In the closing days of the Trump administration, OIG finalized a controversial rule (the “Final Rule”) to amend the discount safe harbor (“Discount Safe Harbor”) to the federal Anti-Kickback Statute (“AKS”), effectively changing the treatment of prescription drug rebates under the AKS. Beginning January 1, 2022,[1] certain reductions in price or other remuneration from pharmaceutical manufacturers to Medicare Part D plan sponsors, or the pharmacy benefit managers (“PBMs”) that contract with those plan sponsors, will be excluded from protection under the AKS Discount Safe Harbor. Additionally, the Final Rule creates two new AKS safe harbors to protect point of sale reductions in price on pharmaceutical products and certain PBM service fees. Given the Final Rule’s complicated history and potential to reshape how pharmaceutical manufacturers and PBMs offer discounts to plan sponsors, legal challenges by affected stakeholders and/or potential changes to the Final Rule by the incoming Biden administration are expected before key portions of the Final Rule take effect.
Background
Establishing a more transparent drug pricing system and eliminating kickbacks to middlemen has been a longstanding goal of the Trump administration. In May 2018, the Administration issued a Drug Pricing Blueprint that stated that the current prescription drug rebate system has “contributed to the high and rising [pharmaceutical] list prices and consumer out-of-pocket spending.” In January 2019, OIG issued a proposed rule to eliminate safe harbor protection for prescription drug rebates paid by manufacturers to plan sponsors and their PBMs and to add two new safe harbors related to pharmaceutical arrangements. Industry response to the proposed rule was swift and robust. OIG received approximately 26,000 comments to the proposed rule from manufacturers, pharmacies, PBMs, wholesalers and plan sponsors, many of whom opposed the proposed rule.
Following a review from the Office of Management and Budget, the White House announced that it was withdrawing the proposed rule in July 2019, likely due to the fact that the Congressional Budget Office determined that the rule would cost $177 billion over 10 years and significantly raise premiums for Part D beneficiaries. Then, on July 24, 2020, President Trump signed the “Lower Prices for Patients by Eliminating Kickbacks to Middlemen” executive order, which again sought to eliminate AKS protection for rebates paid by manufacturers to health plans and PBMs by finalizing the previously withdrawn rule. On November 20, 2020, OIG finalized the previously withdrawn rule in the form of the Final Rule. A summary of this controversial Final Rule, which is likely to have significant effects on rebate arrangements between manufacturers, PBMs, pharmacies and health plans, as well as premiums for Part D beneficiaries, is below.
The Final Rule
I. Amendment to AKS Discount Safe Harbor
The Final Rule revises the Discount Safe Harbor[2] to remove safe harbor protection for reductions in price in connection with the sale or purchase of prescription drugs from manufacturers to Medicare Part D plan sponsors, either directly or through their contracted PBMs, unless the reduction in price is required by law. Importantly, the Final Rule will not affect: (i) safe harbor protection for prescription drug rebates offered to Medicaid managed care organizations; and (ii) reductions in price offered to a Medicare Part D plan or its PBM if the reduction is required by law (e.g., 340B Program discounts). OIG expects that the Final Rule will result in lower cost-share amounts paid by beneficiaries, increased competition, lower drug prices and increased use of generics and biosimilars. The removal of safe harbor protection for prescription drug rebates provided to Part D plan sponsors and their PBMs will go into effect on January 1, 2022.
II. Point-of-Sale Reductions in Price Safe Harbor
The Final Rule also adds a new safe harbor[3] for certain reductions in price for prescription drug products or “point-of-sale chargebacks.” A point-of-sale chargeback is defined as “a payment made by a manufacturer directly or indirectly (through a PBM or other entity) to a dispensing pharmacy equal to the reduction in price agreed upon in writing.” In order to comply with the safe harbor, the chargeback amount due to the pharmacy must be equal to the reduction in price negotiated by a plan (or its PBM) and the manufacturer. According to OIG, this use of chargebacks will make pharmacies whole for the difference between the acquisition cost, plan payment and beneficiary out-of-pocket payment for a prescription drug product.
In order to comply with the point-of-sale reduction safe harbor, the reduction in price offered by a manufacturer to a Part D plan sponsor or to a Medicaid managed care organization must:
- Be set in advance in writing by the manufacturer and the Part D plan sponsor, Medicaid MCO or a PBM under contract with either;
- 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
- Be completely reflected in the price of the pharmaceutical product at the time the pharmacy dispenses it to the beneficiary.
