OIG Finalizes Safe Harbor Amendments Relating to Rebates, but Benefits to Patients Are Unclear

As part of its final push to lower drug prices, the Trump administration announced that it was finalizing a January 2019 proposed rule to amend the safe harbor provisions relating to manufacturer rebates to Medicare Part D plans, Medicaid Managed Care Organizations (MCOs) and their pharmacy benefits managers (PBMs). The Final Rule was published in the Federal Register on November 30, 2020.

The rebate rule has not had a straightforward history. Although the OIG claims that it never withdrew the rule from consideration, the White House and HHS Secretary Alex Azar scrapped the proposed rule in July of last year, soon after a Congressional Budget Office (CBO) report agreed with CMS’s own estimates that the rule will increase Medicare Part D premiums by $58 billion over ten years, likely offsetting any cost savings for patients, and cost the Federal government an additional $177 billion. This July, the President revived the rule in the middle of his election campaign with one additional mandate: that the HHS Secretary “confirm . . . that the action is not projected to increase Federal spending, Medicare beneficiary premiums, or patients’ total out-of-pocket costs.” (see our report on the executive order here).

We previously summarized the main elements of the rule when it was first proposed and it has largely stayed the same. As we explained, the rebate rule is based on the premise that confidential manufacturer rebates to plan sponsors under Medicare Part D, either directly or through PBMs acting under contract with them, do not result in cost savings for the patients but act as kickbacks to these “middlemen.”  According to the OIG, this system incentivized plan sponsors to negotiate higher rebates from manufacturers. Higher rebates allowed the plans to maintain higher profit margins, especially because these payments generally did not reduce patient out-of-pocket costs (deductibles and co-insurance), which are based on the published list price of the prescription pharmaceutical product, that is, the price before the rebates are applied. Manufacturers agree to higher rebates in exchange for exclusive or preferred positions on the plan formulary and the plans and PBMs give preferred formulary placement to the products that will provide them the greatest rebate. (p. 76685)

Under the final rule, the OIG aims to change these incentives by significantly narrowing the anti-kickback statute (AKS) safe harbor for discounts at 42 C.F.R. § 1001.952(h). The final rule would add an exclusion to the current discount safe harbor for “[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 under Medicare Part D, or indirectly through a pharmacy benefit manager acting under contract with a plan sponsor under Medicare Part D, unless it is a price reduction or rebate that is required by law.” (p. 76731) The final rule also adds two new safe harbors: one to protect certain manufacturer price reductions at the point-of-sale (§ 1001.952(cc)), and another to protect certain administrative fees paid by pharmaceutical manufacturers to PBMs (§ 1001.952(dd)). The new safe harbor at § 1001.952(cc) requires the manufacturer to set the price reduction it is offering the plan sponsor under Medicare Part D or Medicaid MCO in writing before the first purchase of the product at that reduced price. The reduction in price must be completely reflected in the price of the prescription pharmaceutical product at the time the pharmacy dispenses it to the patient. The reduction in price can only be a rebate if the full value of the reduction is provided a dispensing pharmacy, directly or indirectly, through a point-of-sale chargeback, or if otherwise required by law. The point-of-sale chargeback is intended to make pharmacies whole for any difference between their acquisition cost and the price reduction agreed to by the Part D Plan, Medicaid MCO, or their PBM.

Changes from the Proposed Rule

Following are the main differences between the proposed rule and the final rule.

Discount safe harbor amendments effective date moved to January 1, 2022

In response to comments that the effective date of January 1, 2020 in the proposed rule would cause patient, pharmacy, and supply chain disruptions, the OIG moved the effective date to January 1, 2022. The proposed rule comment period was set to close on April 8, 2019, which would have meant that entities would have had six months or less to comply with any final rule.  Now, entities have just over a year to make any necessary changes to their business arrangements and come into compliance. OIG stated that the updated effective date should not impact the 2020 Part D bid submission process. (p. 76673) OIG also rejected requests to apply enforcement discretion past the effective date. (p. 76680)

The new safe harbors for point-of-sale price reductions and for PBM service fees will be available for entities to use within 60 days of the publication of the final rule, or January 29, 2021. (p. 76666)

Medicaid MCOs Can Continue to Benefit from the Existing Discount Safe Harbor

The most significant difference in the final rule as compared to the proposed rule is that rebates to Medicaid MCOs are not excluded from the discount safe harbor. In other words, rebates offered from pharmaceutical manufacturers directly to Medicaid MCOs will still be protected by the discount safe harbor, as long as all the conditions of the safe harbor are met. (p. 76675)  However, it is important to note that, in the OIG’s view, any rebates retained by a PBM are service fees, not discounts, and therefore never were, and still are not, protected under the discount safe harbor. (pp. 76675, 76679)

