HHS OIG's Proposed Rule: 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

On January 31, 2019, the Department of Health and Human Services (HHS) Office of Inspector General released a Proposed Rule on 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 (Proposed Rule).¹ The Proposed Rule will be published in the Federal Register on February 6, 2019, and we expect that comments are due on April 8, 2019.²

As indicated by the title of the Proposed Rule, HHS proposes the following three changes:

1. Exclude from the definition of a discount eligible for safe harbor protection certain reductions in price or other remuneration from a prescription pharmaceutical product manufacturer to Part D plan sponsors, Medicaid managed care organizations (MCOs), or pharmacy benefit managers (PBMs) under contract with either.
2. Adopt a new safe harbor that would protect point-of-sale price reductions offered by manufacturers on certain prescription pharmaceutical products payable under Medicare Part D or by Medicaid MCOs.
3. Adopt a new safe harbor that would protect fixed fees that manufacturers pay to PBMs for services rendered to manufacturers that meet specified criteria.

Below we describe these three proposals, and HHS's requests for comment on the proposals, in more detail.   

HHS explains that the purpose of the Proposed Rule is to "address the modern prescription drug distribution model and ensure safe harbor protections extend only to arrangements that present a low risk of harm to the federal health care programs and beneficiaries."³ In the preamble to the Proposed Rule, HHS describes the current structure of rebates in the pharmaceutical supply chain, the historical evolution of the statutory exception for discounts,⁴ and the regulatory discount safe harbor,⁵ as well as concerns with how the current rebate system may create incentives for manufacturers to raise list prices and for PBMs to encourage the use of drugs with higher list prices, thereby harming federal health care programs and their beneficiaries.⁶

HHS offers two key interpretive statements regarding the current statutory exception and regulatory safe harbor. First, with reference to the statutory exception,⁷ HHS states that "[r]ebates paid by drug manufacturers to or through PBMs to buy formulary position are not reductions in price. In the Secretary's view, such a payment would not qualify as 'a discount or other reduction in price.'"⁸ Second, HHS states:

We recognize that the payments manufacturers retrospectively make to PBMs under rebate agreements would not constitute discounts or other reductions in price to the extent such payments are retained by the PBM and not passed through to any buyer[.] We do not intend to imply through the issuance of this proposed rule that such payments qualify for safe harbor protection under 42 CFR 1001.952(h). Notwithstanding, out of an abundance of caution and desire to offer bright line guidance regarding the treatment of retrospective payments to PBMs that they retain, we are proposing to specify that such payments (including payments that may be labeled as "rebates") are not protected by the discount safe harbor.⁹

HHS acknowledges that the Anti-Kickback Statute and the regulatory discount safe harbor were promulgated long before the enactment of the Medicare prescription drug benefit and the evolution of Medicaid MCOs,¹⁰ suggesting that the current rebate system related to these programs necessitates the changes set forth in the Proposed Rule.   

A. Amendment to the Discount Safe Harbor: Exclusion from the Discount Safe Harbor of Remuneration from Drug Manufacturers to Part D Plans, Medicaid MCOs, or their PBMs

In its first proposal, HHS would amend the discount safe harbor (42 C.F.R. § 1001.952(h)) to exclude from protection: "A reduction in price or other remuneration from a manufacturer in connection with the sale or purchase of a prescription pharmaceutical product to a plan sponsor under Medicare Part D, a Medicaid Managed Care Organization [under Social Security Act 1903(m)], or to a pharmacy benefit manager acting under contract with a plan sponsor under Medicare Part D, or Medicaid Managed Care Organization, unless it is a price reduction or rebate that is required by law."¹¹The arrangements excluded from protection under the discount safe harbor would thus be any "reduction in price or other remuneration" from a drug manufacturer in connection with the sale or purchase of a prescription drug to a Part D plan sponsor, Medicaid MCO, or their PBMs (except rebates required by law), although the preamble usually speaks of "rebates." HHS cites rebates under the Medicaid Drug Rebate Program as an example of rebates "required by law."¹² HHS seeks comments on whether the exclusions from the discount safe harbor should go beyond Medicare Part D and Medicaid MCOs to other HHS programs (e.g., "Medicare Part B fee-for-service").¹³

HHS would add definitions of several key terms used in the amendment to the discount safe harbor and seeks comments on these definitions. "Plan sponsor under Medicare Part D" is described as "the sponsor of a prescription drug plan (PDP) as well as a Medicare Advantage organization offering a Medicare Advantage prescription drug plan."¹⁴ Another important term, "pharmacy benefit manager" or "PBM," would be defined as "any entity that provides pharmacy benefits management on behalf of a health benefits plan that manages prescription drug coverage."¹⁵ HHS plans to clarify the scope of price reductions excluded from the discount safe harbor by defining "in connection with" (which is used in proposed 42 C.F.R. § 1001.952(h)(5)(viii) but not defined) and seeks feedback on such a definition.¹⁶   

