Pharmacy Point-of-Sale Price Concession and PBM Service Fee Safe Harbor Final Rule May Reshape Medicare Part D: What Pharmaceutical Manufacturers Need to Know Now

Editor's note: this Advisory was updated on February 24, 2021 to reflect changes in the effective date of the Final Rule.

On November 20, 2020, the Department of Health and Human Services (HHS) Office of Inspector General (OIG) issued a final rule (the Final Rule) that provides for significant changes to the Anti-Kickback Statute (AKS) safe harbors that protect pharmaceutical manufacturer arrangements with Medicare Part D plans, Medicaid managed care organizations (MCOs), and pharmacy benefit managers (PBMs).¹ (On the same day, OIG issued another final rule amending other AKS safe harbors, and the Centers for Medicare and Medicaid Services (CMS) issued a final rule amending its regulatory exceptions to the Stark Law. Arnold & Porter has issued an additional advisory on these rules here.) OIG published a proposed rebate rule on February 6, 2019, and solicited comments on a range of topics.² Our Advisory on the proposed rule can be found here. OIG received approximately 26,000 distinct comments on the proposed rule from a variety of stakeholders. The proposed rule was "withdrawn" according to the website of the Office of Information and Regulatory Affairs,³ but no withdraw notice was published in the Federal Register.

In summary, the Final Rule:

• Will create a new safe harbor protecting certain pharmacy point-of-sale (POS) price concessions provided to Part D plan sponsors and Medicaid MCOs, effective March 22, 2021 (delayed beyond the original sixty-day effective date pursuant to a regulatory freeze⁴);
• Will eliminate existing discount safe harbor protection for rebates to Part D plan sponsors and their PBMs, unless the rebates are price reductions required by law (the effective date for this provision was originally scheduled to be effective January 1, 2022 but has since been delayed until January 1, 2023⁵);
• Will create a new safe harbor protecting certain flat, fixed service fees that manufacturers pay to PBMs, effective March 22, 2021 (pursuant to a regulatory freeze⁶);
• Instructs that price concessions based on formulary placement may qualify for protection under the POS or discount safe harbors;
• Instructs that other safe harbors may protect pharmaceutical manufacturers' arrangements with Part D plan sponsors, Medicaid MCOs, and PBMs—including the group purchasing organization (GPO), warranties, and personal services and management contracts safe harbors—provided the terms of these safe harbors are met; and
• Notes that "neither the discount safe harbor nor the new [POS] safe harbor protects rebates or other reductions in price from a manufacturer that are retained by a PBM, even if that PBM is operating on behalf of a Medicaid MCO."⁷

The Final Rule notes that OIG coordinated with CMS, which administers the Medicare Part D program, "to ensure that this rule can operate effectively in conjunction with the Part D program rules."⁸ However, OIG repeatedly asserts that commenters' requests for guidance on how POS price reductions will be implemented fall "outside the scope of this rule." OIG is not taking comments on the Final Rule.

OIG intends the Final Rule to "reduce beneficiary out-of-pocket spending at the pharmacy counter," increase price transparency, and "create incentives for drug companies to lower the list prices of their drugs."⁹ A statement by HHS Secretary Alex Azar, issued concurrently with the Final Rule, explains that the Final Rule "implement[s]" a July 24, 2020, Trump Administration Part D drug pricing executive order and "is not projected to increase Federal spending, Medicare beneficiary premiums, or patients' total out-of-pocket costs," consistent with the executive order.¹⁰ Although the fate of the Final Rule is uncertain —given the legal challenge filed by the Pharmaceutical Care Management Association (PCMA),¹¹ the potential for an override under the Congressional Review Act,¹² and/or further delay or modification by the incoming Administration —the rule nevertheless warrants careful consideration by pharmaceutical manufacturers given the importance of Medicare Part D and Medicaid MCOs in US patient access to prescription drugs. More information regarding key aspects of the Final Rule follows below.

Safe Harbor Changes

Removal of Discount Safe Harbor Protection for Part D Rebates

Effective January 1, 2023 (delayed from January 1, 2022 pursuant to a court order¹³ and a final rule issued by OIG¹⁴), OIG is amending the discount safe harbor to exclude "[a] reduction in price or other remuneration in connection with the sale or purchase of a prescription pharmaceutical product from a manufacturer to a plan sponsor under Medicare Part D," either directly to the plan sponsor or indirectly through a PBM, "unless it is a price reduction or rebate that is required by law."¹⁵ OIG did not finalize its proposal to exclude rebates to Medicaid MCOs (directly or indirectly through a PBM) from the discount safe harbor.¹⁶ Rebates to Medicaid MCOs thus can be structured to comply with the discount safe harbor or the new safe harbor for POS discounts.

