Within the high-cost specialty drug market, biosimilars have emerged as one of the most important disruptors in the pharmaceutical landscape. As highly similar alternatives to existing biologic drugs, they are increasing competition and creating opportunities to reduce costs in therapeutic areas such as inflammatory conditions, oncology and endocrinology.
While biosimilars are often discussed in the context of cost savings and increased competition, their impact on the traditional rebate-driven economics of pharmacy benefit managers (PBMs) and drug manufacturers is equally significant. For payors, employers and consultants seeking to optimize pharmacy benefit strategies, understanding how biosimilars influence rebate structures is critical.
Overview of Biosimilars
Biosimilars are biologic products that are similar to an already FDA-approved reference biologic (originator product), with no clinically meaningful differences in safety, purity or potency. Unlike generic drugs, which are chemically identical to their brand counterparts, biosimilars are complex molecules derived from living organisms, making their development and regulatory pathways more intricate.
Since the first U.S. biosimilar approval in 2015, that competition has accelerated. Multiple biosimilars are now available for blockbuster drugs such as adalimumab (Humira) and infliximab (Remicade), expanding treatment options and increasing pricing pressure. While greater competition has the potential to lower net costs, the pathway to those savings is not always straightforward because of the role rebates play in the market.
The Traditional Rebate Model
In the U.S. pharmacy benefit system, rebates are retrospective payments made by drug manufacturers to PBMs (and ultimately plan sponsors) in exchange for favorable formulary placement. Key characteristics of the traditional rebate model include:
- High-list prices wholesale acquisition cost (WAC) paired with substantial rebates.
- Formulary exclusivity or preferred positioning tied to rebate guarantees.
- Spread between gross cost and net cost as a central economic driver.
For many high-cost biologics, manufacturers have historically competed not by lowering list prices, but by increasing rebate percentages to secure or maintain market share.
How biosimilars disrupt rebate dynamics:
1. Lower List Price Strategy vs. High Rebate Strategy
Biosimilar manufacturers often enter the market with lower WACs rather than offering large rebates. This creates a fundamental tension in a system optimized for high-list/high-rebate drugs. In some cases, originator manufacturers respond by increasing rebates to maintain preferred formulary status, effectively offsetting the biosimilar’s lower price.
2. “Rebate Trap” Phenomenon
The rebate trap occurs when the net cost of the originator biologic (after rebates) is equal to or lower than the biosimilar’s net cost, despite the biosimilar having a lower list price. PBMs and plan sponsors may be financially incentivized to prefer the originator product due to higher rebate guarantees, even if the biosimilar offers transparency and lower upfront costs.
3. Formulary Strategy Complexity
PBMs must balance multiple factors when deciding formulary placement:
- Guaranteed rebate revenue.
- Net cost comparisons.
- Client-specific rebate pass-through arrangements.
- Clinical considerations and provider adoption.
As a result, some formularies initially excluded biosimilars or placed them in non-preferred tiers, slowing adoption despite their cost-saving potential.
4. Shift Toward Net Cost Evaluation
As scrutiny from regulators and large employers of PBM practices has increased, there has been a gradual shift toward evaluating drugs based on net cost rather than rebate volume. Biosimilars are well-positioned in this environment because their pricing model is typically more transparent and less reliant on back-end rebates.
5. Impact on PBM Revenue Models
PBMs that rely heavily on retained rebates or spread pricing may experience margin compression as biosimilars reduce overall rebate pools. This has contributed to the rise of alternative PBM models, including:
- Pass-through pricing models.
- Transparent fee-based arrangements.
- Net cost formularies.
These models are often more aligned with maximizing biosimilar adoption.
Case Study: Adalimumab (Humira) Market Entry
The 2023 introduction of multiple adalimumab biosimilars provides a clear example of rebate disruption. Biosimilars launched with dual pricing strategies:
- Low-list-price versions with minimal rebates
- High-list-price versions with significant rebates
Originator manufacturer AbbVie responded aggressively with increased rebates, resulting in scenarios where PBMs continued to favor Humira on formulary due to higher rebate guarantees, despite the availability of lower-cost biosimilars.
The implications for plan sponsors and employers:
- Rebate vs. Net Cost Tradeoff. Employers must evaluate whether maximizing rebates or minimizing net cost is the primary objective.
- Contract Alignment. PBM contracts should be structured to ensure alignment with biosimilar adoption goals (e.g., rebate pass-through, net cost guarantees).
- Formulary Transparency. Greater visibility into formulary decision-making is essential to ensure that financial incentives do not override cost-saving opportunities.
- Clinical Management. Encouraging provider and member adoption of biosimilars through education and utilization management is critical.
Future Outlook
The continued expansion of biosimilars, particularly in high-cost categories like oncology and inflammatory therapies, will further pressure the rebate-driven model. With policymakers and regulators increasingly focused on rebate reform, there may be an acceleration of the transition toward transparent, net-cost-based pricing frameworks.
Over time, the success of biosimilars will depend not only on their clinical and economic value but also on the evolution of the underlying financial incentives that govern formulary decision-making.
Biosimilars have the potential to significantly reduce drug spending, but their impact is closely tied to the structure of the rebate system. While they introduce competition and lower list prices, they also challenge entrenched financial models that prioritize rebate volume over net cost. For plan sponsors, understanding and addressing these dynamics is essential to fully realizing the value of biosimilars.
