OIG Proposed Safe Harbor Revisions Take Aim at Formulary Rebates, Volume-Based PBM Administrative Fees

Yesterday the U.S. Department of Health and Human Services (HHS) Office of the Inspector General (“OIG”) released a proposed rule to put into practice an idea floated in HHS’ May 2018 Blueprint for lowering drug prices:  eliminating discount safe harbor protection for manufacturer rebates offered to Medicare Part D plans (including Medicare Advantage Prescription Drug Plans), Medicaid Managed Care Organizations (MMCOs), and their PBMs, as an incentive for drug manufacturers to reduce list prices.  The proposed exclusion was accompanied the addition of new proposed safe harbors for manufacturer point-of-sale discounts provided to such plans and PBMs, and non-volume based administrative fees paid to PBMs.  The intent of these amendments taken together is simply stated by the OIG:  it is “to eliminate rebates from manufacturers to PBMs, and replace them with discounts provided to beneficiaries at the point of sale.”  (p. 66)

OIG’s case against formulary rebates:  In brief, the preamble presents a three-pronged criticism of the current rebate framework:

• PBM rebates increase drug costs to beneficiaries in the deductible phase and those with percentage-based cost-sharing obligations, since both of these out-of-pocket costs are based on the list price (WAC), which does not take into account rebates paid by the manufacturer to the plan or its PBM. According to the OIG, PBMs and manufacturers benefit from higher WACs, but beneficiaries pay more.
• Current rebates skew PBM and plan formulary decisions in favor of drugs with the highest rebates, which may be more expensive and/or less effective than drugs with lesser rebates.
• Current rebates are not transparent. Since manufacturer-PBM rebate agreements are confidential, plan sponsors do not know what portion of manufacturer rebates to PBMs, if any, are passed on to the plans.

Narrowing of Discount Safe Harbor:  To address these problems, the proposed rule would add an exclusion from the current discount safe harbor for “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, or to a pharmacy benefit manager acting under contract with a plan sponsor …, unless it is a price reduction or rebate that is required by law.”  Interestingly, the OIG expresses its view that the discount safe harbor even in its current form does not protect rebates paid for formulary position to Part D plans, MMCOs, or their PBMs, because these entities are not “buyers” as contemplated under the safe harbor.  (Many in the industry have heretofore taken a more expansive interpretation, since health plans arguably are ultimately “buyers” of prescription drugs.)  This raises the question why an amendment to the safe harbor is necessary.  The OIG’s answer is that the agency is acting “out of an abundance of caution and desire to offer bright line guidance regarding the treatment of retroactive payments to PBMs that they retain.”  (p. 19 and note 36).

The preamble makes clear OIG’s intent that the discount safe harbor continue to protect discounts offered to other entities, including wholesalers, hospitals, physicians, pharmacies, and third-party payors in other Federal health care programs.  (p. 41).  (One wonders how the latter federal payors (e.g., the TRICARE retail drug benefit) can be considered “buyers” when Part D plans and MMCOs are not.)  OIG also does not intend the safe harbor exclusion to affect existing value-based arrangements between manufacturers and Part D and MMCO plan sponsors, though the text of the proposed amendment, as drafted, contains no exclusion that would protect such arrangements.  The OIG also does not intend the amendment to affect Medicaid supplemental rebate agreements.

New safe harbor for point-of-sale price reductions:  Along with the stick the OIG offers a carrot:  a new safe harbor for a reduction in price charged by a manufacturer for a drug that is payable by a Part D plan, an MMCO, or their PBMs, if the reduction is applied to the price charged to the beneficiary at the point of sale.  The rule requires that the price reduction be set in advance under a contract with the plan or PBM, and it may not “involve a rebate unless the full  value of the reduction in price is provided to the dispensing pharmacy through a chargeback or series of chargebacks . . . .”  Although this proposal is not crystal clear, the preamble describes a system under which the manufacturer would enter into a contract with the plan or PBM to offer a reduced price to network pharmacies.  This can be done through a chargeback or rebate to the pharmacy if the full price reduction to the pharmacy, combined with the patient’s cost sharing and the plan’s reimbursement to the pharmacy, is at least equal to the price agreed upon between the manufacturer and the plan or PBM.  The pharmacy, in turn, would be required to pass the entire manufacturer price reduction through to the beneficiary at the point of sale.  (p. 47)

New Safe Harbor for Administrative Fees to PBMs:  Currently, many PBMs charge administrative fees that are based on a percentage of WAC or sales.  The OIG objects that these variable fees can “function as a disguised kickback.”  (p. 23)  Accordingly, a new safe harbor is proposed for PBM administrative fees that are for services that are specified in a written agreement that covers all of the services the PBM will provide in connection with the PBM’s arrangements with health plans during the term.  Importantly, the fees must be fixed (i.e., not percentage-based), fair market value, and not take into account business generated between the parties or between the manufacturer and the PBM’s health plans.  In addition, the PBM must disclose at least annually, and to HHS on request, the services rendered by the PBM to the manufacturer.  The OIG is considering, and solicits comments on, whether PBMs should also be required to disclose their fee arrangements to their client health plans, though this requirement is not reflected in the propose rule.

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It is by no means certain that the anticipated shift from formulary rebates to point-of-sale discounts will have the desired effect of reducing pharmaceutical list prices and beneficiary out-of-pocket costs.  The proposed safe harbor amendment does not affect plans other than Part D or MMCO plans, so drug manufacturers may contract to provide discounts to these plans but leave their WACs, and current rebating practices, in place for the commercial market.  Among beneficiaries, there will be winners and losers.  Beneficiaries in the deductible phase and with co-insurance based on a percentage of list price will benefit from reductions in out-of-pocket expenses.  Those with flat copays will benefit less, and all Part D and MMCO beneficiaries will see their premiums increase as plans stop applying manufacturer rebates to reduce premiums.  The OIG believes that total reductions in cost-sharing will exceed total premium increases (p. 99), but critics disagree.  What can be said with confidence about the proposal is that it will increase transparency.  Government beneficiaries will know that their deductible costs and percentage-based cost-sharing are based on an actual net price.

The proposed rule will appear in the Federal Register on February 6.  The proposed effective date for the discount safe harbor amendment is January 1, 2020, and that of the of the new safe harbor for point-of-sale discounts is 60 days following publication of the final rule.  (The proposed effective date for the new safe harbor for PBM administrative fees is not specified.)  Comments on the proposed rule will be due on April 7.