The Formulary-Rebate Connection: Why Lowest-Net-Cost Strategy Is More Important Than Ever
In a volatile drug pricing environment, the plans that win are the ones that think beyond WAC.
The market looks calm. The underlying economics aren’t.
On the surface, drug spending trends seem manageable. Utilization is predictable, trend rates are quoted with confidence, and rebate checks are still arriving. But underneath that apparent stability, the economics of drug pricing are shifting faster than most plan sponsors realize.
Most favored nation (MFN) rule developments are reshaping how manufacturers think about pricing ceilings. Biosimilar uptake is disrupting long-standing rebate arrangements on blockbuster biologics. And manufacturers – never passive participants in this ecosystem – are quietly restructuring how and where they put their contract dollars. The formulary strategy decisions you make today will have outsized consequences for plan performance in 2027, 2028, and beyond. And at the center of all of it is a question that sounds simple but rarely is: what are you actually paying, net of everything?
The Rebate Landscape Is Shifting — And Not in Your Favor
Rebate compression is real. Manufacturers are moving value out of traditional rebate structures and into other contract vehicles – price protection clauses, administrative fees, utilization-based incentives, and outcomes arrangements. For plans and PBMs that have been managing formulary strategy primarily through the lens of rebate PMPM, that shift creates a meaningful blind spot.
This is especially visible in the biologic space. Adalimumab, ustekinumab, and other high-spend biologics have historically generated substantial rebate revenue — revenue that plans have counted on to offset premium or control trend. But the emergence of biosimilars has changed the calculus. Manufacturers are competing aggressively to retain market share, which means rebate offers are fluctuating, contract terms are increasingly complex, and the “right” formulary position for a given plan is no longer obvious. Plans that are evaluating these decisions on rebate dollars alone are leaving money – sometimes significant money – on the table.
What Lowest-Net-Cost Really Means
Lowest-net-cost is not simply about choosing the cheapest drug. It’s about evaluating the full financial picture: rebates, price protection, patient cost share, utilization impact, and administrative costs – together, in context, for your specific plan population.
That framing changes how you think about a lot of decisions. A preferred branded product with a strong rebate may still lose the lowest-net-cost comparison to a biosimilar available at a significantly lower WAC with no rebate at all. Whether that trade-off is favorable depends on your contract terms, your utilization mix, your patient cost-sharing design, and how effectively your utilization management program can steer volume.
The adalimumab biosimilar landscape is the clearest current example. Plans across the market are landing in different places – some maintaining rebated Humira as preferred, others transitioning to interchangeable biosimilars at lower WAC, and others building tiered strategies that capture value from both. None of those positions is universally right. But plans that are making those decisions without modeling the full net-cost picture are almost certainly not in the optimal position.
Utilization management programs – prior authorization, step therapy, quantity limits – are where lowest-net-cost strategy gets operationalized. The clinical and administrative design of those programs directly determines whether your formulary intent translates into actual cost performance. A formulary position without the right UM infrastructure behind it is just a paper strategy.
A Practical Framework for Plan Sponsors
If you’re looking to pressure-test your current approach, here’s where to start:
Know your baseline. Before you can optimize, you need a clear picture of what you’re paying today — gross cost, rebate, price protection, and net cost at the drug and therapeutic class level. Surprises at this stage are common, and they’re informative.
Model your conversion opportunities. Where are you on biosimilar and generic uptake relative to where you could be? Formulary tier and UM design both influence conversion rates, and in high-spend categories, even modest shifts in utilization mix can move the net-cost needle meaningfully.
Review your rebate contract terms. First, ask whether you even have full visibility into your contract terms — many plan sponsors are working with summaries or secondhand reporting rather than the underlying agreement. The right partner should be able to give you that transparency. Then ask whether the terms themselves are working: Are utilization-based tiers actually achievable given your current formulary design? Are price protection clauses structured to provide real downside protection, or are the thresholds set where they’re unlikely to trigger? These details matter more than they used to.
Align formulary tiers and UM criteria to your net-cost targets. Your clinical program should be designed to support your financial strategy, not operate independently of it. If your formulary team and your rebate team aren’t working from the same model, you’re going to have gaps.
Partner with an organization that can execute. Lowest-net-cost strategy requires both clinical and financial expertise working in coordination. Having a strategy on paper is a starting point — but the value is in the implementation.
The Plans That Win Are the Ones That Think in Lockstep
The next 18 months will sort plans into two categories — and with MFN pricing on the horizon for 2027, the window to get your strategy right is shorter than it feels. The pricing environment is too volatile, the biosimilar landscape is too active, and the rebate market is too dynamic to manage formulary strategy and contract strategy as separate functions.
Health Delegates sits at that intersection by design. As a rebate solutions partner and clinical management organization, we bring both sides of the equation to the table — the contract expertise to understand where value actually lives in your rebate arrangements, and the clinical formulary expertise to translate that into UM programs and tier design that perform.
If you haven’t done a formulary review with a lowest-net-cost lens recently, it’s worth the conversation.
➤ Schedule a formulary review with our team
Subscribe for Exclusive Industry Insights
Contact Us
