Be Prepared: Current Rebate Implications of CMS’s Proposed Drug Pricing Anti-Kickback Rule

Morgan Lewis
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The Centers for Medicare and Medicaid Services (CMS) issued proposed regulations in February targeting manufacturer arrangements with pharmacy benefit managers (PBMs). These proposed regulations are a direct outgrowth of the administration’s drug pricing blueprint, and if finalized, would revise the Anti-Kickback Statute discount safe harbors that have protected drug manufacturer rebates from potential criminal liability, and affect their agreements with PBMs. However, what many may not realize is that even if the proposed regulations are not finalized, they warrant special attention, as the preamble elucidates CMS’s view on applicability of the current safe harbors to current contracting practices.

The vast majority of prescription drug claims are covered by private insurers, including Medicare Part D and Medicaid Managed Care (MMC) plans. These insurers contract with PBMs to negotiate rebates from manufacturers, which are intended to offset the amount insurers pay to pharmacies. Insurers also contract with PBMs to develop and administer formularies used to manage pharmacy benefits. These are lists of drugs that are covered by a health plan and are usually in tiers differentiated by beneficiary copay. When developing and managing formularies, PBMs evaluate the cost of drugs in a therapeutic class, based on the price the pharmacy charges the plan reduced by rebates and other discounts. Thus, the payment of rebates can make a manufacturer’s drug more cost effective than other therapeutically equivalent drugs, resulting in a preferred drug formulary position. If passed through to the insurer, the rebate also may reduce insurers’ costs, permitting the insurer to provide drug benefits at reduced prices to beneficiaries. However, concerns have been raised as to whether the full value of these rebates is passed to insurers.

In addition to rebates, drug manufacturers also commonly pay PBM administrative fees for the performance of certain services pursuant to rebate agreements between drug manufacturers and PBMs. CMS has expressed concerns regarding these separate administrative fees.

The proposed rule reflects the administration’s belief that these PBM arrangements can result in higher list prices, higher federal healthcare program net costs, instances of PBM preference for higher-priced drugs, and higher out-of-pocket costs to federal healthcare program beneficiaries, particularly those receiving drugs through Medicare Part D and Medicaid Managed Care channels. To address these perceived effects and by way of background, the proposed rule would make three changes to the current safe harbors:

  • It would remove rebates paid by manufacturers to PBMs under Medicare Part D and MMC plans from the current discount safe harbor.
  • It would create a new safe harbor for discounts provided in the form of rebates on prescriptions reimbursed under Medicare Part D and MMC plans. This safe harbor would only apply if certain conditions are met, including that the full value of the price reduction be provided to the dispensing pharmacy and be completely applied to the price of the drug charged to the beneficiary at the point of sale. Clarification, however, is needed on how the benefit is passed through to the beneficiary. If the rebate functions as copay assistance, it could reduce beneficiary rejection rates or encourage use of a particular product. Moreover, if enacted, these changes in the safe harbors, taken together, may put manufacturers and PBMs at risk, depending on the terms of their existing PBM rebate agreements.
  • It would create a new safe harbor for PBM administrative fees that meet certain conditions. Importantly, while the proposed administrative fee safe harbor would protect payments for services that are furnished by the PBM to the manufacturer, the preamble identifies certain core “pharmacy benefit management services” that the PBM provides to the plan and not the manufacturer. These services would not be protected.

Because the proposed rule would potentially criminalize many longstanding practices, it raises a host of legal issues. But even if the proposed rule is not finalized, manufacturers should pay special attention to the discussion in the preamble, as it may warrant reevaluation of current compliance with existing regulations.

  • First, although Congress anticipated that Medicare Part D plans would use their formularies as leverage to obtain manufacturer rebates, and it separately mandated payment of rebates on all prescriptions paid by MMC plans, the preamble articulates CMS’s belief that some rebates paid by manufacturers to insurers or PBMs under MMC or Medicare Part D plans are not covered by the current discount exception in the Anti-Kickback Statute.
  • Second, the preamble states CMS’s position that rebates paid to PBMs do not constitute discounts protected by the current safe harbor to the extent such payments are retained by the PBM and not passed through to any plan. Manufacturers should consider evaluating the terms of their existing PBM agreements regarding the pass-through of rebates on to the insurer.
  • Third, the preamble expresses CMS’s concern that PBM administrative fees that are based on a percent of list price can function as disguised kickbacks, resulting in higher fees regardless of the actual services provided. Manufacturers should consider the implications of the preamble on fair market value analyses predicated solely on benchmarking other manufacturers’ fee percentages.
  • Fourth, the preamble reiterates CMS concerns regarding rebate agreements that cover prescriptions under both commercial and federal healthcare programs but pay rebates only on commercial prescriptions. CMS has long been concerned that such commercial rebates can induce purchases under federal healthcare programs in violation of the Anti-Kickback Statute. Manufacturers, accordingly, should continue to ensure that agreements covering federal healthcare programs are negotiated independently from commercial rebate agreements.
  • Finally, the preamble to the proposed rule highlights CMS’s view of the differences between services PBMs provide plans and those they provide manufacturers. Manufacturers should take these perceived distinctions into account and ensure that services are provided for the manufacturer’s benefit when performing market value analyses of service fees for the purpose of price reporting compliance.
Overall, the proposed rule and its accompanying discussions are likely to cause re-evaluation of current PBM practices, regardless of whether the rule is finalized. Accordingly, manufacturers should review CMS’s preamble discussions against their current rebate and PBM practices to understand how these practices fit within CMS’s current thinking. Companies should also consider the potential impact of the rule on their current PBM agreements to be prepared in the event the rule is finalized. 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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