On January 31, the Department of Health & Human Services (HHS) Office of Inspector General (OIG) issued a proposed rule to fundamentally change the system for negotiating drug prices under Medicare Part D and, potentially, for other government and private payers. HHS proposes to revise the regulatory discount safe harbor to the Anti-Kickback Statute (AKS) so the rebates that pharmaceutical manufacturers pay to Medicare Part D and Medicaid managed care organizations (MCOs) are no longer protected by the safe harbor. While the revision would not make such rebates illegal per se, HHS anticipates that pharmaceutical manufacturers, Part D plans and Medicaid MCOs would conclude that—absent the safe harbor’s protection—rebate payments present too great a legal risk, and the practice of paying such rebates would come to an end.
HHS hopes that pharmaceutical manufacturers, free from the obligation to pay rebates, will convert the rebate payments into reduced list prices and price discounts delivered at the time and point of sale.
The proposed rule reflects a priority of HHS Secretary Alex Azar, who has targeted rebates. HHS touted the rule as having “the potential to be the most sweeping change to how Americans’ drugs are priced at the pharmacy counter, ever.” While there is no doubt that the change, if enacted, would be quite significant, there is uncertainty about what exactly the rule would accomplish. The proposed rule’s own estimates vary tremendously as to whether it would actually save the federal government money, and thus far, stakeholder reactions have been mixed. The Pharmaceutical Research and Manufacturers of America (PhRMA) hailed the proposal as a means to “fix the misaligned incentives in the system,” while pharmacy benefit manager (PBM) trade associations argued against the rule. Democrats on the Hill quickly offered their clear opposition; Senate Finance Committee Ranking Member Ron Wyden (D-OR) and House Energy & Commerce Committee Chair Frank Pallone (D-NJ) issued a statement asserting that the rule is the wrong approach to addressing drug pricing and will increase government spending as well as Medicare beneficiaries’ premiums and out-of-pocket costs. Congressional Republicans have thus far been mostly silent on the rebate rule, but discussion is likely to pick up during several scheduled committee hearings about drug pricing.
Background. Drug reimbursement under Medicare Part D and for Medicaid MCOs differs from reimbursement for most other covered items and services because it has, to date, involved manufacturer rebates to plans and PBMs after a drug has been dispensed. These rebates reduce the plan’s or PBM’s net cost for the drug. Manufacturers generally agree to pay rebates in exchange for preferred treatment by the plan, such as inclusion on a formulary or on a lower tier in Part D, or inclusion on a preferred drug list with limited utilization management in Medicaid. This quid pro quo could make these rebates an illegal kickback under the AKS, but there is currently little risk because of the discount safe harbor. The discount safe harbor is one of many safe harbors under the AKS that protect conduct that is thought to be at low risk of fraud and abuse.1
Summary of the Proposed Rule. Under the proposed rule, HHS aims to reverse the long-standing legal protection for manufacturer rebates to plans and PBMs. In tandem with this change, HHS proposes the creation of a new safe harbor that would protect price reductions provided to Medicare Part D plans, Medicaid MCOs and PBM providers that are set in advance, do not involve a rebate (unless the full value of the reduction is provided to the dispensing pharmacy through a chargeback) and are “completely” applied to the drug’s price paid by the beneficiary at the point of sale. In effect, the two changes mean that rebates paid by a manufacturer to Medicare Part D plans, Medicaid MCOs and PBM providers would not be protected by any safe harbors if the payment is paid after the beneficiary obtains a drug from a pharmacy. Discounts would be protected if the discount is realized by the pharmacy at the point of sale so that the beneficiary is charged a lower price when obtaining the drug. HHS proposes that the exclusion of drug rebates from the definition of discounts that are protected from AKS risk would be effective on January 1, 2020.
HHS also proposes adding a safe harbor for service fees paid by manufacturers to providers of PBM services. This new safe harbor would create an avenue for protecting payments from manufacturers to PBMs while attempting to ensure that such payments are not disguised prohibited rebates.
