Let’s say the quiet part out loud:
Rebates take money from sick employees and help discount premiums for healthy ones.
And the moment you point this out, the defenses come fast:
“But it’s legal.”
“Fiduciaries must treat everyone equal.”
Those aren’t explanations.
They’re rationalizations.
Here’s the truth: A health plan that relies on sick people overpaying for drugs isn’t “balanced.” It’s broken.
Legal? Maybe.
Ethical? Not even close.
And every fiduciary should know it.
Where Ethics and Fiduciary Duty Collide
Let’s put this plainly:
Rebates come from the sickest 5–10% of your employees using high-cost drugs simply to stay functional.
Those same employees likely face high deductibles, steep coinsurance, and inflated list prices engineered to make the rebate pool bigger.
Then those rebate dollars get used to reduce premiums or fund other plan costs for the healthy majority.
The result?
The sick subsidize the healthy while struggling to pay for the medications keeping them alive.
And most leaders pretend this tradeoff doesn’t exist.
Some fiduciaries hide behind “acting in the best interest of all participants,” as if that phrase magically justifies harming the few for the convenience of the many.
But let’s be honest:
Using your sickest employees as a revenue strategy isn’t fiduciary leadership.
It’s a moral failure with a legal facade.
The Sick Subsidize The Healthy
Ethics in a Fog of Legality
Once you understand how the rebate system really works, the ethical breach becomes undeniable:
1. The rebate economy starts with inflated prices.
List prices rise so rebate checks can rise.
Everyone in the system knows it.
Only the sick pay the difference.
Why should sick employees pay inflated prices just to fund a rebate everyone else enjoys?
2. Coinsurance is calculated on inflated numbers.
Employees pay 20–40% of a fictional list price.
If any other industry charged consumers based on a fake sticker price, regulators would call it deceptive.
In health plans, we call it “cost sharing.”
3. Rebate checks feel like free money.
They aren’t.
They represent the accumulated overpayments of your most medically vulnerable people.
Using those dollars to reduce premiums for everyone else isn’t “smart purchasing.”
It’s internal cost-shifting from the vulnerable to the comfortable.
4. High deductibles multiply the harm.
People in a High-Deductible Health Plan (HDHP) pay the full inflated list price until their deductible is met.
For the sickest employees, that means they fund your rebate pool at the highest possible rate.
It’s not a side effect.
It’s the business model.
5. Harm isn’t theoretical. It’s measurable.
And has a large human impact:
Doses skipped
Prescriptions abandoned
Chronic conditions worsening
ER visits spiking
Medical debt spiraling
Avoidable deaths
This is not an “unintended consequence.”
It’s a predictable outcome of a system designed to extract value from the sickest people in your care.
Ethical Questions Every Fiduciary Must Answer
1. Who paid for the rebate check your plan celebrated last year?
Picture their conditions.
Picture their bills.
If you can’t explain the money flow without discomfort, you’ve already found the ethical breach.
2. Could you defend your rebate strategy in an employee town hall?
Plain English only.
No jargon.
Try saying:
“We charge your sickest coworkers inflated prices so everyone else can pay lower premiums. And if you or your family get sick, that’s how it will work for you too.”
If that sounds unthinkable, so is the strategy.
3. Are you comfortable knowing employees skip medication to pay rent or buy groceries?
Because they are.
Not because the drug is expensive.
Because the rebate system made it expensive.
4. If the person skipping medication were your spouse or child, would you still defend the plan design?
Ethics become clear when anonymity disappears.
If You Can’t Tell Employees
Case Study: Insulin in an HDHP
Many employees, especially lower-paid workers, choose a High-Deductible Health Plan (HDHP) because it has the lowest premium.
But for anyone who becomes dependent on insulin, that choice becomes a financial trap almost immediately. Consider an employee who develops diabetes in a typical HDHP:
30-day insulin list price: ~$500
HDHP rule: pay full list price until the deductible is met
Common deductible: $3,000–$5,000
This means she pays:
$500 per month, out of pocket
$1,500 in the first quarter alone
And she still hasn’t reached the deductible
Only after meeting the deductible does she shift to coinsurance or a copay.