HHS also specifies some of the arrangements the discount safe harbor would continue to protect. In particular, HHS intends for the discount safe harbor to "continue to protect discounts on prescription pharmaceutical products offered to other entities," including but not limited to "wholesalers, hospitals, physicians, pharmacies, and third-party payors in other federal health care programs."¹⁷ HHS also intends for the discount safe harbor to continue protecting "other types of discounts (e.g., volume or prompt pay discounts to wholesalers) that currently are protected by the discount safe harbor" and asks whether additional text is needed to clarify this point.¹⁸ Although it discussed protecting these discounts, HHS expressed concern that protecting them could lead to "unintended loopholes."¹⁹  HHS stated a concern that such price reductions might be used to funnel remuneration to parties that otherwise would have been in the form of rebates (as those rebates would no longer qualify for safe harbor protection).²⁰

HHS states that it "does not intend for this proposal to have any effect on existing protections for value-based arrangements between manufacturers and plan sponsors under Medicare Part D or Medicaid MCOs."²¹ HHS solicits comments on the extent to which the proposed discount safe harbor change and the accompanying new safe harbor (presumably the safe harbor for certain point-of-sale discounts) may affect any existing or future value-based arrangements between manufacturers and Part D plan sponsors or MCOs; and how any "currently protected arrangements or arrangements that might be protected under the proposed safe harbor are "value-based."²²

With regards to rebates to a PBM or MCO for "private pay plans," HHS notes that "nothing in this rule changes the discount safe harbor's provision that excludes from protection price reductions offered to one payor but not to Medicare or Medicaid, particularly when such discounts serve as inducements for the purchase of federally reimbursable products."²³ HHS further explains that:

[I]f a manufacturer offered a rebate on a product to an insurer for its private pay plans conditioned (explicitly or implicitly) on the product's favorable formulary placement across all plans (including Part D plans), such a rebate could be remuneration that would implicate the anti-kickback statute and would not be protected by the current discount safe harbor or by the provisions of this proposed rulemaking.²⁴

HHS proposes that if the amendment to the discount safe harbor were finalized, it would take effect on January 1, 2020. Recognizing that "many entities may be using the current discount safe harbor to protect financial arrangements that no longer would meet the definition of 'discount,'" HHS seeks comment on whether this proposed effective date would give affected entities a sufficient transition period.²⁵

HHS seeks comments on a number of additional topics concerning the proposed change in the discount safe harbor, including the following:

• Whether excluding from safe harbor protection price reductions from manufacturers to plan sponsors under Medicare Part D or Medicaid MCOs (either directly or through PBMs) would affect beneficiary access to prescription pharmaceuticals, either due to cost or formulary placement.
• Whether supplemental rebates paid to state Medicaid programs would be affected by the proposal.
• Whether there are price reductions from manufacturers to entities other than Part D sponsors, Medicaid MCOs, and their PBMs that pose fraud and abuse risks.
• Whether there are safeguards already in place or that could be included to protect beneficial price reductions while preventing potential abuses.
• Whether the proposed definitions of "manufacturer," "wholesaler," "prescription pharmaceutical product," and the other new definitions are sufficient.

B. New Safe Harbor for Certain Point-of-Sale Reductions in Price for Prescription Pharmaceutical Products

In its second proposal, HHS would create a new safe harbor (proposed 42 C.F.R. § 1001.952(cc)) to protect certain point-of-sale (POS) price reductions offered by manufacturers of prescription pharmaceutical products to Medicare Part D plans, Medicaid MCOs, or their PBMs.²⁶ Specifically, the proposed POS safe harbor would apply to any price reduction that meets three conditions:

1. The price reduction must be set in advance between the manufacturer and the Part D plan sponsor, the Medicaid MCO, or its PBM.
2. The price reduction cannot involve a rebate as defined in 42 C.F.R. § 1001.952(h) (i.e., "any discount the terms of which are fixed and disclosed in writing to the buyer at the time of the initial purchase to which the discount applies, but which is not given at the time of sale"²⁷) unless the full value of the price reduction is provided to the dispensing pharmacy through a chargeback or series of chargebacks (or unless the rebate is required by law).
3. The price reduction "must be completely applied to the price of the prescription pharmaceutical product charged to the beneficiary at the point of sale."²⁸

With respect to the first condition, HHS would define "set in advance" as "fixed and disclosed in writing to the plan sponsor under Medicare Part D or the Medicaid MCO by the time of initial purchase,"²⁹ meaning the first purchase of the product by the Part D plan or Medicaid MCO on behalf of the beneficiary at the reduced price.

