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The US HHS Office of Inspector General proposes to amend the current Anti-Kickback statute "safe harbors" for drug discounts in a way that would exclude rebates widely used by biopharma companies from protection – with the expected result of lower prices for prescription drugs.

The proposal  applies to rebates drug makers now provide voluntarily to Medicare Part D drug plans and Medicaid managed care plans. It would not apply to rebates required by law, such as those governed by the Medicaid drug rebate program. And the OIG does not believe it should apply to supplemental rebates offered by state Medicaid programs.  

Under federal anti-kickback laws, many kinds of payments or discounts offered to federal programs or providers reimbursed by those programs are considered improper kickbacks to induce use of services, and they are liable to criminal prosecution. The current safe harbors specify that certain kinds of discounts (including drug rebates) are protected from those rules. The new proposal would revoke most of these safe harbors for biopharma. It was released Jan. 31 with a 60-day comment period, and just a few days ahead of President Trump's State of the Union address, where drug pricing is a likely topic. Manufacturer groups applauded the provisions as in line with their view that discounts should go to patients not health system intermediaries, but did not address how the changes would play out financially.

The proposal targets "incentives related to pharmaceutical list prices as set by manufacturers, increases in these prices by manufacturers, rebates paid by manufacturers to [PBMs] ... and the misalignment of incentives caused by concurrently increasing list price."

Emergence of the long-awaited proposed rule surprised some stakeholders. It has been under review at the White House Office of Management and Budget since July. (Also see "HHS Advancing Attack On Rebates With Proposal To Revoke Safe Harbor" - Pink Sheet, 24 Jul, 2018.)

Industry watchers have speculated that concerns among some in the Trump administration that the change would lead to steep increases in Part D premiums and Medicare spending might have quashed it.

But here it is. “The [HHS] Secretary is concerned that rebate arrangements are neither beneficial to health care programs and beneficiaries, nor are they innocuous,” the proposal states.

“The provisions of this proposed rule are specifically aimed at incentives related to pharmaceutical list prices as set by manufacturers, increases in these prices by manufacturers, rebates paid by manufacturers to [pharmacy benefit mangers] acting on behalf of Part D plan sponsors and Medicaid MCOs [managed care organizations], and the misalignment of incentives caused by concurrently increasing list prices and rebates.”

In the Secretary’s view, “the statutory exemption for discounts…does not apply to most rebates paid by drug manufacturers to PBMs acting on behalf of Part D plans or to Medicaid managed care plans. To the extent those rebates are paid to or through PBMs to buy formulary position, such payments would not be protected by the discount statutory exemption” under the proposal.

Discounts At Point Of Sale

Instead the proposed rule creates two new safe harbors. One would protect price reductions manufacturers provide to Part D and Medicaid managed care plans that are then offered at the point-of-sale to the patient beneficiary.

Under the new safe harbor, a manufacturer is permitted to offer a reduction in price on a particular drug if certain conditions are met. First, the reduction would have to be set in advance with a plan sponsor or PBM and must be offered in Part D and Medicaid.

Second, it must be paid by a manufacturer to a dispensing pharmacy in an amount at least equal to the amount agreed upon upfront. And third, the reduction in price must be completely reflected in the price the pharmacy charges to the beneficiary at the point-of-sale.

Flat Service Fees To PBMs

A second safe harbor is designed to protect fees that manufacturers pay to PBMs for services rendered when those services relate in some way to the PBMs’ arrangement to provide pharmacy benefit management to health plans.

The proposal explains: “we have in mind, by way of example, services rendered to manufacturers that depend on or use data gathered by PBMs from their health plan customers (whether claims or other types of data).” For example, PBMs might provide services for drug firms to prevent duplicate discounts on claims under the federal 340B discount program.

Payments must be flat fees and not based on a percentage of sales or take into account the volume or value of any referrals or business generated. PBMs would be required to disclose to health plans and HHS, on request, the services it provides to manufacturers and the costs for such services.

Economic Impact Analyses

The proposal includes several estimates of the costs and savings that could flow from the change. The CMS Office of the Actuary estimates the rule will produce aggregate savings of $4bn for states over 10 years.

For the Part D program, the rule includes the results of several economic analyses by three different organizations (including the Office of the Actuary) that reach varying conclusions based on how manufacturers, PBMs and plans would react to the change.

Most of the analyses suggest “total beneficiary cost sharing would decrease and premiums would increase, and that the decrease in total beneficiary cost-sharing would offset the total increase in premiums across all beneficiaries, regardless of assumptions regarding whether or not manufacturers retained rebates or applied a percentage of them as list price reduction, or PBMs and plan sponsors changed formularies or obtained additional price concessions,” the proposed rule says.

However, it also acknowledges that “more beneficiaries would pay more for premiums than they would save in cost sharing, suggesting that out-of-pocket impacts are likely to vary by individual and the greatest benefit of these transfers accrue to sicker beneficiaries (e.g., those with more drug spending and/or those using high-cost drugs.).”

Manufacturers Respond Positively

The Pharmaceutical Research and Manufacturers of America issued a positive statement in response to the proposed rule. “We applaud the Trump administration for taking steps to reform the rebate system to lower patients’ out-of-pocket costs,” President and CEO Stephen Ubl said.

“Our current health care system results in patients often paying cost-sharing based on the list price, regardless of the discount their insurer receives. We need to ensure that the $150bn in negotiated rebates and discounts are used to lower costs for patients at the pharmacy. 

“This proposal would also fix the misaligned incentives in the system that currently result in insurers and pharmacy benefit managers (PBMs) favoring medicines with high list prices.” 

PBMs Defend Rebates

Not surprisingly, the Pharmaceutical Care Management Association, the PBM trade group, expressed disappointment in the proposal. “We are concerned…that eliminating the long-standing safe harbor protection for drug manufacturer rebates to PBMs would increase drug costs and force Medicare beneficiaries to pay higher premiums and out-of-pocket expenses, unless there is a viable alternative for PBMs to negotiate on behalf of beneficiaries,” the group said.

“Any proposals to eliminate PBM-negotiated rebates must consider the impact it will have on Medicare beneficiaries' access to affordable prescription drugs and costs to taxpayers."

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