Meanwhile, the PBM’s net price for insulin after rebates is much lower. But she is forced to pay based on the inflated price designed to maximize rebate revenue.
The outcome is predictable:
She rations doses
Her blood sugar control deteriorates
She risks hospitalization
All while the inflated price she pays helps fund rebates that lower premiums for healthier coworkers.
Tell yourself this is “legal.”
Then ask whether it’s ethical to design a plan where the people least able to absorb financial shocks subsidize everyone else.
Fiduciary Solution: Ethics First
Three commitments define an ethically sound health plan:
1. The sick should never subsidize the healthy.
Rebates shouldn’t be the foundation of your plan or premium strategy.
Seek lowest net cost solutions whenever possible.
Avoid rebates wherever possible
2. Coinsurance should never be based on inflated, fictional prices.
Use lowest net price frameworks.
Cap out-of-pockets for specialty drugs.
Or eliminate coinsurance entirely.
Anything else is a silent tax on the sick.
3. Ask your benefits team the question that reveals everything:
“Show me exactly who pays the most in our plan and why.”
If the answer is “people with the highest medical needs pay the most,” the responsibility to fix it is yours.
Key Takeaways
If your plan relies on sick employees overpaying, it’s broken.
Ethics must be the standard. Legality is the bare minimum.
Fiduciary leadership begins where legal minimums end.
Rebates are funded by the sickest 5-10%.
HDHPs + inflated list prices = predictable harm.
“Equal treatment” isn’t an excuse for harming the vulnerable.
Don’t do it if wouldn’t explain it in an Employee Town Hall.
A Better Kind of Leadership
You can:
Meet the legal minimum and still fail the people who depend on you.
Satisfy ERISA while ignoring human consequences.
Run a plan that looks efficient on paper but quietly extracts the most from the people who are already suffering the most.
That isn’t fiduciary leadership.
It’s rationalized harm.
Because the real issue here isn’t compliance.
It’s conscience.
“The mere existence of pharmacy rebate schemes has placed fiduciaries in an impossible position, not of their own making. Many states have realized this and enacted laws barring rebates altogether. It’s time for Congress to do the same.”
– Alden Bianchi, Employee Benefits Lawyer
Impossible positions are exactly where leadership becomes visible.
You can’t change the entire system overnight. But you can stop structuring your plan in ways that harm the sickest people in it.
A fiduciary’s first responsibility is to protect people especially the ones at greatest risk.
A rebate-driven design flips that duty upside down, forcing the sickest employees to fund the benefits of the healthiest.
No appeal to legality can make that morally acceptable.
No spreadsheet can sanitize the human damage it causes.
Rebates don’t just distort prices.
They distort priorities.
No fiduciary should tolerate a system that harms the very people who trust them most.
Call to Action:
Join the Nautilus Proof Movement
The biggest red flag in PBM contracting isn’t a bad clause.
It’s that you don’t know what’s in your contract.
PBM agreements are private.
Rebate flows are opaque.
And silently terms can create significant fiduciary exposure.
The Nautilus Contract X-Ray initiative is changing that by building the first marketwide benchmark of real PBM clauses. It lets fiduciaries:
See what others are signing
Spot dangerous language
Avoid rebate-diversion traps
Make defensible, participant-aligned decisions
Until PBM contracts become transparent, fiduciaries are making multimillion-dollar decisions in the dark.
📄 Send us your PBM contract → We’ll run a Contract X-Ray
📊 Compare it to fiduciary-grade standards
🤝 Join the coalition building a transparent, participant-first pharmacy market
Be part of the proof. Not the problem.
Note of Appreciation
Alden Bianchi
Alden Bianchi is an Employee Benefits and Executive Compensation lawyer with McDermott Will & Shulte. He advises corporate, not-for-profit, governmental, and individual clients on issues, including retirement plans, stock and stock-based compensation arrangements, ERISA fiduciary and prohibited transaction issues, benefit-related aspects of mergers and acquisitions, and health and welfare plans.
Visit nautilushealth.org/pbm to find educational resources, procurement tools, model contract terms, the PBM Configurator, and other tools.
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