HHS proposes removal of safe harbor protections for prescription drugs

February 11, 2019 | Health care

On January 31, 2019, the Office of the Inspector General (OIG) of the Department of Health and Human Services (HHS) released a proposed rule that would eliminate anti-kickback safe harbor protections for price reductions or other remuneration between drug manufacturers and plan sponsors under Medicare Part D, Medicaid Managed Care Organizations (MCOs), and any Pharmacy Benefits Managers (PBMs) under contract with those groups. At the same time, HHS proposed to create two new safe harbor protections for some point-of-sale price reductions on prescription drugs, and certain PBM service fees. The proposed changes would take effect in 2020 if finalized. The proposed rule was published in the Federal Register on February 6, 2019, and is open for public comment through April 8, 2019.

The proposed rule would make fundamental changes to the nature of negotiations between drug manufacturers, PBMs, Part D plans, and Medicaid MCOs. Notably, the Administration intends for the policy to create new incentives for manufacturers to lower list prices and replace rebates with discounts.

Importantly, the proposed changes would apply only to Part D plans and Medicaid managed care organizations. Discounts under current safe harbor provisions would continue for drugs offered to other entities, such as wholesalers, hospitals, physicians, pharmacies, and third-party payers in other federal health care programs. State-based rebate arrangements also would remain in place.

In order to change policies governing contracts between PBMs and commercial payers, Congress would have to pass legislation that the President would sign into law. In a speech on Friday, February 1, 2019, HHS Secretary Alex Azar said,

Congress has an opportunity to follow through on their calls for transparency . . . by passing our proposal into law immediately and extending it into the commercial drug market.

Context

HHS has stated their view that manufacturer rebates to PBMs and insurance plans present a significant incentive to list higher prices for prescription drugs. Because rebates and other concessions are often based on a drug’s list price, HHS sees higher prices as benefitting plans, PBMs and manufacturers either directly in the case of drug manufacturers, or as a function of the percentage rebate paid to plans and PBMs.

Specifically for Medicare, HHS asserts that under the current rebate structure, stakeholders can take advantage of cost sharing and government reinsurance structures under Part D. In addition, because rebates are higher for brand-name pharmaceuticals and biologics, HHS raised concerns that current practices could discourage the use of generic and biosimilar products by creating a disincentive for PBMs to give such drugs more favorable placement on formularies.

The proposed rule builds upon comments submitted in response to a request for information included in the 2019 Medicare Advantage and Part D policy and technical notice of proposed rulemaking.

This proposed rule follows on a series of administrative actions that began on May 11, 2018, when the President released the American Patients First Trump Administration Blueprint to Lower Drug Prices and Reduce Out of Pocket Costs. The Blueprint includes a number of policy proposals focused on the way drugs are priced both in the US and globally, some of which may be achieved through regulatory changes, while others may require legislation or international trade negotiations.

Highlights of the key provisions of the proposed rule are provided below:
 

Amendment to the discount safe harbor

The proposed rule would amend the existing discount safe harbor so that the safe harbor no longer would protect price reductions from manufacturers to plan sponsors under Medicare Part D or Medicaid MCOs, either directly or through PBMs acting under contract with plan sponsors.

Because the discount safe harbor applies to items payable by Medicare, Medicaid or other federal health care programs, HHS solicits comments on whether this amendment should also apply to prescription pharmaceutical products payable under other HHS programs such as Medicare Part B fee-for-service, or Medicaid managed care programs operating under a Section 1915 waiver.

Under the proposed rule, the amendment to the discount safe harbor would take effect on January 1, 2020.
 

New safe harbor for certain price reductions on prescription pharmaceutical products

The proposed rule would create a new safe harbor that would provide for manufacturers to offer a price reduction for a prescription drug to a Part D plan, a Medicaid MCO, or a PBM if the following conditions are met:

1. The price reduction would need to be set in advance of a plan or PBM purchasing a drug.
2. Rebates would only be permitted if the price reduction is provided to the dispensing pharmacy via a chargeback.
3. Any price reductions must be reflected in the price the pharmacy charges to the beneficiary, i.e. the pharmacy would have the necessary information to appropriately charge a beneficiary who owes coinsurance, because all discounts are known at the point of sale, even if the manufacturer ultimately gives the pharmacy a payment through a chargeback corresponding to the negotiated price with the payer.

