By Giorgio Vescera, Vice President of Underwriting and Analytics at Navion
Your PBM just sent a proposal showing two separate wins: lower claim costs from biosimilars, plus a strong rebate guarantee. The math looks amazing. You save $1 million on claims and receive $600,000 in rebates. Total benefit: $1.6 million annually.
Except you won’t get both. You’ll get one or the other, and likely much less than either number suggests.
This gap between what proposals show and what employers actually receive is created by a single contract clause: rebate credit language. It allows PBMs to take financial credit against your guaranteed rebates when drug prices fall, or biosimilars are introduced into the market. In other words, if you’re saving money on the claim side as a result of a manufacturer lowering its prices or releasing a biosimilar, the PBM reduces the rebate you receive, which significantly lowers those projected savings.
The result is a financial optic most employers don’t see until their rebate payments arrive.
How Rebate Credits Became Standard
Rebate credits started with insulin.
In 2024, the cap on Medicaid drug rebates, known as the AMP cap, was removed. Insulin manufacturers responded with list price cuts that few in the industry saw coming. Insulin had historically been one of the most heavily rebated drug categories, and PBMs had counted on those rebates when they underwrote their contracts. The legislation all but eliminated them.
That left PBMs holding rebate guarantees they could no longer fund. Instead of updating every contract, they introduced rebate credits: contract language that lets the PBM take credit against a rebate guarantee when a drug’s price drops and its rebates shrink. The PBM measures what it can actually collect against what it promised, then reduces your rebate check to close the gap.
In 2025, PBMs extended the concept to Humira biosimilars. Many were co-preferring Humira and its biosimilars on the same formulary tier. As members moved to the lower-cost biosimilars, the Humira rebate dollars the contract assumed started disappearing, and rebate credits covered that shortfall too.
From there, the list kept growing: more drugs affected by the Inflation Reduction Act, then the Stelara biosimilars.
The pattern is the same each time. When a high-rebate drug gets cheaper, the rebate guarantee stops matching reality. A $5,000 rebate guarantee made sense when scripts cost $8,500. It doesn’t work when scripts cost $1,200.
The Hidden Math: Where Savings Disappear
Here’s a realistic scenario. An employer group with significant Humira utilization negotiates a biosimilar-preferred contract. The proposal shows:
- Claim costs drop from $8,500 per script to $1,200 (saving $7,300 per script)
- Rebate guarantee of $4,000 per script
For 200 scripts annually, this projects to $1.46 million in claim savings plus $800,000 in rebates, about $2.26 million total.
But when reconciliation arrives, the math changes. The PBM claims credit for the claim savings the employer already realized. The rebate payment is reduced by the amount the client saved by filling the biosimilar instead of the highly rebated product. Because the client saved $7,300 per script and the rebate was $4,000, the rebate is wiped out entirely. Annual savings land at $1.46 million instead of $2.26 million.
Across a three-year contract, that $800,000 annual gap becomes $2.4 million in unexpected rebate loss.
The Real Problem: Contract Language is Everything
The core issue isn’t that rebate credits exist. It’s that the language authorizing them is intentionally vague.
Most rebate credit clauses read: “PBM may take credit against guaranteed rebates when lower-cost alternatives enter the market” or “when utilization shifts to lower-cost therapeutics.”
Notice what’s missing: specificity. Which drugs trigger credits? Is there a date cutoff? Is the credit calculated on the cost difference between the two products, or on the actual rebate lost when the lower-cost product is filled? What are the criteria for adding products to rebate credit eligibility, or removing them?
Every PBM interprets and calculates this differently. Some apply credits broadly. Others apply them narrowly. Some calculate the credit on the cost difference between products. Others use the actual rebate lost. The contract language gives them discretion, and they use it.
During reconciliation, when employers finally see the math, it’s too late. The calculations have already been done. The check’s already been reduced. And because the contract language is ambiguous enough to support the PBM’s interpretation, there’s no clear violation.
Why This Matters in 2027
As PBMs compete for business this renewal season, rebate credit language is becoming more aggressive. For employers renewing in 2027, the contract you sign now controls how rebate credits are calculated for the next three years.
Rebate credits also don’t expire on their own. Many PBMs are still applying credits to products whose price dropped, or whose biosimilar launched, more than two years ago. By then, the pricing shift should already be reflected in the contract. Keeping the credits in place lets a PBM show higher per-claim rebate guarantees on paper while the credits reduce what’s actually paid out.
What You Need to Do
Before signing a contract, ask:
- “Can you provide a proposal with no rebate credits?” Comparing it with the standard proposal shows how much of the rebate guarantee depends on credits.
- “Show me the rebate credit language. Which drugs does it apply to?”
- “How exactly is the credit calculated?”
- “Can you walk me through an example with real numbers?”
- “What is my effective rebate guarantee if rebate credits are applied?”
Rebate credits exist because they allow PBMs to show increased rebates each year, even though the actual rebates a group receives could be lower in the years ahead as manufacturers lower prices and new biosimilars are released for highly rebated products. They let PBMs present competitive proposals on paper while protecting margins through contract language most employers never fully understand. The complexity isn’t accidental. It’s the point.
You’re signing a three-year contract that controls millions of dollars in pharmacy spend. You should understand every term. If you don’t, the person across the table probably counted on that.
