollars are allocated before deciding which solutions to put in place.
And pharmacy rebates are only one piece of the puzzle.
Recently, I wrote about something called pharmacy bagging. Brown bagging, white bagging, clear bagging, and gold bagging. Sounds more like a trip to the grocery store than a healthcare discussion, doesn’t it?
These terms describe different arrangements for distributing and administering specialty medications. Sometimes a patient picks up a medication and brings it to a provider. Other times, a specialty pharmacy ships it directly to the treatment location, or the healthcare system coordinates the process through its own pharmacy.
The same medication can result in very different costs depending on how it’s acquired, distributed, administered, and billed.
Think about that for a moment. The medication hasn’t changed, and the treatment may be exactly the same. Yet the financial arrangements behind how that medication reaches the patient can influence what the health plan pays and what the employee owes.
So why should an employer care about pharmacy distribution or rebates?
Because these are the kinds of costs that ultimately influence the healthcare budget. And if employers don’t understand what’s driving those expenses, how can they determine whether they’re getting the best value from their health insurance?
I see this frequently during renewal season. Employers receive their new rates, look at the percentage increase, and immediately begin asking whether another insurance company can offer something less expensive.
That’s understandable. Healthcare continues to be a significant expense for businesses, and nobody wants to pay more than necessary.
But I’ve always believed there’s a more important conversation to have before shopping for another insurance carrier.
How is the current plan funded? Who retains unused claims dollars? Where do the pharmacy rebates go? Can the employer review meaningful claims information and understand the financial arrangements behind the plan?
Whether an employer is fully insured, level-funded, or partially self-funded, those questions help establish a clearer picture of what the business is actually purchasing.
And understanding the financial structure is only the beginning.
We also have to consider whether the coverage is working for the people who depend on it. Having health insurance and being able to afford healthcare are two very different things.
An employer may offer a health plan that satisfies affordability requirements, but can its lowest-paid employees actually afford to use it? Can they manage the deductible, prescription costs, and other out-of-pocket expenses? Do they understand where to go for care?
These are connected conversations. Managing healthcare spending shouldn’t simply mean finding the lowest premium. It should mean understanding how the money is being used and whether the benefits are delivering value to both the company and its employees.
Sometimes the right decision is changing insurance carriers or exploring a different funding arrangement. Other times, the opportunity may already exist within the current plan through better pharmacy contracts, improved care navigation, or a closer examination of how healthcare services are being billed.
There’s no single solution that works for every employer. Understanding the financial arrangements has to come before making recommendations.
Which brings me back to that conversation with the auto dealership.
If someone purchasing a car can clearly see how a manufacturer’s rebate affects the final price, shouldn’t a business spending hundreds of thousands of dollars on health insurance have a better understanding of where its pharmacy rebates are going?
I think that’s a reasonable question.
And perhaps it’s one of the most important questions employers should be asking before their next renewal.
About Ken Wosczyna
Ken Wosczyna of EBA-1 is a healthcare strategist specializing in employer-sponsored health plans, utilization analytics, and sustainable cost control. Based in Stamford, Connecticut, he helps employers develop long-term healthcare strategies that improve affordability for employees while creating more predictable healthcare spending for businesses. Through data-driven analysis and multi-year planning, Ken works with organizations to reduce overspending and build sustainable health plans that better serve both employers and their workforce.
For additional perspectives on employer healthcare strategy, cost management, and industry trends, visit https://eba-1.com/ or subscribe to Ken’s LinkedIn newsletter, K.I.S.S. Healthcare 101 — Keep It Simple & Smart, Monthly Health Insurance at https://www.linkedin.com/build-relation/newsletter-follow?entityUrn=7249889392675155968