New Safe Harbor for POS Discounts

OIG also is finalizing its proposal to establish a new safe harbor at 42 C.F.R. § 1001.952(cc) to protect certain pharmacy POS price reductions offered by manufacturers to Medicare Part D plan sponsors and Medicaid MCOs (the "POS safe harbor").¹⁷ The POS safe harbor was scheduled to take effect sixty (60) days after the Final Rule is published in the Federal Register.¹⁸ A subsequent delay by OIG and HHS pushed the effective date of the Final Rule to March 22, 2021, pursuant to the Administration's regulatory freeze and in light of litigation challenging the final rule by the PBM industry.¹⁹

Under the POS safe harbor, "remuneration" subject to the AKS will not include a price reduction offered by a manufacturer on prescription pharmaceutical product that is payable under Medicare Part D or by a Medicaid MCO if the reduction in price: (1) is set in advance in writing by the time of the first purchase of the product at that reduced price by the Part D plan sponsor or Medicaid MCO on behalf of an enrollee; (2) does not involve a rebate unless the "full value of the reduction in price is provided to the dispensing pharmacy by the manufacturer, directly or indirectly, through a point-of-sale chargeback or series of point-of-sale chargebacks, or is required by law"; and (3) is "completely reflected in the price of the prescription pharmaceutical product at the time the pharmacy dispenses it to the beneficiary."²⁰

OIG defines a "point-of-sale chargeback" to mean "a payment by a manufacturer made directly or indirectly (through a PBM or other entity) to a dispensing pharmacy equal to the reduction in 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."²¹ OIG declined to specify in the Final Rule the manner in which POS chargebacks would be processed, the data elements that would be exchanged to process these chargebacks, or any requirement on what entities may administer these chargebacks.²² OIG referred to CMS commenters' requests for guidance related to the chargeback administration process.²³

For a price reduction under the POS safe harbor to be "completely reflected" in the price the pharmacy charges the beneficiary at the POS, the discount must be applied to "the price of the drug upon which any beneficiary cost sharing is calculated."²⁴ OIG notes that the amount paid by a beneficiary at the pharmacy counter will depend on the benefit design of her particular plan. The preamble references the following examples to illustrate discounts that have been "completely reflected" in the price charged to the beneficiary at the POS, assuming the beneficiary purchases a drug with a list price of $120 and a POS discount of $20:

• If the beneficiary is in the deductible phase of her plan (in which she is responsible for 100% cost sharing), the full POS discount would be received by the beneficiary to reduce the price charged at the pharmacy counter. The beneficiary would be charged $100.
• If the beneficiary is not in the deductible phase of her plan, and her plan has a 20% co-insurance obligation, the beneficiary's co-insurance is calculated after the POS discount is applied. The beneficiary would be charged $20.
• If the beneficiary is not in the deductible phase of her plan and her plan has a $25 copayment, the beneficiary would be charged her copayment of $25, but "the reduction in price must be reported [by the plan] in accordance with existing rules and regulations governing the reporting of discounts and other reductions in price under the Part D program" and accounted for in the actuarial valuation of Part D bids.²⁵

In the preamble to the Final Rule, OIG explains that price reductions provided to Part D plan sponsors or Medicaid MCOs conditioned on formulary placement for a manufacturer's drug can qualify for protection under the new POS safe harbor.²⁶OIG recognizes that "reductions in price contingent on formulary placement can foster competition among manufacturers to the ultimate benefit of beneficiaries and Federal health care programs, provided that safety and efficacy considerations are not disregarded."²⁷ Specifically, OIG states that POS reductions in price conditioned on formulary placement may qualify for protection under the POS safe harbor if "there are no required services (e.g., marketing or switching)," and all conditions of the POS safe harbor are met.²⁸ OIG further states: "Whether other arrangements would be considered a 'service' that would not be protected, such as the scenario suggested by a commenter (conditioning a reduction in price on a formulary not covering a competing drug), would be subject to a case-by-case analysis."²⁹

Regarding "bundled sale" arrangements, OIG confirms that "a reduction in price for one drug contingent on formulary placement for another drug" may be protected under the POS safe harbor as long as the discount is reflected in the price of the product at the POS (in addition to satisfying the other requirements of the POS safe harbor).³⁰ OIG notes that reductions in price that are not known at the time of sale cannot be reflected at the time of sale, and therefore do not qualify for protection under the POS safe harbor.³¹