The OIG decided not to apply the rebate exclusion to Medicaid MCOs because of strong opposition from commenters. These commenters described additional costs to states to set and certify new Medicaid MCO rates, and for the various affected entities to renegotiate their contracts, some of which may require legislative or agency approval and could lead states to make significant cuts to other parts of their Medicaid programs. (p. 76675-76) OIG conceded that Medicaid beneficiaries often already have nominal cost-sharing obligations for prescription pharmaceutical products, maximum allowable cost-sharing amounts, or no coinsurance obligations. (p. 76675) For these reasons, the OIG agreed that eliminating discount safe harbor protection for reductions in price offered to a Medicaid MCO would have minimal, if any, effect on the amount a Medicaid beneficiary pays for a prescription pharmaceutical at the pharmacy. Id.

Changes in the new safe harbor on point-of-sale price reductions

The OIG also made some tweaks to clarify the new safe harbor on point-of-sale price reductions rule in several aspects:

• The final rule clarifies that under the new safe harbor, the price reductions can be contingent on formulary placement as long as all conditions of the safe harbor are met. (p. 76708) The OIG confirmed that the rule does not limit the types of negotiation methods the parties may use, and even noted that such contingent discounts can foster competition to the ultimate benefit of patients and Federal health care programs. (p. 76683) However, the OIG cautioned that the reduction in price must be a reduction in price and not a payment for a service (e.g., marketing or switching). (p. 76683, -708)
• The OIG clarified that the value of the point-of-sale chargeback to a pharmacy must be “equal to the reduction in price” between the manufacturer and the Part D plan sponsor or Medicaid MCO, rather than “at least equal to the [discounted] price,” as earlier proposed. (p. 76697) The OIG had not intended to permit patients to receive the entire dollar value of a discount but instead to apply the discount when calculating the price upon which the beneficiary’s cost sharing is calculated. (p. 76682) The modification is in line with this intent.
• The OIG also clarified that an entity other than a PBM may administer the point-of-sale chargeback process. (p. 76699-70)
• The chargebacks are renamed “point-of-sale chargebacks” under the final rule to avoid confusion. They are defined broadly enough to cover both direct rebates from a manufacturer to a pharmacy, or chargebacks administered by third parties.

Does the Final Rule Change the Cost Savings Calculation?

As required by the July 2020 Executive Order, Secretary Azar confirmed that the final rule “is not projected to increase Federal spending, Medicare beneficiary premiums, or patients’ total out-of-pocket costs.” The Secretary’s about-face is not based in any changes made to the rule itself but on a reassessment of the regulatory impact of the rule.

Indeed, the final rule dedicates a sizeable portion to a revised regulatory impact statement that attempts to explain away the earlier estimates by the CBO. The OIG notes that, unlike the proposed rule, the final rule “consider[s] the range of strategic behavior changes stakeholders may make in response to this rule, including the extent to which manufacturers lower list prices or retain a portion of current rebate spending, PBMs change benefit designs or obtain additional price concessions, and the impact on consumer utilization of lower-cost drugs.” (p. 76719) For example, the Secretary’s confirmation letter predicted that parties will continue to negotiate for several years into the future, and in his view (“informed by two decades of deep experience in pharmaceutical pricing, payment, and reimbursement”), this will lead to beneficiary price concessions beyond the earlier estimates.

It is unclear if the revised regulatory impact statement adds anything to the earlier analyses. For one, the CBO estimates appears to have already considered some of the behavior changes that the final rule claims to consider for the first time (e.g., likelihood that manufacturers will lower prices; the rule’s impact on beneficiary plan utilization). Also, the final rule presents the same analysis regarding the rule’s effects on Medicare premiums as the proposed rule, but highlights a different scenario as before (scenario with behavior change assumptions). Ironically, this scenario still predicts a smaller increase in Medicare premiums (the OIG claims that it is a de minimus increase). (p. 76726)

We can predict that these safe harbor amendments will dramatically alter the way in which Part D Plans, Medicaid MCOs, and their PBMs, use rebates received by manufacturers, and will reduce patient co-insurance obligations.  They will also create new opportunities for wholesalers or other entities to provide chargeback administration services to facilitate compliance with the point-of-sale price reduction safe harbor.  However, it is more difficult to predict whether these amendments will actually result in reduced list prices for pharmaceuticals, as intended, or whether the benefits to patients of reduced out-of-pocket expenses will be outweighed by increased premiums.  Answers to these questions will begin to emerge over the next two years, as rebate contracting begins to conform to the new safe harbors and reacts to the narrowing of the discount safe harbor effective in January 2022.