With respect to the second condition, HHS would define "chargeback" as "a payment made directly or indirectly by a manufacturer to a dispensing pharmacy so that the total payment to the pharmacy . . . [i.e., total of the beneficiary cost-sharing, plan payment, and manufacturer chargeback] 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."³⁰ HHS asks for comment on "the ability of wholesalers to facilitate chargebacks to pharmacies in a timely fashion."³¹

With respect to the third condition, HHS states that "the reduction in price must be completely reflected in the price the pharmacy charges to the beneficiary at the point of sale. For example, if the discounted rate is set in advance, at the time of dispensing the pharmacy would have the information needed to appropriately charge a beneficiary who owes coinsurance, even if the manufacturer ultimately tenders the dispensing pharmacy a payment through a chargeback to reflect this negotiated price with the payor."³²

HHS states that this proposed new safe harbor would apply to reductions in price without regard to what phase of the Part D benefit the beneficiary is in.³³ HHS asks for comment on proposed revisions to the regulatory text to clarify how the proposed safe harbor would apply during periods of 100% cost-sharing (presumably meaning the deductible).³⁴

HHS proposes that the effective date for the new safe harbor would be 60 days after publication of the final rule.³⁵

HHS solicits comment on a number of additional topics related to the proposed new safe harbor for POS price reductions, including the following:

• Whether the proposed safe harbor could result in negative or positive effects on pricing or competition due to an increase in transparency.³⁶ Similarly, HHS asks whether allowing price reductions to be processed at the POS may provide pharmacies with sufficient data to reverse engineer manufacturers' or PBMs' discount structures and (if so) how this might occur, how it might affect competition, and how (if at all) this should be addressed in the proposed safe harbor.
• Whether the safe harbor would incentivize manufacturers to provide POS discounts and whether (and, if so, how) the proposed conditions should be modified to encourage these POS price reductions without posing any undue risk to programs or patients.³⁷
• Whether the proposal captures the intent to exclude from protection price reductions offered to one payor but not to Medicare or Medicaid.³⁸
• Whether ownership relationships between some pharmacies and PBMs could create potential issues, and how to best address them.³⁹
• Whether the proposed definitions, including the proposed definition of "chargeback," are appropriate.

C. New Safe Harbor for Certain PBM Service Fees ⁴⁰

In its third and final proposal, HHS proposes a new safe harbor (proposed 42 C.F.R. § 1001.952(dd)) that would protect certain fixed fee service arrangements between PBMs and manufacturers (PBM Service Fees).⁴¹ HHS states that some PBM fees may not implicate the Anti-Kickback Statute, or may be protected under existing safe harbors, but nevertheless proposes this new safe harbor specific to PBMs to protect certain low risk service fees. HHS explains that if service fees paid by manufacturers are tied to the list price, based on sales volume, or far exceed the fair market value of the services performed, the fees could function as disguised kickbacks.

HHS first proposes to limit safe harbor protection to payments for services that: (1) the PBM furnishes for the manufacturer's benefit, and (2) relate in some way to the PBM's arrangements to provide "pharmacy benefit management services" to health plans.⁴² HHS clarifies that services that "relate in some way to the PBM's arrangements with health plans," could include, for example, services rendered to manufacturers that depend on or use data gathered by PBMs from their health plan customers (e.g., services to prevent duplicate discounts on 340B claims).⁴³   

HHS does not propose to define "pharmacy benefit management services," but provides examples of such services, including: (1) contracting with a network of pharmacies; (2) establishing payment levels for network pharmacies; (3) negotiating rebate arrangements; (4) developing and managing formularies, preferred drug lists, and prior authorization programs; (5) performing drug utilization review; and (6) operating disease management programs.⁴⁴

HHS proposes to limit safe harbor protection to fee arrangements that meet the following three requirements:

1. The PBM and manufacturer have a written agreement that: (i) covers all of the PBM services, and (ii) specifies each service provided and the compensation for such services.⁴⁵
2. Service fees 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 or 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 by a federal health care program.⁴⁶
3. At least annually, PBMs must disclose in writing to each health plan with which it contracts, and to HHS upon request, the services rendered to each manufacturer and their associated costs.⁴⁷

HHS solicits comments on the following additional topics related to the proposed PBM Service Fees safe harbor:

• Its proposed approach to "pharmacy benefit management services" and whether additional services should be considered PBM services.
• Whether the safe harbor should be limited to fees that relate to the PBM's arrangements to provide "pharmacy benefit management services" to health plans.
• Whether the safe harbor should specify the format of the fee agreement (e.g., whether there should be one agreement covering all services, or whether there should be separate agreements for services that relate to each health plan).
• Requiring fees to be consistent with fair market value, including comments on avoiding risks of gaming with respect to valuation or other conditions in the proposed safe harbor.
• The fixed fee approach, including HHS's concern that service fees based on a percentage of price could influence PBMs to include higher-priced drugs in favorable tiers on its formulary to increase its own profits.
• The "volume or value criterion," including examples of low risk, beneficial service arrangements that take the volume or value of referrals into account.
• Whether, and if so under what conditions, PBMs should be required to disclose the fee arrangements to health plans.
• Whether PBMs also should be required to disclose additional information, such as information about valuation and valuation methodology; information demonstrating that arrangements are not duplicative; and information demonstrating that arrangements meet the "volume or value" criterion, and whether this transparency requirement raises any competitive concerns.
• Whether fee arrangements could be attributed to services provided to particular health plans.

D. Additional Requests for Comment

In addition to the requests for comment describe above, HHS discusses the lack of transparency in the system and the complexity of many arrangements. In this regard, HHS solicits comment on issues of transparency and compliance with program rules, particularly as related to bundled rebates, price protection or rebate guarantees, and other information not readily apparent when rebates are reported.

© Arnold & Porter Kaye Scholer LLP 2019 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.