On January 31, 2019, the U.S. Department of Health and Human Services (“HHS”) Office of Inspector General (“OIG”) published a proposed rule designed to combat rising drug costs (“Proposed Rule”). The Proposed Rule seeks to eliminate rebates paid by pharmaceutical manufacturers to plan sponsors or their pharmacy benefit managers (“PBMs”) under Medicare Part D and Medicaid managed care organizations (“MCOs”) by excluding the rebates from the federal Anti-Kickback Statute (“AKS”) discount safe harbor. The Proposed Rule will be open for public comment for sixty (60) days after the publication date, which is currently scheduled for February 6, 2019. If implemented, the Proposed Rule will take effect on January 1, 2020.

The Proposed Rule seeks to reduce drug costs by, among other things, ensuring that beneficiaries receive the benefit of the discount directly at the pharmacy. It also seeks to eliminate financial incentives to PBMs and MCOs to make formulary decisions based on a drug’s rebate potential. Specifically, the Proposed Rule amends the current safe harbor and creates two (2) new safe harbors as described below.

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

First, the Proposed Rule seeks to amend the current AKS discount safe harbor by excluding from the definition of “discount” any pharmaceutical manufacturer reductions in price on prescription pharmaceutical products in connection with their sale to, or purchase by, health plan sponsors under Medicare Part D or Medicaid MCOs, directly or through PBMs, unless the price reduction is required by law.

Further, a new safe harbor included in the Proposed Rule would protect certain price reductions offered by pharmaceutical manufacturers to consumers at the point-of-sale on certain pharmaceutical products covered under Medicare Part D or by Medicaid MCOs, provided that the following conditions are met:

  1. The reduction in price must be set in advance with the plan sponsor under Medicare Part D, a Medicaid MCO or a PBM. HHS proposes that “‘set in advance’ would mean that the terms of the reduction in price would be fixed and disclosed in writing to the plan sponsor under Medicare Part D or the Medicaid MCO by the time of the initial purchase.”
  2. The reduction in price cannot involve a rebate, as defined in 42 C.F.R. § 1001.952(h), unless the full value of the reduction in price is provided to the dispensing pharmacy through a chargeback or a series of chargebacks, or the rebate is required by law. HHS proposes to define a “chargeback” as a “payment made directly or indirectly by a manufacturer to a dispensing pharmacy so that the total payment to the pharmacy for the prescription pharmaceutical product is at least equal to the price agreed upon in writing between the Plan Sponsor under Part D, the Medicaid MCO, or a PBM acting under contract with either, and the manufacturer of the prescription pharmaceutical product.”
  3. The reduction in price must be completely reflected in the price the pharmacy charges to the beneficiary at the point-of-sale.

HHS intends that the Proposed Rule captures any conduct that “mimics” rebates, but is described differently in the contracts between the parties. The Proposed Rule solicits comments on a number of specific topics including, by way of example, this approach to address the range of fees that exist between the parties.

The discount safe harbor would continue to protect pharmaceutical rebates that satisfy its requirements and that are offered to entities other than health plan sponsors under Medicare Part D and Medicaid MCOs.  These entities include wholesalers, hospitals, physicians, pharmacies and third party payors in other Federal health care programs.  Notably, the current discount safe harbor excludes from the definition of “discount” any reduction in price applicable to one payor but not to Medicare, Medicaid or other Federal health care programs.

PBM Service Fees Safe Harbor

In addition, the Proposed Rule promulgated a second new safe harbor to protect certain flat fee payments from pharmaceutical manufacturers to PBMs for bona fide services that PBMs provide to pharmaceutical manufacturers in connection with the pharmacy benefit management services it provides to health plans. The Proposed Rule includes examples of services that a manufacturer provides to a PBM to prevent duplicate discounts for 340B claims. The proposed safe harbor does not protect any payment for services that a PBM provides to a health plan; the only services protected are those that benefit the manufacturer.

In order to qualify for the safe harbor, the following conditions must be met:

  1. The PBM and the pharmaceutical manufacturer must have a written agreement that: (i) covers all of 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 (ii) specifies each of the services to be provided by the PBM and the compensation for such services. The proposed rule notes that compliance with the first condition is necessary to demonstrate compliance with the second condition.
  2. The compensation paid to the PBM 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 any referrals or business otherwise generated between the parties, or between the manufacturer and the PBM’s health plans, for which payment may be made in whole or in part under Medicare, Medicaid or other Federal health care programs.
  3. The PBM must disclose in writing to each health plan with which it contracts at least annually, and to the HHS Secretary upon request, the services it rendered to each pharmaceutical manufacturer that are related to the PBM’s arrangements with that health plan and the associated costs for such services.

If implemented, the Proposed Rule will transform drug pricing beyond the Medicare Part D and Medicaid programs. All stakeholders in the drug supply chain, consumers and customers will be impacted. We encourage interested parties to review the Proposed Rule and consider submitting comments.

For further information on the impact of the Proposed Rule on your business, please contact your Cooley attorney.

Posted by Sarah K. diFrancesca