Industry News

HHS Proposes Safe Harbor Amendments Related to Pharmaceutical Rebates.

The Department of Health and Human Services (HHS) Office of Inspector General (OIG) recently proposed a rule to amend the federal Anti-Kickback Statue (AKS) regulatory discount safe harbor.  The proposed rule would amend the definition of a discount under the safe harbor to exclude pharmaceutical manufacturer rebates provided to Pharmacy Benefit Managers (PBM), Medicare Part D (Part D) plan sponsors, or Medicaid Managed Care Organizations (Medicaid MCO).  The change stems from findings that such prescription drug rebates are counterproductive and ineffective in decreasing prescription drug prices.  In most cases, the discounts do not flow down to the beneficiaries or federal health care programs and may discourage competition and encourage formulary manipulation.  Further, the lack of transparency regarding agreements between PBMs and pharmaceutical manufacturers can cause program integrity and compliance issues.  HHS also notes that both the statutory exception and the regulatory safe harbor were enacted prior to the establishment of Part D and the promulgation of regulations governing Medicaid Managed Care delivery systems.

To address the noted issues, the Proposed Rule excludes from the discount safe harbor rebate arrangements between manufacturers and PBMs or plans that do not lower the cost of the pharmaceutical at the point of sale, which could ultimately reduce the beneficiary’s out-of-pocket costs.  Additionally, HHS proposes a new safe harbor that will protect rebates, provided that the health plan applies the rebate price paid by the beneficiary at the point of sale price (the Point-of-Sale Reductions safe harbor).  Finally, the proposed rule will include a new safe harbor allowing manufactures to pay service fees to PBMs, so long as the arrangements meet certain transparency requirements (the PBM Service Fee safe harbor).  If the rule is finalized, the Point-of-Sale Reductions safe harbor will go into effect 60-days after publication of the final rule, and the amendment to the discount safe harbor will take effect on January 1, 2020.  The proposed rule does not provide an effective date for the PBM Service Fee safe harbor.

Discount Definition

Under the current AKS definitions, prescription drug rebates from the manufacturer to the PBMs and plans fall under the regulatory definition of discounts, providing them with discount safe harbor protection.  The AKS has both a statutory discount exception and regulatory discount safe harbor.  Currently, the statutory exception applies to, “a discount or other reduction in price obtained by a provider of services or other entity under a Federal health care program if the reduction in price is properly disclosed and appropriately reflected in the costs claimed or charges made by the provider or entity under a Federal health care program.”  The regulatory safe harbor states that a “discount”, as defined by the rule, is not “renumeration,” so long as the buyer, seller, and offeror comply with the standards set out in the regulation.  The regulation defines “discounts” as, “a reduction in the amount a buyer . . .is charged for an item or service based on an arms-length transaction.”  However, the safe harbor specifically excludes: 1) cash or cash equivalents; 2) the supplying of a good or service for free or reduced charge to induce the purchase of a different good or service; 3) a reduction in price applicable to one payor but not to federal health care program payors; 4) a routine reduction or waiver of  beneficiary coinsurance or deductible amount; 5) warranties; or 6) services provided in accordance with a personal or management services contract.  As defined by the regulation, a “rebate” is, “any discount the terms of which are fixed and disclosed in writing to the buyer at the time of the initial purchase to which the discount applies, but which is not given at the time of sale.”  In the proposed rule, the definitions for rebate and discount remain the same; however, an additional exception to the definition of an allowable rebate or discount under the safe harbor would be included.

Proposed Amendment to Discount Safe Harbor

The proposed rule would amend the definition of “discount” to explicitly exclude any reduction in price or other remuneration that is not required by law and is offered by a pharmaceutical manufacturer to a Part D plan sponsor, Medicaid MCO, or PBM acting on its behalf in connection with the sale or purchase of the manufacturer’s prescription pharmaceutical products. The proposed change is not meant to prohibit discounts on prescription pharmaceuticals offered to wholesalers, hospitals, physicians, pharmacies, and third-party payors in other federal health care programs.  HHS seeks comments on specific questions regarding the amendment, including:

  • Whether the restriction proposed by the amendment should only apply to Medicare Part D and Medicaid MCOs, or whether the amendment should apply more broadly to prescription pharmaceuticals under other HHS programs, such as Medicare Part B fee-for-service?
  • What additional or different regulatory text may be necessary to clarify other types of discounts that would remain protected under the discount safe harbor when conditions are met?
  • Whether declining to protect rebates to Part D and Medicaid MCO plan sponsors would affect beneficiary access to prescription products?
  • Whether there are any unidentified unintended loopholes?
  • Will supplemental rebate agreements between states and drug manufactures be affected by the proposed rule?

Two New Regulatory Safe Harbors

HHS is proposing a Point-of-Sale Reductions safe harbor that will allow the beneficiary to capture the rebate value.  Under this safe harbor, manufacturers can offer a price reduction to a Part D plan sponsor or Medicaid MCO and it would not be considered “renumeration” if the reduction fits the safe harbor elements.  To qualify, the following elements must be met: 1) The reduction in price must be set in writing and fixed in advance of the initial purchase; 2) The sale must only involve a rebate when the full value of the price reduction is provided to the dispensing pharmacy in a chargeback or series of chargebacks; and 3) the reduction in price must be completely applied to the price of the drug at the point of sale to the beneficiary.  For purposes of this regulation, initial purchase refers to the first purchase by the plan sponsors or Medicaid MCOs of the product at the reduced price on behalf of the enrollees.

Additionally, HHS is proposing a new PBM Service Fees safe harbor.  Under this safe harbor, fees paid by manufacturers for PBM services provided, such as contracting and establishing payment levels with a network of pharmacies, negotiating rebates, creating and managing formularies, and preferred drug lists would be excluded from the definition of “renumeration,” so long as the services were related to those the PBM provides to one or more health plans.  However, the PBM service fees will only fit the safe harbor if there is a written agreement between the PBM and manufacturer outlining all services provided, the terms and specifics of each service, and compensation associated with the services.  The compensation paid to the PBM must be consistent with the fair market value of an arm’s-length transaction, not be based on percentage of sales, not be determined by the volume or value of referrals or business, and disclosed in writing, along with a description of the services rendered to manufacturers, to each plan it contracts with annually and to the Secretary upon request.

The proposed rule also solicited comments on specifics such as definitions for “chargeback” and “pharmacy benefit management services.”  The comment period for the proposed rule ends on April 8, 2019.

The Proposed Rule is available at: