Healthcare Economics Engine

Rebate Optimization

Model formulary tier changes, quantify rebate impact vs. net cost, and identify when accepting lower rebates delivers higher total savings

The Rebate Trap

Your PBM brags about $42 PMPM in rebates. Sounds great—until you realize they steered utilization to the highest-WAC drugs to maximize their rebate revenue. Your net cost? 15% higher than it should be. Rebates aren't savings when the ingredient cost is inflated to create them.

Typical Rebate

$35-$50

PMPM Rx rebates

Rebate Retention

15-25%

PBM keeps portion

Net Cost Impact

8-12%

higher when rebate-chasing

✗ What Fails Without This Engine

•Can't model net cost: only see gross ingredient cost and rebate separately
•Formulary decisions based on rebate dollars, not total cost of care
•No visibility into rebate-for-spread trade: PBM wins, plan loses
•Generic deflection undetected: brand preferred when generic is cheaper net

Net Cost Optimization

Our Rebate Optimization Engine models formulary tier scenarios, calculates true net cost (ingredient + dispensing - rebates), identifies when lower rebates yield lower total cost, and generates alternative formularies optimized for net spend—not rebate maximization.

Rebate Optimization Algorithm
// Current state analysis
FOR each drug IN formulary:
  gross_cost = ingredient_cost + dispensing_fee
  rebate = contracted_rebate_percent × WAC
  net_cost = gross_cost - rebate
  
  // Find therapeutic alternatives
  alternatives = GET_same_therapeutic_class(drug)
  
  FOR each alt IN alternatives:
    alt.net_cost = (alt.ingredient + alt.dispensing) - alt.rebate
  
  // Rank by net cost
  RANK alternatives BY net_cost ASC

// Scenario modeling
SCENARIO "High Rebate (Current)":
  preferred_brands = drugs with rebate > 40%
  total_rebate_pmpm = $48
  net_cost_pmpm = $285

SCENARIO "Low Rebate Generic":
  preferred_generics = lowest_net_cost
  total_rebate_pmpm = $22
  net_cost_pmpm = $242
  
  savings = $285 - $242 = $43 PMPM
  foregone_rebate = $48 - $22 = $26 PMPM
  
  NET BENEFIT = $43 - $26 = $17 PMPM
  // You save $17 PMPM by accepting lower rebates

// Implementation
IF net_savings > rebate_loss:
  RECOMMEND formulary_change
  GENERATE tier_placement_report
  FLAG utilization_targets

Engineering Architecture

Core Components

Net Cost Calculator: Ingredient + dispensing - rebates for every NDC
Therapeutic Substitution Finder: Identify lower-cost alternatives in same class
Scenario Modeler: Compare high-rebate vs. low-rebate formularies
Utilization Shifter: Forecast member response to tier changes

Optimization Metrics

Net Cost Reduction

8-14%

vs. rebate-chasing

Generic Deflection

$12-18 PMPM

captured savings

Rebate Impact

$20-35 PMPM

foregone rebates

Net Benefit

$8-22 PMPM

total plan savings

Real-World Applications

Statin Formulary Redesign

•Current: Lipitor preferred (high rebate, high WAC)
•Rebate: $42 PMPM, Net cost: $68 PMPM
•Alternative: Generic atorvastatin preferred
•Rebate: $8 PMPM, Net cost: $28 PMPM
•Net savings: $40 PMPM despite $34 lower rebates
•Annual savings: $480K on 10K lives

Diabetes Therapy Optimization

•PBM preferred: Brand GLP-1 (rebate-maximizing)
•Engine analysis: Generic metformin + SGLT2i cheaper net
•Rebate loss: $18 PMPM
•Net cost savings: $52 PMPM
•Net benefit: $34 PMPM
•3-year savings: $1.2M, implementation approved

Optimize for Net Cost, Not Rebates

Model formulary scenarios. Calculate true net cost. Identify when accepting lower rebates delivers higher total savings. Stop chasing rebates—start chasing net cost reduction.

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