Discounts, rebates and kickbacks

One of the purposes of this blog is to educate readers about basic issues in pharmacy business.  This post will discuss the differences between discounts, rebates, and kickbacks.  Warning – I am not a lawyer and this is not a legal opinion.  It’s a non-lawyer’s attempt to understand and explain some basic pharmacy business concepts.

A headline on the Wall Street Journal Health Blog from earlier this year announced that “AstraZeneca Pays $7.9M to Settle Kickback Charges Paid to a PBM”   The federal government alleged that AstraZeneca made illegal rebate payments to Medco in exchange for preferred formulary position for Nexium (a very popular drug prescribed for ulcers).

Pharmaceutical companies commonly provide rebates to PBMs and specialty pharmacies to increase use of their products, so why was the rebate in this situation a kickback?

Discounts vs. Rebates

A discount is a reduction in the amount that a seller charges a buyer.  It is intended to increase the likelihood of a sale and, consequently, to increase use of a good or service.  A pharmaceutical company provides a discount to a hospital pharmacy so the pharmacy will use the company’s product rather than a competitor’s. Discounts are given at the time of the sale, are shown on the invoice, and are provided to the purchaser.

A rebate is also a reduction in price that is intended to increase sales.  However, while the method used to calculate the rebate is specified at the time of purchase, the actual rebate is received in the future.   This is necessary because rebates are based on product sales.  While rebates for generic products are usually paid to the purchaser (a pharmacy or wholesaler), rebates for patented, brand name products are usually paid to the PBM.   Pharmaceutical companies provide rebates so that PBMs will place their products in preferred positions on PBM formularies.   A pharmaceutical company pays a rebate so a PBM will make its product the only one of its kind on the formulary (exclusive status) or so that the copay for its product is less than the copay of competing products (preferred status).


A kickback occurs when one party provides payment, or offers to pay, in order to get or increase business with another party.  In pharmacy, most kickback litigation involves Medicaid and Medicare.  Kickbacks are specifically defined and prohibited in federal legislation.   The Social Security Act “provides criminal penalties for individuals or entities that knowingly and willfully offer, pay, solicit or receive remuneration in order to induce the referral of business reimbursable under the Federal or state health programs.”

This seems a lot like what pharmaceutical companies do – they pay PBMs to increase sales of their drugs, many of which are reimbursed by Medicaid or Medicare.  Pharmaceutical companies can legally offer rebates because of the “safe harbor” provisions in federal law.   The safe harbor provision allows a company to legally offer a rebate if the rebate is properly disclosed to the plan sponsor (the organization, such as a health insurance company or self-insured employer, that is paying for the drugs) and if the rebate is reflected in the amount that the PBM charges the sponsor.  The federal government allows these types of rebates because it believes that it can benefit from them.  A rebate paid to a PBM and passed on to the federal government can lower the government’s drug costs.

However, not all rebates are legal and the line separating legal and illegal rebates is not clear.  The general rule seems to be that the more transparent the rebate reporting, and the more the plan sponsor benefits from it, the less likely that it’s a kickback.  That is, if the rebate is clearly reported to the plan sponsor and if the rebate, or a major portion of it, is passed on to the sponsor, then it’s less likely to be a kickback.

A rebate is more likely to be a kickback when it interferes with or skews clinical decision making with no benefit to the patient, when it increases costs, when it results in overutilization, or when it raises concerns about patient safety or quality of care.

So where did AstraZeneca (allegedly) cross the line?

The government’s complaint alleges that AstraZeneca “knowingly conspired with Medco” to keep Nexium in a preferred formulary position even though competing drugs were less expensive to patients and health plans (including the federal government).  If this allegation is true, then AstraZeneca’s rebate payments were kickbacks because they resulted in plan sponsors paying higher prices for ulcer drugs.