Late yesterday, the Office of Inspector General (OIG) of the Department of Health and Human Services (HHS) released a proposed rule to amend the anti-kickback safe harbors[1] in response to perceived risks that rebates paid by pharmaceutical manufacturers to payors and pharmacy benefit managers (PBMs) may contribute to pharmaceutical list price inflation and not benefit patients and payors.  The proposed rule would (i) remove safe harbor protection for drug manufacturer rebates to Part D plans, Medicaid managed care organizations, and PBMs acting under contract with either type of entity, (ii) establish a new safe harbor protecting manufacturer “point of sale” price reductions on Part D and Medicaid managed care drug utilization, and (iii) establish a new safe harbor protecting certain service fees paid by drug manufacturers to PBMs.  The proposed rule is scheduled to be published in the Federal Register on February 6, 2019, with a 60-day public comment period.

Reed Smith’s Life Sciences and Health Industry Group will be preparing a more detailed client bulletin analyzing the potential implications of the proposed rule and identifying areas for comment.  In the meantime, here are a few of our “hot takes” to consider as you review the proposal.

  1. What is this? Although the proposed rule takes the form of amendments to the anti-kickback safe harbors, substantively it is an explicit, broad attempt to affirmatively regulate and change pharmaceutical pricing and contracting structures.  Apart from being a questionable exercise of the HHS Secretary’s authority to promulgate safe harbor regulations defining “permissible” practices under the anti-kickback statute, there is a serious potential for the actions to be challenged as violations of the Medicare Part D statute’s noninterference clause.[2]
  2. Redefining formulary rebates as kickbacks? The Secretary makes the novel and remarkable assertion that “[r]ebates paid by drug manufacturers to or through PBMs to buy formulary position are not reductions in price” and therefore are not eligible for protection under the broad statutory anti-kickback discount exception for “discounts or other reductions in price [which are] properly disclosed and appropriately reflected in the costs claimed or charges made … under a Federal health care program.”[3]  The potential effect of that position is to re-characterize as prohibited remuneration under the anti-kickback statute manufacturer drug rebates that are conditioned upon the payor’s formulary placement of the drug — by far, the most common type of rebate in the marketplace today.  This position is (to put it charitably) not only inconsistent with the agency’s approach requiring reporting of rebates as price concessions under Medicaid and encouraging payment of rebates to Medicare Advantage plans on utilization of Part B drugs, but also appears to upend one of the longstanding pillars of the Part D program, namely, price competition between manufacturers for more-favorable formulary position from Part D plan sponsors — which other current HHS proposals seek to promote (e.g., allowance of increased utilization management of protected class drugs to increase manufacturer rebates).  Although the Trump Administration presumably intends to preclude reliance upon the statutory discount exception as permitting payment of rebates when it is removing their protection under the regulatory discount safe harbor, the potential unintended ramification could be to expose participants to existing (and past) rebate contracts to material civil and criminal liability, most notably via qui tam lawsuits.  Conversely, while the Secretary may intend that competition for formulary position would now take the form of new point-of-sale discounts, there is nothing in the proposed rule indicating that would be permissible, and intrinsically it would appear to be just another form of “buy[ing] formulary position.”  Apart from the potential fraud and abuse issues raised by these statements, if the point-of-sale discounts cannot be conditioned upon formulary position it is unclear why manufacturers would pay them—throwing into doubt whether the rule would accomplish the Secretary’s goal for “this proposal to result in manufacturers lowering their list prices, and replacing rebates with discounts.”  Overall, these issues point up some of the many perils of attempting to use a fraud statute to attempt to accomplish policy goals.
  3. Out with the old (manufacturer rebates)! The specific change that the proposed rule would make to the existing discount safe harbor would be to amend the definition of “discount” to exclude a “reduction in price or other remuneration from a manufacturer in connection with the sale or purchase of a prescription pharmaceutical product” to a Medicare Part D plan sponsor, a Medicaid managed care organization, or a PBM acting under contract with them, unless the price reduction is required by law, such as rebates under the Medicaid rebate program.  In a notable omission, however, the safe harbor amendment would not exclude protection for manufacturer rebates paid to Medicare Advantage plans on their utilization of Part B drugs; it is not clear why they would be treated differently than rebates to Part D plans or Medicaid managed care organizations.
  4. In with the new (point of service discounts)! The Secretary seeks to incent manufacturers to modify pricing and contracting practices by creating a new safe harbor for point of sale discounts under Part D and Medicaid managed care.  The new safe harbor would protect manufacturer reductions in price for drugs payable by plan sponsors that (i) are set in advance with the plan sponsor or its PBM, (ii) are not rebates, unless the full value of the rebate is provided to the pharmacy via a “chargeback,” and (iii) are “completely applied to the price … charged to the beneficiary at the point of sale.”  “Chargeback” is defined as a payment made directly or indirectly by the manufacturer to the pharmacy “so that the total payment to the pharmacy for the … product is at least equal to the price agreed in writing” between the manufacturer and the plan sponsor or its PBM.  It is unclear what mechanism the Secretary has in mind by his reference to “chargebacks” (since chargebacks are typically administered by wholesalers), or how a point-of-sale reduction would be extended to a patient if the product were subject to a fixed copayment under the plan’s benefit design.  Further, the reference to the “total payment to the pharmacy” being agreed between the manufacturer and the plan sponsor appears to merge the plan-pharmacy price negotiation into the manufacturer-plan negotiation, in some unspecified manner.  These are only a few of myriad questions regarding how (and whether) the new point-of-sale discounts would work, in practice.