In its commentary, OIG clarified that reductions in price given to Part D plan sponsors or Medicaid MCOs that are conditioned on formulary placement of a particular drug can qualify for protection under this new safe harbor if all safe harbor conditions are met. The point of sale reductions in price safe harbor is effective on January 29, 2021.
III. PBM Service Fee Safe Harbor
The other new safe harbor[4] applies specifically to PBMs and will protect certain arrangements between PBMs and pharmaceutical manufacturers for services provided to the manufacturers by PBMs. Such services might include contracting with a network of pharmacies; establishing payment levels for network pharmacies; negotiating rebate arrangements; developing and managing formularies, preferred drug lists and prior authorization programs; performing drug utilization review; and operating disease management programs. Specifically, the safe harbor provides that the AKS definition of “remuneration” does not include any payment to a PBM by a manufacturer, for services the PBM provides to the manufacturer that are also related to the pharmacy benefit management services that the PBM furnishes to a health plan, so long as:
- The PBM has a signed, written agreement with the manufacturer that covers all of the services the PBM provides to the manufacturer in connection with the PBM’s arrangements with health plans. The agreement must specify each of the services to be provided by the PBM and the compensation associated with such services;
- 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;
- The compensation paid to the PBM by the manufacturer is consistent with fair market value in an arm’s length transaction, a fixed payment not based on a percentage of sales and is not determined in a manner that takes into account the volume or value of referrals; and
- The PBM discloses in writing the services rendered to each pharmaceutical manufacturer related to the PBM’s arrangements to furnish PBM services to the health plan (i) to each health plan with which it contracts at least annually; and (ii) to the Secretary of HHS upon request. The PBM must also disclose the fees it receives for such services to the Secretary of HHS upon request.
Like the safe harbor covering point of sale reductions in price, the PBM service fee safe harbor is effective on January 29, 2021. Operationally, this safe harbor presents interesting questions related to fair market value and increases the importance of legal review of PBM and manufacturer arrangements.
Practical Takeaways
Already, the Final Rule has been extremely polarizing. As an initial matter, there is the question of whether the rule was officially withdrawn by the Trump administration prior to being finalized. Additionally, while HHS intends for the Final Rule to result in manufacturers lowering prescription drug list prices and replacing rebates with point-of-sale reductions in price, many health plans and PBMs are skeptical that this will in fact occur.
In its commentary, OIG recognized that many organizations will need to restructure their rebate arrangements in order to obtain AKS safe harbor protection. As a result, OIG has delayed the effective date for removing safe harbor protection for rebates until 2022. While legal challenges and/or potential changes to the Final Rule by the incoming Biden administration are expected in the interim, organizations should be mindful of the impact of the Final Rule on their current and future prescription drug rebate arrangements. In the meantime, we recommend that manufacturers, PBMs, plan sponsors, pharmacies and other providers who currently utilize the AKS Discount Safe Harbor to protect their prescription drug rebate programs do the following:
- Review their current prescription drug arrangements to determine if they may be affected by the Final Rule and to identify applicable “change in law” provisions that might be used to renegotiate such arrangements if necessary;
- Consider communication with their contracted manufacturers, vendors and PBMs to ensure compliance with the Final Rule; and
- Consider collecting data that may be necessary to renegotiate any affected arrangements so that your organization is prepared ahead of 2022 if the Final Rule remains in place.
We will continue to monitor developments in this area. If you have any questions regarding the Final Rule and its potential effects, please contact:
- Julie Lappas at (317) 977-1490 or jlappas@wp.hallrender.com;
- Todd Nova at (414) 721-0464 or tnova@wp.hallrender.com;
- Jennifer Viegas at (317) 977-1490 or jviegas@wp.hallrender.com;
- Abby Kaericher at (202) 780-2989 or akaericher@wp.hallrender.com;
- Matt Reed at (317) 429-3609 or mreed@wp.hallrender.com; or
- Your primary Hall Render contact.
Hall Render blog posts and articles are intended for informational purposes only. For ethical reasons, Hall Render attorneys cannot—outside of an attorney-client relationship—answer specific questions that would be legal advice.