The Final Rule also provides that the POS safe harbor may protect certain value-based arrangements (e.g., arrangements in which the price charged for a drug is linked to its efficacy). While some stakeholders had commented that value-based arrangements would not "neatly fit" into the POS safe harbor "because they typically rely on gathering data after the point of sale and making payments after the point of sale,"³² OIG explains that for a manufacturer to use the POS safe harbor to protect value-based arrangements, the reduction in price "must be in the form of a point-of-sale discount." ³³ Although OIG acknowledges that "not all value-based arrangements for Part D products" previously protected under the discount safe harbor would fit into the new POS safe harbor, OIG notes that value-based arrangements could qualify for protection under other safe harbors, such as the personal services and management contracts safe harbor (42 C.F.R. § 1001.952(d)) or warranties safe harbor (42 C.F.R. § 1001.952(g)).³⁴OIG goes on to explain that the AKS / safe harbor analysis is a fact-specific inquiry and "[t]he fact that an arrangement does not fit in a safe harbor does not mean it is necessarily unlawful."³⁵ OIG also notes that the advisory opinion process remains available for stakeholders seeking further protection for value-based arrangements.³⁶

Finally, the POS safe harbor and amendments to the discount safe harbor add definitions for the terms manufacturer, Medicaid MCO, PBM, prescription pharmaceutical product, and wholesaler.

New Safe Harbor for Fixed Fee Payments

OIG is finalizing its proposal to create a new safe harbor that protects certain flat, fixed fee service fees that manufacturers pay to PBMs for services the PBM provides to the manufacturer.³⁷ This new safe harbor was scheduled to become effective sixty (60) days after publication of the Final Rule in the Federal Register but was subsequently delayed by OIG and HHS to March 22, 2021, pursuant to the Administration's regulatory freeze and in light of the PBM industry litigation challenging the final rule.³⁸ Specifically, the new safe harbor will protect fees for services the PBM provides to the manufacturer "related to the pharmacy benefit management services" that the PBM furnishes to health plans, provided the following four requirements are met:

1. The PBM and manufacturer have a signed, 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"; and (ii) "specifies each of the services to be provided by the PBM and the compensation associated with such services";
2. "The services performed under the agreement do not involve the counseling or promotion of a business arrangement or other activity that violates any State or Federal law";
3. The service fees are: (i) "consistent with fair market value in an arm's-length transaction"; (ii) "a fixed payment, not based on a percentage of sales"; and (iii) "not 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 under" Federal health care programs; and
4. The PBMs discloses in writing: (i) at least annually, "to each health plan with which it contracts . . . the services rendered to each pharmaceutical manufacturer"; and (2) "to the Secretary upon request, the services rendered to each manufacturer . . . and the fees paid for such services."³⁹

The new safe harbor would protect "only a pharmaceutical manufacturer's payment for those services that a PBM furnishes to the pharmaceutical manufacturer, and not for any services that the PBM may be providing to a health plan."⁴⁰ While the final rule provides a non-exhaustive list of services that PBMs may provide to health plans,⁴¹ OIG declines to specify the services that PBMs may provide to manufacturers.⁴² OIG does state in the preamble, however, that adjudicating claims is a service that a PBM performs for a health plan but not for a manufacturer, and that "developing a formulary is a service that a PBM provides to a plan. Therefore, those fees cannot be tied to formulary placement."⁴³ By contrast, both member aggregation services "that depend on or use data gathered from PBMs from their health plan customers," and preventing duplicate discounts on 340B claims might qualify as services provided by PBMs to manufacturers.⁴⁴ OIG declined to remove the requirement in the new safe harbor that the fees "relate to" PBM services that the PBM furnishes to health plans. Further, OIG does not provide guidance on what it means for a fee to "relate to" such services beyond characterizing this requirement to mean that the services must be "connected in some way" to the PBM services that the PBM provides to health plans.⁴⁵

The second safe harbor requirement, that the services performed under the agreement do not involve the counseling or promotion of a business arrangement or other activity that violates any State or Federal law, was not included in the proposed rule. OIG states in the preamble to the Final Rule that it added this requirement out of "concerns about the use of this safe harbor to convert costs and lost revenue to service fees" and to clarify "that the safe harbor applies only to 'legitimate' services" and not to "arrangements between manufacturers and PBMs for services that are not necessary, are worthless, or are duplicative."⁴⁶

Regarding the requirement that the service fees be consistent with fair market value in an arm's-length transaction, OIG instructs that "the compensation must reflect the fair market value of the service rendered, and not the value of the products involved."⁴⁷Also, due to the requirement that the service fee not be determined in a manner that takes into account the volume or value or any referrals or Federal health care program business, "[A] fair market value determination cannot be made through comparison to transactions where compensation may have taken the value of referrals into account." The preamble cites to an OIG letter to the Internal Revenue Service from 1992 that explained that "[m]erely because another buyer may be willing to pay a particular price is not sufficient to render the price paid to be fair market value."⁴⁸