  5. Protection for PBM service fees. The Secretary also proposes a new safe harbor to protect service fees paid to PBMs for services provided to a manufacturer “related to the pharmacy benefit management services that the PBM furnishes to one or more plans,” (i) pursuant to a written agreement defining the services, (ii) which are consistent with fair market value, made on a fixed fee basis, and not determined based on the volume or value of referrals otherwise generated between the parties, and (iii) where the PBM discloses the services furnished to its plan clients at least annually and to the Secretary on request.  Although the proposal seems most likely to be intended to provide an alternative to traditional PBM administrative fees paid by manufacturers under rebate contracts, which are commonly based upon a percentage of the drug’s list price (and that would be consistent with the agency’s criticism of the use of list prices in manufacturer relationships), the proposed rule is extremely unclear about what these fees would be for, in a world where rebates are banned.  If the idea is that the new fees would be paid to PBMs for administering the new point-of-sale discounts, that is left unstated — perhaps out of a desire to avoid explicitly creating a new role, with an associated safe harbor, for these “middlemen.”  Moreover, it is not clear why this new safe harbor is needed, given that the preamble indicates that it is not intended to supplant other potential safe harbor protection for PBM/manufacturer fee relationships (which presumably would include the OIG’s previous guidance that PBM administrative fees can be protected under the group purchasing organization safe harbor).[4]
  6. What about private/commercial insurance relationships?  Although the safe harbors only address kickbacks in connection in federal health care programs, the proposal emphasizes the existing safe harbor limitation that “discounts” do not include arrangements where a price concession is extended to one payor but not to federal health care programs.  Thus, while private plan rebates obviously cannot be explicitly contingent on federal program plan formulary status for a product, the proposal creates uncertainty regarding the ability to maintain existing pricing structures with respect to commercial health plans.  In short, the agency seems to be trying to influence not only federal program contracting behavior, but private plan contracting behavior.
  7. Effective Dates. The proposed new safe harbor for point of sale discounts would take effect 60 days after publication of a final rule, but the Secretary seeks comments on removing safe harbor protection for current rebate structures effective January 1, 2020.  Inasmuch as Medicare Part D calendar year 2020 formulary rebate negotiations are already well underway (and most commonly, already completed), the potential for such an imminent effective date raises major questions about contractual obligations/liabilities if the change goes into effect, as well as enormous challenges to negotiate and implement replacement point-of-sale discounts (to the extent those are offered) and modify existing plan reporting processes to reflect the new system.
  8. Implications for others? Although the Secretary indicates that the proposed rule is only intended to affect drug manufacturer/plan rebate and service fee arrangements, it includes several unrelated comments of note.  For example, it suggests that discounts to wholesalers are protected under the existing safe harbor (though it is not clear what category of “buyer” they would be).  It also seeks comments on whether greater clarity is needed regarding protection of prompt pay discounts under the safe harbor (even though in 1991 the Secretary indicated that such discounts do not even implicate the anti-kickback statute and therefore no such protection was even needed).[5]  Beyond these specific items, the general approach of the regulation might have implications for device manufacturers that may increasingly contract with payors in connection with outcomes-based initiatives, or for other distribution channel compensation relationships based on list prices.
  9. Regulatory impact? (with the emphasis on the “?”). Aside from the usual, comically low estimates of the time required by industry stakeholders to review a new rule (2 hours) and modify business practices in light of it (20 hours), the proposed rule contains an extensive discussion of potential regulatory impacts on affected stakeholders.  Notably, despite consulting with the CMS actuary and engaging two independent consultants to run multiple potential scenarios to assess potential responses to the proposed rule, the bottom line seems to be that a very wide range of positive or negative economic impacts are possible, and that the agency does not necessarily have a strong sense of what is likely to happen in response to the rule.  For example, the proposal notes the potential risk of significant premium increases, and the potential for varying patient benefits depending on whether a patient is using a high cost or low cost drug.

If you have additional questions concerning the proposed rule or are considering submitting comments on it, please contact Robert Hill (, Joseph Metro (, or another member of Reed Smith’s Life Sciences and Health Industry Group with whom you work.

[1] 42 C.F.R. § 1001.952(h).

[2] 42 U.S.C. § 1395w-111(i) (“the Secretary … may not interfere with the negotiations between drug manufacturers and pharmacies and PDP sponsors….”).

[3] 42 U.S.C. § 1320a-7b(b)(3)(A).

[4] 42 C.F.R. § 1001.952(j). See 68 Fed. Reg. 23736 (May 5, 2003).

[5] 56 Fed. Reg. 35979 (July 29, 1991)