On November 20, 2020, the Department of Health and Human Services (HHS) Office of Inspector General (OIG) released a final rule that removes the existing legal safe harbor that protects rebates currently negotiated between pharmaceutical manufacturers and Medicare Part D prescription drug plans, either directly or through Pharmacy Benefit Managers (PBMs). To replace this rescinded safe harbor, OIG finalizes two much narrower ones: one to discounts passed-through to beneficiaries at the point-of-sale (POS) and one to allow certain PBM service fees.

The proposed version of this rule, initially released in January 2019, was never finalized and HHS officials publicly stated that it was withdrawn. It was also listed as withdrawn on the Office of Management and Budget’s unified agenda, but no formal notice of withdrawal was made in the Federal Register. However, in July 2020, President Trump signed a series of drug pricing-related Executive Orders (EOs), including an EO instructing HHS to finalize the rebate policy. The EO also directed HHS to confirm that the new rule is not projected to increase federal spending, Medicare premiums, or total out-of-pocket costs for patients, likely in response to previous criticism of the proposed rebate rule that it would increase premiums. Analyses from the CMS Office of the Actuary (OACT) and others estimated that the rule would lead to increases in Federal spending and beneficiary premiums, but the Secretary of HHS issued a statement that he believes the rule is consistent with the EO.

The OIG says that this final rule is issued to incentivize manufacturers to lower list prices; reduce incentives for plans to choose high-cost, high rebate drugs over comparable lower-priced drugs; lower out-of-pocket spending; and increase transparency. The rule may face legal challenges because of both process and content and implementation of the rule.

OIG Removes existing safe harbor for part d rebates, finalizes two new safe harbors

The final rule removes safe harbor protection for price reductions made in connection with the sale or purchase of pharmaceutical products from manufacturers to Part D plans either directly or through PBMs. OIG initially proposed to also remove safe harbor protection for rebates from pharmaceutical manufacturers to Medicaid managed care organizations (MCOs). However, in response to comments, OIG has not finalized this, so these rebates are still permitted.

In its place, OIG is finalizing the creation of two new safe harbors:

• Point-of-sale reductions in price; and
• PBM service fees.

 

The removal of safe harbor for the existing Part D was originally scheduled to be effective January 1, 2022, meaning existing negotiations and agreements between manufacturers, Part D plans, and PBMs for the current 2021 plan year are not affected.

 

However, in response to a lawsuit challenging the regulation filed by the Pharmaceutical Care Management Association (PCMA), which represents PBMs, the Biden Administration delayed the effective date of this provision of the rule to January 1, 2023. This means that protections for the current rebates structure will last through the 2022 plan year. The Biden Administration will likely use this delay to further review the regulation and PCMA has agreed to pause its litigation to allow for this review. However, PCMA has said that if the Biden administration moves forward with the rule after reviewing it, the group will resume its legal challenge.

Safe harbor for point-of-sale price reductions

OIG has finalized a new safe harbor for price reductions given at the point-of-sale. This price reduction must meet the following conditions:

• Set in advance with a Part D plan sponsor, a Medicaid MCO, or PBM acting under contract with either;
• Does not involve a rebate, unless the full value of that reduction is provided to the dispensing pharmacy by the manufacturer, either directly or indirectly, through a point-of-sale chargeback or is required by law; and
• Reflected in the price of the product at the time the pharmacy dispenses the drug to the beneficiary.

 

In response to comments, OIG clarifies that these requirements mean that price reductions shall be applied to the price of the drug used to calculate beneficiary cost sharing. Additionally, OIG notes that under this new safe harbor, price reductions that are upfront discounts negotiated between a manufacturer and a plan sponsor are permitted.

Safe harbor for certain fees paid by a manufacturer to a pbm

A second new safe harbor will protect certain fees that a pharmaceutical manufacturer pays to a PBM related to the PBM’s arrangements to provide pharmacy benefit management services to health plans. PBMs will have to annually disclose to each health plan with which it contracts the services provided to each manufacturer; information about both the services and the associated fees will also have to be disclosed to the Secretary of HHS upon request.

The services and compensation through these fees must be set out in a written agreement that covers all of the services the PBM provides to the manufacturer. The compensation must also be consistent with fair market value, be a fixed payment not based on a percentage of sales, and not be determined in a way that accounts for volume or value of any referrals or business between the two parties or between the manufacture and the PBM’s health plan.

OIG, in response to comments about the scope of these protected fees, is adding that these must be “legitimate” services, meaning the safe harbor does not protect arrangements between PBMs and manufacturers that are not necessary, are worthless, or are duplicative.

Azar says rule won’t increase spenidng, premiums, or Out-of-pocket costs

To meet the directive from the EO about increased costs, HHS Secretary Alex Azar released a statement to “confirm that in [his] view the Final Rule implementing the Executive Order is not projected to increase Federal spending, Medicare beneficiary premiums, or patients’ total out-of-pocket costs.”

The final rule mentions analyses conducted by CMS Office of the Actuary (OACT), Wakely Consulting Group, and Milliman, Inc. that suggest total beneficiary cost-sharing would decrease and this decrease in total beneficiary cost-sharing would offset any increase in premiums across all beneficiaries. However, OIG goes on to mention that some analyses that estimated higher premiums found that more beneficiaries would pay more in premiums than they would save in cost-sharing. OIG suggests that this means out-of-pocket impacts will vary by individual, with beneficiaries with more drug spending and/or using high-cost drugs seeing more cost benefits.