Impact on Drug Prices. There are two ways that the proposed rule could accomplish its goal of reducing prescription drug costs, drug prices and drug price increases. As HHS hopes, manufacturers could lower their list prices, which in turn could cause pharmacies to accept lower payments from public payers and commercial plans. Alternatively, rather than offering an across-the-board price reduction, manufacturers could still provide discounts to individual managed care plans as long as the discounts were reflected at the point of sale. Under the current system, rebates are not transparent; if a manufacturer gives a high rebate to Medicare Part D plans, Medicaid MCOs and PBM providers, no one but the manufacturer and the plan or PBM is aware of these price concessions, which are subject to confidentiality agreements. Some economists argue that transparency actually discourages big discounts: If a manufacturer knows that a deep discount will become publicized, it may not offer such a discount out of the belief that other health plans will demand the same low price. Also, manufacturers will be aware of their competitors’ pricing strategies and may adjust their strategies to eliminate what they see as unnecessary price concessions.
Medicare Impacts. HHS’ projections of the fiscal impact of the proposal vary significantly. Three of the five actuarial analyses that predicted spending impacts concluded that the proposal would actually cost the federal government more money to operate Medicare Part D, while two found there would be savings.2 For Medicare beneficiaries, each of the six projections predicts that Part D premiums would rise under the proposal because Part D plans use some or all rebate revenue to keep premiums down, and HHS anticipates that with the loss of that revenue, premiums will increase. The CMS Office of the Actuary (OACT) concluded that “the majority of beneficiaries would see an increase in their total out-of-pocket payments and premium costs” but average spending would decline because the “minority of beneficiaries who utilized drugs with significant manufacturer rebates would experience a substantial decrease in costs.” Although the proposed rule does not address any effects of drugs covered under Medicare Part B, the proposal could have consequences for Part B drug spending. If manufacturers stop providing rebates to commercial plans for drugs that are also covered under Part B (the possibility of which is addressed below), then the loss of such rebates could increase federal spending on those drugs. But if net prices for such drugs fall in the commercial market, then Part B drug spending may decrease accordingly.
Medicaid Impacts. Importantly, rebates paid to state Medicaid programs (including supplemental rebates) remain covered by the safe harbor under HHS’ proposal. Since most pharmaceutical rebates under Medicaid are paid directly to states, and because rebates paid to Medicaid MCOs are comparatively low, the proposal would not affect Medicaid the way it would affect Medicare Part D. The estimated Medicaid fiscal impact is comparatively small; OACT projected $1.7 billion in increased costs for the federal government and $200 million in increased costs for state Medicaid programs over ten years.3 Nevertheless, a substantial change in drug reimbursement under Medicare is likely to have Medicaid ramifications. If list prices fall due to the end of rebates under Medicare, then rebates paid to states—which are tied to list prices—could also fall. States, however, could cut pharmacy payment rates under the theory that pharmacies are acquiring drugs at lower prices. Thus, a potential outcome is that rebate revenue to states would decrease, but states’ payments to pharmacies would also decrease.
Commercial Plan Impacts. The AKS applies only to federal healthcare programs such as Medicare and Medicaid; therefore, the proposed rule does not directly impact rebates paid to commercial health plans, and Secretary Azar has called on Congress to pass legislation to directly restrict rebates in the commercial market. Nonetheless, it could have an impact; in the proposed rule, OIG emphasized its long-standing concern that discounts provided in the commercial sector could be used to induce Medicare or Medicaid business. Manufacturers may conclude that payment of rebates to sponsors of commercial plans or to PBMs that also sponsor or provide services to Part D plans creates enough legal uncertainty that such rebates should be avoided. Further, many states have their own anti-kickback laws that apply to the commercial market. Manufacturers may also find it is easier to align their Medicare Part D and commercial practices, and thus the end of rebates under Part D could mean the end of rebates in the commercial market as well.
1Conduct that does not fall within the terms of a safe harbor may still be legal, although entities may be more cautious about engaging in activity not protected by a safe harbor, especially in conditions such as this, where OIG has specifically identified what it believes to be a higher-risk situation.
2OACT offered the most negative assessment, concluding that the federal government would have to spend an additional $196.1 billion over ten years as a result of the proposal. The most optimistic analysis predicted savings of $99.6 billion over that time period; this particular scenario was the only actuarial analysis that assumed that net prices would drop because of the proposal.
3 The increase in costs is based in part on states having to increase Medicaid MCO payments to compensate them for their loss in rebate revenue. OACT estimated that states nevertheless would save $4 billion over ten years overall because the additional Medicaid costs would be offset by lower drug prices paid by states for their own employees. This assumes that manufacturers would reduce the list price of their drugs or slow the increase in list prices of their drugs.