HHS Proposes Changes to Drug Rebate Safe Harbors

The U.S. Department of Health & Human Services (HHS) has issued a proposed rule that would amend the safe harbor regulation for certain drug rebates that manufacturers pay to pharmacy benefit managers (PBMs) Medicare Part D, and Medicaid managed care organizations (MCOs).

Published in the Federal Register on February 6, the proposal is designed to address criticism that these rebates have contributed to the skyrocketing costs of prescription drugs.

“The prominence of rebate arrangements in the prescription drug supply chain has been cited as a potential barrier to lowering drug costs,” HHS notes in its proposed rule.

The proposal would revise the discount safe harbor to explicitly exclude from the definition of a discount eligible for safe harbor protection certain reductions in price or other remuneration from a manufacturer of prescription pharmaceutical products to plan sponsors under Medicare Part D, Medicaid managed care organizations as defined under section 1903(m) of the Act, or pharmacy benefit managers under contract with them.

Safe harbors protect arrangements that could otherwise violate the Anti-Kickback Statute. In this instance, the safe harbor has allowed drug manufacturers to pay rebates to PBMs when certain conditions are met. HHS points out that this not only has resulted in higher costs for consumers, but also has influenced PBMs to include higher-priced drugs in favorable tiers on their formularies. This not only increases the PBM’s profits, but also excludes other less expensive drugs, including generics from being offered to patients.

“Excluding rival drugs with ‘rebate walls’ or ‘bundled rebates’ distorts our free market system, discourages generic competition and biosimilar adoption, and causes patients to pay more out of pocket,” HHS noted in a fact sheet.

The proposed rule also includes two new safe harbors: The first would protect certain point-of-sale reductions in price on prescription pharmaceutical products, the idea being that it would encourage drug manufacturers to provide discounts directly to the consumer, which would lower prescription drug prices and out-of-pocket costs, including percentage-based copays.

The second new safe harbor would protect certain PBM service fees. It would allow a manufacturer to 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 certain conditions are met. First, the reduction in price would have to beset in advance with the plan sponsor under Medicare Part D, a Medicaid MCO, or a PBM.

“We propose that ‘set in advance’ would mean that the terms of the reduction in price would be fixed and disclosed in writing to the plan sponsor under Medicare Part D or the Medicaid MCO by the time of the initial purchase,” HHS states.

HHS notes that such fees are often calculated into the list price of a drug product, and that could “function as a disguised kickback.”

HHS is taking comments on the proposal for the next 60 days. Once finalized, the industry will have 60 days to implement it. At 123 pages, the rule is lengthy so anyone with a stake in this area should take the time to review it in detail.

The Health Law Offices of Anthony C. Vitale advises clients about safe harbors and stays up to date on revisions to ensure compliance with your legal obligations. If you have any questions, contact us at 305-358-4500 or send us an email to info@vitalehealthlaw.com.

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The Health Law Offices of Anthony C. Vitale