On January 31, the Department of Health and Human Services (HHS) Office of Inspector General (OIG) issued a proposed new rule that, if finalized, would eliminate existing protection under the Anti-Kickback Statute (AKS) “discount” safe harbor (42 C.F.R. 1001.952(h)) for drug manufacturers’ rebates to plan sponsors or pharmacy benefit managers (PBMs) acting under contract with plan sponsors under the Medicare Part D and Medicaid managed care (“Medicaid MCOs”) programs. If the rule is finalized, these type of rebates could be subject to prosecution under the AKS. In addition to eliminating such drug rebates, HHS proposes to create two new safe harbors that would: (1) protect point-of-sale discounts that drug manufacturers offer directly to patients; and (2) protect certain fixed fee service arrangements between drug manufacturers and PBMs.
In the preamble to the proposed rule, HHS outlines the key reasons why it believes the current protection for manufacturer rebates to plan sponsors (or PBMs under contract with the plan sponsors) under Medicare Part D and Medicaid MCOs should be eliminated. HHS’ fact sheet,which accompanied the proposed rule, outlines three reasons why the current safe harbor for these types of rebates should be eliminated:
- Rebates drive up the price of drugs because PBMs and Medicare Part D plans typically negotiate rebates as a percentage of the list price. Federal healthcare beneficiaries often pay a percentage of the list price and thus pay more for drugs when the list price increases.
- Drug manufacturers pay rebates and other payments to PBMs, but these savings generally are not passed on to consumers and, therefore, result in higher out-of-pocket costs for prescription drugs.
- The rebate system discourages the use of lower-priced generics and biosimilars because insurers and Medicare Part D plan sponsors can extract higher rebates for brand drugs and biologics.
The proposed rule would also add two new safe harbors. The first would protect point-of-sale price reductions offered by manufacturers on certain drugs payable under Medicare Part D or by Medicaid MCOs. HHS says that these point-of-sale reductions create less risk for fraud and abuse to federal healthcare programs than the current rebate system.
The second proposed safe harbor would permit a fixed fee model between PBMs and drug manufacturers for “pharmacy benefit management services.” It would not permit fees for services provided by the PBM to a health plan. Although the rule does not define “pharmacy benefit management services,” it gives several examples of what would qualify, including “contracting with a network of pharmacies; establishing payment levels for network pharmacies; negotiating rebate arrangements; developing and managing formularies, preferred drug lists, and prior authorization programs; performing drug utilization review; and operating disease management programs.”
HHS says that “[r]eplacing safe harbor protections for opaque rebates with transparent discounts is expected to lead to lower Part D spending for Medicare beneficiaries as a whole, because the projected reductions in out-of-pocket costs are larger than potential increases in premiums.” Note that the proposed rule would only apply to rebates affecting federal healthcare programs and therefore would not directly impact commercial insurance rebates.
We anticipate that the proposed rule will have a significant impact on the current drug payment system, if finalized. Entities currently protected under the old safe harbor will need to restructure their contractual arrangements to comply with the new rule; similarly, entities that wish to claim protection under the new safe harbors will need to do the same.
If finalized, the new rule would take effect January 1, 2020. HHS is currently soliciting comments on whether “the proposed effective date gives affected entities a sufficient transition period for any necessary restructuring of arrangements.” The deadline for submitting comments on the proposed rule is 5:00 PM on April 7, 2019.
Norton Rose Fulbright is closely following the proposed rule and will post updates as information becomes available.