Recently, the U.S. Department of Health and Human Services (“HHS”) Office of Inspector General (“OIG”) published a proposed rule (“Proposed Rule”) in the Federal Register to amend the federal anti-kickback statute safe harbor regulations by (1) revising the discount safe harbor to remove protection for reductions in price provided by a pharmaceutical manufacturer to a Medicare Part D plan sponsor, Medicaid managed care organization (“Medicaid MCO”), or pharmacy benefit manager (“PBM”) acting on behalf of either, (2) adding a new safe harbor to protect certain point-of-sale reductions in price for pharmaceutical products, and (3) adding a new safe harbor to protect certain fixed fee compensation arrangements between a pharmaceutical manufacturer and a PBM.

The OIG devotes a substantial portion of the preamble to the Proposed Rule to describing how current prescription drug rebating practices, particularly rebates negotiated between pharmaceutical manufacturers and PBMs, distort the market and ultimately harm federal health care programs and their beneficiaries. The OIG notes that these harms result, in part, because a PBM’s compensation is often based on the size of the rebates that it generates for its health plan customers. Higher-priced drugs allow for greater rebates, which may incentivize PBMs to give higher-priced drugs preferred formulary placement.

While health plans realize savings from the rebates that are passed along to them, the OIG is concerned that these savings are generally not passed along to beneficiaries through reduced cost sharing obligations. This is because a beneficiary’s cost sharing obligation is typically based upon the price paid at the pharmacy counter, not the “net price” after taking into account the rebates. The OIG also cites evidence that health plans fail to take into account the full value of rebates in setting premiums. In issuing the Proposed Rule, the OIG aims to better align incentives among manufacturers, PBMs, and health plans to hopefully curb rising drug prices, among other things. Below, we outline some of the key provisions in the Proposed Rule.

Revisions to Discount Safe Harbor

The discount safe harbor, found at 42 C.F.R. § 1001.952(h), protects certain reductions in price provided by a seller of an item or service payable by a federal health care program provided that certain conditions are met. The Proposed Rule proposes to amend the definition of “discount” to exclude (with limited exceptions) a “reduction in price or other remuneration” provided by a manufacturer “in connection with the sale or purchase of a prescription pharmaceutical product” to a Medicare Part D plan sponsor (including a Medicare Advantage plan offering a prescription drug plan), a Medicaid MCO, or to a PBM acting on behalf of either of these types of entities.

If the proposed changes are finalized, many prescription drug rebates negotiated by PBMs currently structured to comply with the discount safe harbor would no longer be protected. The OIG has proposed an effective date of January 1, 2020, in order to provide sufficient time for existing arrangements to be restructured.

New Safe Harbor: Point-of-Sale Reductions in Price for Prescription Pharmaceutical Products

The OIG proposes the creation of a new safe harbor for point-of-sale reductions in price, which is intended to protect a narrower set of reductions in price offered by prescription drug manufacturers to Medicare Part D plan sponsors and Medicaid MCOs that the OIG views as lower risk.

In order to be protected by the proposed safe harbor, reductions in price on prescription pharmaceutical products offered by manufacturers to a Medicare Part D plan sponsor or Medicaid MCO would need to meet the following criteria:

• The price reduction is set in advance with a Medicare Part D plan sponsor, a Medicaid MCO, or a PBM acting on behalf of either;
• The sale does not involve a rebate unless the full value of the price reduction is provided to the dispensing pharmacy through a “chargeback” or series of “chargebacks" (a payment to the pharmacy to ensure that the pharmacy receives the agreed upon price), or is required by law; and
• The price reduction is completely applied to the price of the prescription pharmaceutical product charged to the beneficiary at the point of sale.

The OIG proposes that this new safe harbor would be effective 60 days after the publication of the final rule.

New Safe Harbor: PBM Service Fees

The second new safe harbor in the Proposed Rule would protect certain payments from prescription pharmaceutical manufacturers to PBMs when the PBM provides services to the manufacturer that are “related to the pharmacy benefit management services that the PBM furnishes to one or more health plans.” The OIG clarifies these services would include, for example, “services rendered to manufacturers that depend on or use data gathered by PBMs from their health plan customers,” such as “services for pharmaceutical manufacturers to prevent duplicate discounts on 340B claims.”

To qualify for protection under this new safe harbor, the following criteria would need to be met:

• The PBM and the manufacturer must have a written agreement that covers all the services the PBM provides to the manufacturer in connection with the PBM’s arrangements with health plans for the term of the agreement and specifies each of the services to be provided by the PBM and the compensation associated with such services;
• The PBM’s compensation must: (i) be consistent with fair market value in an arm’s-length transaction; (ii) be a fixed payment, not based on a percentage of sales; and (iii) not be determined in a manner that takes into account the volume or value of referrals or business otherwise generated between the parties, or between the manufacturer and the PBM’s health plans, for which payment may be made under Medicare, Medicaid, or other federal health care programs; and
• The PBM must disclose in writing to each health plan with which it contracts at least annually, and to the Secretary of HHS upon request, the services rendered to each manufacturer related to the PBM’s arrangements to furnish pharmacy benefits services to the health plan.

Verrill Dana will continue to analyze the Proposed Rule and will monitor the rulemaking process. Organizations can submit comments on the Proposed Rule until 5 P.M. on April 8, 2019. Comments can be submitted here.