HHS Proposes Changes to Rebates for Part D Plans Under the Anti-Kickback Statute

On February 6, 2019, the Department of Health and Human Services (HHS) published proposed regulations under section 1128B of the Social Security Act (known as the "Anti-Kickback" statute) that, beginning January 1, 2020, would change the safe harbor treatment of rebates involving prescription drugs to Medicare Part D plans (individual and Employer Group Waiver Programs (EGWP) plans), Medicaid managed care organizations (Medicaid MCOs) and the pharmacy benefit mangers (PBMs) under contract with them. This alert describes the proposed changes, which can be found at this link.

CHEIRON OBSERVATION: HHS has requested feedback on many aspects of the proposals such as the definitions (e.g., of "PBM," "manufacturer," and "prescription drug product" for purposes of the proposed rules) and the impact upon beneficiary access to prescription pharmaceutical products either due to cost or formulary placement. We anticipate that many impacted parties will comment and that HHS will have difficulty considering and reacting to the comments fast enough to implement by the proposed January 1, 2020 effective date.

Actions Needed Now: Plan sponsors should review the proposed changes and determine whether they would like to submit comments. Comments on the proposal must be provided by April 8, 2019 (This is one week after the Medicare Part D Payment Policies and final Call Letter for 2020 is scheduled to be released). Comments should reference file code OIG-0936-P and may be submitted by mail or electronically through the Federal eRulemaking Portal at https://www.regulations.gov/.


Current Rules: Section 1128B of the Social Security Act generally provides criminal penalties for soliciting or receiving payments (such as bribes, kickbacks, or rebates) in return for purchasing, ordering or referring items or services for which payment may be made under a Federal health program (such as Medicare or Medicaid). Collectively, these prohibitions are the "anti-kickback" rules. However, HHS regulations allow certain discounts for prescription drugs (including rebates) that do not cause a violation of the anti-kickback rules (called "safe harbor discounts").

HHS Concerns: HHS has several significant concerns about the current rebate framework, which has been cited as a potential barrier to lowering drug costs:

  1. The Rebate-Based System Harms Beneficiaries: Under the current system, rebates are often not applied at the point of sale to offset the beneficiary's deductible or coinsurance or otherwise reduce the price paid at the pharmacy counter. In these instances, beneficiaries experience out-of-pocket costs related to the drug's price before rebates, rather than the net cost after rebates. Beneficiaries may also be harmed from rebates creating a financial incentive to make formulary decisions based on rebate potential, not the quality or effectiveness of a drug.
  2. High List Prices Harm Federal Health Care Programs: The current rebate framework does not translate into lower Medicare and Medicaid per beneficiary spending on prescription drugs. To the extent that the rebate structure fuels high list prices, rebates may in fact increase Medicare and Medicaid costs. HHS believes that rebates have proven to be ineffective at and counterproductive to putting downward pressure on drug prices.
  3. The Rebate System Is Not Transparent: In some or many instances, plan sponsors under Medicare Part D and Medicaid MCOs have limited information about the percentage of rebates passed on to them and the percentage retained by their PBMs. The terms of rebate agreements manufacturers negotiate with PBMs often are treated as highly proprietary and, in many instances, are unavailable to the plans.

Proposed Revisions to Regulations

HHS proposes to amend the existing discount safe harbor so that it would no longer protect rebates from manufacturers to plan sponsors under Medicare Part D or Medicaid MCOs, either directly or indirectly through PBMs, unless the reduction is required by law. This change would be effective on January 1, 2020.

HHS also proposes to add two safe harbors, which would be effective 60 days after publication of the final regulations:

Safe Harbor for Point-of-Sale Reductions: Under this proposed new safe harbor, a manufacturer could offer a reduction in price on a particular prescription pharmaceutical product to a plan sponsor under Medicare Part D, to a Medicaid MCO, or through a PBM acting under contract with either if all of the following three conditions are met:

  1. The reduced price must be set in advance with a plan sponsor under Medicare Part D, a Medicaid MCO, or the PBM.
  2. The reduction in price could not involve a rebate unless the full value of the reduction in price is provided to the dispensing pharmacy through a chargeback or a series of chargebacks, or the rebate is required by law.
  3. The reduction in price must be completely applied to the price of the prescription pharmaceutical product charged to the beneficiary at the point of sale.

Safe Harbor for PBM Service Fees: A payment by a manufacturer to a PBM for management services provided to a pharmaceutical manufacturer (not for any service provided to a health plan) would be permitted as long as the following conditions are met:

  1. The PBM must have a 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 for the term of the agreement and specifies each service (for example, to prevent duplicate discounts on 340B claims) to be provided by the PBM and the compensation associated with such services.
  2. The compensation paid to the PBM must:
    1. Be consistent with fair market value in an arm's-length transaction,
    2. Be a fixed payment, not based on a percentage of sales, and
    3. Not be determined in a manner that takes into account the volume or value of any referrals or business between the parties, or between the manufacturer and the PBM's health plans, for which payment may be made in whole or in part under Medicare, Medicaid, or other Federal health care programs.

  1. The PBM must disclose in writing to each health plan with which it contracts at least annually, and to the Secretary of HHS upon request, the services rendered to each pharmaceutical manufacturer that are related to the PBM's arrangements with that health plan and the associated fees the PBM receives for such services.

CHEIRON OBSERVATION: If enacted, the proposals will likely lead to an increase in the Part D premiums as it will substantially alter the relationship between pharmaceutical manufacturers, Medicare Part D plans, PBMs, and participants. The new relationship could also extend to or impact those in the non-Medicare, i.e., commercial, marketplace. Already PBMs and insurers have begun to create plans applying rebates at the point of sale, with one major insurer (UnitedHealthcare) announcing that it will require all new employer clients beginning January 1, 2020 to apply rebates at point of sale.

Cheiron is an actuarial consulting firm that provides actuarial and consulting advice. However, we are neither attorneys nor accountants. Accordingly, we do not provide legal services or tax advice.