The proposed rule solicits comment on how pharmacies and PBMs under a common owner would function under this safe harbor.

The proposed effective date for the new safe harbor would be 60 days after publication of the final rule.
 

New safe harbor for certain PBM service fees

The proposed rule would create a new safe harbor that would protect fixed fees that manufacturers pay to PBMs for services provided to pharmaceutical manufacturers that meet certain criteria.

More specifically, the proposed safe harbor would protect fixed fees that manufacturers pay to PBMs for services provided to pharmaceutical manufacturers, for the manufacturers’ benefit, when those services relate in some way to the PBMs’ arrangements to provide pharmacy benefit management services to health plans. The safe harbor would apply only to a pharmaceutical manufacturer's payments for services a PBM provides to the manufacturer; the safe harbor would not apply to for any services that the PBM provides to a health plan.

To receive the protections under the proposed new safe harbor, HHS proposes the following criteria:

1. The PBM and the manufacturer have a written agreement that:
   1. Covers all of the services the PBM provides to the manufacturer in connection with the PBMs’ arrangements with health plans for the term of the agreement
   2. Specifies each of these services to be provided by the PBM and the compensation for such service
2. Compensation paid to the PBM must:
   1. Be consistent with fair-market value for an arm’s length transaction
   2. Be a fixed payment, not based on the percentage of sales
   3. 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 manufacturers and the PBMs’ health plans, for which any payment may be made in whole or in part by Medicare, Medicaid or other Federal health care programs
3. The PBM at least annually disclose in writing to each health plan with which it contracts, the services the PBM provided to each pharmaceutical manufacturer that is related to the PBM’s arrangements with that health plan and the associated costs for such services. The disclosure would have to be made to HHS as requested.

The proposed rule seeks comment on whether the third condition for the safe harbor should be expanded to require PBMs to disclose fee arrangements to the health plans; OIG proposes to require disclosure of the fee arrangements to HHS.
The proposed rule also seeks comment on whether the third condition for the safe harbor should be expanded to require PBMs to disclose to HHS additional information about the fee arrangements, including information about some or all of the following:

• Information about valuation and valuation methodology
• Information demonstrating that fee arrangements are not duplicative of other arrangements for which the PBM might receive duplicative payments
• Information demonstrating that fee arrangements meet “volume or value” criteria

The proposed rule does not specify an effective date for the proposed new safe harbor.
 

Impact of the proposed rule

HHS recognizes that the proposed rule would affect beneficiary and government spending on Part D plans, premiums and cost sharing, but cites difficulty in predicting manufacturer and Part D plan behavior in modeling the impact of the proposed policy changes. To that end, HHS engaged the CMS Office of the Actuary, Milliman and Wakely Consulting Group to assess the potential on both premiums and out of pocket expenses under various assumptions.

In general, HHS expects that the proposed rule would reduce out-of-pocket prescription drug costs for individuals enrolled in health plans that elect to use the proposed new safe harbor for certain point-of-sale price reductions.

The six modeled scenarios project increases in premiums ranging from nine percent to 19 percent, and reductions in cost-sharing ranging from nine percent to 14 percent.
 

Background on the Stark anti-kickback statute

When originally enacted in 1989, the Stark Law (named after former House Ways and Means Committee Chairman Pete Stark (D-CA) was intended to address concerns that referrals for health services can create incentives for overutilization, restrict patient choice, and reduce market competition in instances where there is a financial benefit such as profit sharing for the referring practitioner. The Stark Law has two key elements:

• A prohibition on physicians making referrals for certain “designated health services” (DHS) payable by Medicare to an entity with which the physician or an immediate family member has a financial relationship
• A prohibition on that entity from filing claims with Medicare (or any other billing) for those referred services

The statute includes specific exceptions to the prohibitions and provides for the Secretary of the Department (HHS) to create additional regulatory exceptions for financial relationships that do not present a risk of program or patient abuse.

Presently, rebates between drug manufacturers and other non-consumer entities such as PBMs and insurance plans have an exemption granted under the Secretary’s authority.

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