OIG also clarifies that "compensation for services may be determined on a per-unit-of-work basis and thus vary with the volume of work performed," provided "the unit-based compensation does not vary during the course of the compensation arrangement in any manner that takes into account referrals or other Federal business generated."⁴⁹ For example, "the safe harbor would not protect per unit compensation that varies with either increases or decreases in volume (e.g., X amount per unit for the first 1,000 units, X + 1 per unit for additional units)."⁵⁰ In addition, the safe harbor "would not protect any per-unit-of-work fee that is based on or otherwise connected with drug prices."⁵¹

Lastly, with respect to the disclosure requirements for PBMs to health plans and the HHS Secretary, OIG confirms that "provided that the manufacturer "has taken no steps to discourage or impede the PBM from meeting the disclosure requirements, the PBM's failure to meet the disclosure requirement will not, by itself, cause the manufacturer to lose the protection of the safe harbor."⁵² OIG cautions, however, "that "if the manufacturer were aware of a failure to disclose and took no steps to remedy it, liability might attach to the manufacturer through various legal theories, depending on all the facts of the arrangement and the conduct of the parties."⁵³

Other Safe Harbors and Arrangements

OIG emphasizes that the discount safe harbor will "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."⁵⁴ Protection will remain available under the discount safe harbor for price concessions provided to these parties, including for rebates, even if the discounted drug ultimately is dispensed to a Part D enrollee.⁵⁵ Further, OIG notes that the GPO safe harbor can protect manufacturer payments to PBMs, if the arrangement in question meets all elements of the safe harbor.⁵⁶ Regarding compliance with the GPO safe harbor, OIG explains: "[F]or a PBM to qualify as a GPO acting as a purchasing agent on behalf of its members, the PBM could not wholly own the members, nor could the members be wholly owned by the same parent corporation as the PBM. This may limit the utility of the safe harbor for many PBMs. . . . PBMs and manufacturers wishing to use the GPO safe harbor should closely scrutinize their arrangements for full compliance with all safe harbor conditions and definitions, including all requirements relating to written agreements and disclosures."⁵⁷

OIG also addresses commercial payor rebates, noting, on the one hand, that the AKS "is not implicated in arrangements that involve only commercial, private pay, or self-pay arrangements."⁵⁸ However, OIG asserts that some arrangements that ostensibly include only commercial utilization may involve problematic "swapping [that] shift[s] costs to the Federal health care programs," and that OIG maintains "a long-standing concern about arrangements that 'carve out' referrals of Federal health care program beneficiaries or business generated by Federal health care programs from otherwise questionable financial arrangements."⁵⁹ OIG explains that such arrangements would need fact-specific review and suggests that manufacturers may request protection from sanctions under the AKS for specific arrangements through the advisory opinion process.⁶⁰

Drug Price Reporting

The Final Rule preamble briefly addresses drug price reporting considerations associated with POS price concessions and notes that these topics exceed the scope of the Final Rule. For example, OIG "recognizes that the final rule has the potential to affect calculations of AMP [Average Manufacturer Price], Best Price, and Federal Upper Limits in ways and to an extent that may be difficult to anticipate."⁶¹ In response to comments regarding the Final Rule's effects on drug acquisition prices for the Department of Veterans Affairs (VA) and other government agencies, OIG writes that the Final Rule "does not change" the requirements of relevant pricing metrics, or "whether Federal programs, such as the VA, count transactions governed by this final rule as 'Federal'" and therefore exempt from price reporting.⁶² Notably, however, OIG does confirm in the preamble that OIG "ha[s] consulted with CMS as part of this rulemaking and are informed that point-of-sale chargebacks should be treated as plan discounts."⁶³ Finally, OIG wrote that while it "appreciate[s] commenters' feedback on 340B and the potential for point-of-sale duplicate discounts in Part D[,] . . . [e]stablishment of mechanisms for avoiding duplicate discounts or resolving disputes or errors regarding rebates is outside the scope of this rule."⁶⁴

Conclusion

In light of the significant Final Rule changes described above, pharmaceutical manufacturers may wish to consider:

• The Final Rule's safe harbor amendments and guidance as they negotiate for price concessions and fees with Part D plans, Medicaid MCOs, and PBMs; and
• How to treat the new payments contemplated under the Final Rule for government price reporting purposes and how to document their conclusions in their "reasonable assumptions" files.

If you have any questions about any of the topics discussed in this Advisory, please contact your Arnold & Porter attorney or any of authors.

© Arnold & Porter Kaye Scholer LLP 2020 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.