In November 2020, the Department of Health and Human Services (HHS) finalized a regulation aimed at lowering prescription drug prices and out-of-pocket spending for prescription drugs by excluding rebates on prescription drugs paid by manufacturers to or purchased by Medicare Part D plan sponsors or pharmacy benefit managers (PBMs) acting under contract with Medicare Part D plan sponsors from the existing discount safe harbor under the federal Anti-Kickback Statute (AKS).1 The regulation reflects the first change to the AKS discount safe harbor since the Medicare Part D program was established.2 In addition to the rebate exclusions, two new safe harbors were added. One of these new safe harbors protects point-of-sale reductions in price from a manufacturer to a plan sponsor under Medicare Part D or a Medicaid Managed Care Organization (MCO) for a prescription drug payable, in whole or in part, by a plan sponsor under Medicare Part D or a MCO, provided certain conditions are met. The other protects certain fixed-fee services arrangements between manufacturers and PBMs.3
New Rule
The rule finalized in November modifies the existing discount safe harbor4 by expressly excluding from the definition of a “discount” eligible for safe harbor protection certain reductions in price or other remuneration from a manufacturer of prescription drug to plan sponsors under Medicare Part D or PBMs under contract with them. The final rule notes that, from 2014 to 2016, Part D rebates and price concessions grew three times faster than gross drug expenditures. In theory, price concessions should help lower government spending by lowering premiums. When Part D plan sponsors subtract their estimated rebates from plan bids, the result should be a lower premium. In turn, lower premiums should result in lower government spending on premium subsidies. However, in the final rule, OIG reiterated a point it previously made in the proposed rule about price concessions, such as rebates, stating:
[R]ebates also may create a perverse incentive that rewards manufacturers for increasing their list price, while subjecting consumers to higher out-of-pocket costs. Since beneficiary out-of-pocket costs are often calculated based on the list price of the drug (i.e., before rebates are paid), beneficiaries pay higher cost-sharing than they would if discounts were reflected at the point of sale. Furthermore, high list prices may result in more beneficiaries more quickly reaching the catastrophic phase, where the Federal government bears 80 percent of the drug costs and the Part D plans only cover 15 percent of the drug costs.5
Based on the foregoing concerns, the agency finalized its proposal and issued the final rule to create incentives for manufacturers to lower list prices, reduce incentives for Part D plans to have high-cost, highly rebated drugs, and lower beneficiary out-of-pocket spending. Prior to the final rule, a rebate offered by a pharmaceutical manufacturer to a Medicare Part D drug plan or entity contracting with a Medicare Part D drug plan may have fit under the discount safe harbor if applicable criteria under the safe harbor were met.
New Safe Habors
The final rule also adds a new safe harbor at 42 C.F.R. § 1001.952(cc) for point-of-sale price reductions that are offered by pharmaceutical manufacturers for prescription drug products that are payable under Medicare Part D or a Medicaid MCO that meet certain criteria. Discounts may be permissible under the new safe harbor if they are: (1) set out in advance; (2) in writing with a Part D Plan or Medicaid MCO; (3) do not involve rebates; and (4) reflect the price a pharmacy would charge a beneficiary at the pharmacy counter (the point of sale).
The final rule also clarifies a few aspects regarding permissible point-of-sale price reductions under the discount safe harbor, including that discounts tied to formulary placement and bundled sales arrangements may be permissible. For formulary placement, the OIG noted that “reductions in price given to Part D plan sponsors or Medicaid MCOs that are conditioned on formulary placement of a particular drug can qualify for protection under the new safe harbor for point-of-sale reductions in price (and could have been protected for Part D plan sponsors under the discount safe harbor, and can continue to be protected under the discount safe harbor for Medicaid MCOs if all safe harbor conditions are met).”6 The OIG further clarified that point-of-sale reductions contingent on formulary placement may qualify for protection provided that there are no required services (e.g., marketing) in connection with the formulary placements and all conditions of the safe harbor are met.7 In regard to bundled price arrangements, the OIG clarified that a reduction on price contingent on a bundled sales arrangement (e.g., by providing for a reduction in price for one drug contingent on formulary placement of another drug) is not prohibited. OIG cautioned, however, “that to be protected under the safe harbor, the reduction in price must be reflected in the price of the product at the point of sale and a reduction in price that is not known at the time of sale (and therefore cannot be reflected at the time of sale) would not meet this condition of the safe harbor.8
The second new safe harbor (42 C.F.R. § 1001.952(dd)) protects certain fixed payments that manufacturers pay to PBMs for services rendered to the manufacturers. The safe harbor requires the services and compensation to be: (1) set out in writing: (2) the compensation must be a fixed-fee services arrangement consist with fair market value; and (3) there is an annual disclosure requirement for the PBM to make disclosures to contracted health plans regarding the services rendered to the pharmaceutical manufacturer related to the pharmacy benefit management services provided to the health plan.
Pharmaceutical companies have until January 1, 2022, until rebates are no longer protected under the existing discounts safe harbor. The deadlines give companies time to amend existing arrangements and become compliant with the new regulations. The new safe harbors will become effective on January 29, 2021, 60 days after the rule was finalized.
AGG Observations
These changes represent the federal government’s increased scrutiny on prescription drug costs and efforts aimed at reducing the costs to the government. While rebates have the potential to reduce government spending, they may result in increased list prices and higher out-of-pocket costs for beneficiaries. This final rule is the OIG’s attempt to ensure such incentives are not influencing manufacturer pricing.
[1] Final Rule, “Fraud And Abuse; Removal of Safe Harbor Protection for Rebates Involving Prescription Pharmaceuticals And Creation of New Safe Harbor Protection for Certain Point-of-Sale Reductions in Price on Prescription Pharmaceuticals and Certain Pharmacy Benefit Manager Service Fees,” 85 Fed. Reg. 76666, available at https://public-inspection.federalregister.gov/2020-25841.pdf (November 30, 2020).
[2] The Anti-Kickback Statute and its accompanying regulations make it a criminal offense to knowingly and willfully offer, pay, solicit, or receive any remuneration to induce or reward referrals of items and services which may be reimbursable by federal health care programs (e.g., Medicare, Medicaid). 42 USC § 1320a-7b(b); 42 CFR Part 1001. “Remuneration” includes the transfer of anything of value, directly or indirectly, overtly or covertly, in cash or in kind, and includes any kickback, bribe or rebate. 42 USC § 1320a-7b(b)
[3] Final rule, 85 Fed. Reg. 76666 (November 30, 2020).
[4] The discount safe harbor, which can be found at 42 § CFR 1001.952(h), protected “a discount or other reduction in price” on an item or a service reimbursable under the Medicare, Medicaid or other Federal healthcare program provided the criteria set forth in the safe harbor were met (e.g., the reduction in price is properly disclosed to the buyer and the reduction is properly reflected in the costs claimed or charges made for the item or service). 42 CFR § 1001.952(h)
[5] Final Rule, “Fraud And Abuse; Removal of Safe Harbor Protection for Rebates Involving Prescription Pharmaceuticals And Creation of New Safe Harbor Protection for Certain Point-of-Sale Reductions in Price on Prescription Pharmaceuticals and Certain Pharmacy Benefit Manager Service Fees,” 85 Fed. Reg. 76666, available at https://public-inspection.federalregister.gov/2020-25841.pdf (November 30, 2020).
[6] Id.
[7] Id.
[8] Id.
