February 6, 2023

Volume XIII, Number 37


February 06, 2023

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Eleventh Hour Rulemaking: HHS Eliminates Safe Harbor Protections for PBM Drug Rebates; and Creates Two New Safe Harbors for Point-of-Service Discounts and PBM Fixed-Fee Arrangements

On November 30, 2020, the United States Department of Health and Human Services (“HHS”) Office of Inspector General (“OIG”) issued a final rule (“Final Rule”) that makes significant changes to the federal Antikickback Statute (“AKS”) safe harbor regulations as such regulations relate to the cost of prescription drugs as covered by the Medicare and Medicaid programs.

More specifically, the Final Rule amends the AKS discount safe harbor (“Discount Safe Harbor”) at 42 C.F.R. §1001.952(h) to eliminate safe harbor protection for drug discounts and rebates offered by pharmaceutical manufacturers to pharmacy benefit managers (“PBMs”), Medicare Part D prescription drug plan (“Medicare Part D”) sponsors, and Medicaid managed care organizations (“Medicaid MCOs”).  In addition to making significant changes to the Discount Safe Harbor, the Final Rule creates two new pharmaceutical-related safe harbors: (i) a safe harbor (the “Point-of-Sale Safe Harbor”) applicable to certain prescription drug point-of-sale discounts as offered to Medicare and Medicaid beneficiaries to reduce their direct out-of-pocket prescription drug costs and (ii) a safe harbor (the “PBM Service Fees Safe Harbor”) applicable to flat fee arrangements paid by drug companies directly to PBMs for PBM services.

In this article we will review the Final Rule’s AKS-related provisions, the context and purposes of the AKS provisions, and questions now being raised about the Final Rule’s enforceability.

The Final Rule: Key Anti-Kickback Statute Provisions

In large part, the Final Rule follows the language of the proposed rule (the “Proposed Rule”) that was released on February 6, 2020 and analyzed in our February 11, 2019 Blog Post.  In addition, the Final Rule’s AKS-related provisions echo statements most recently made by President Trump in his July 24, 2020 Executive Order, “Executive Order on Lowering Prices for Patients by Eliminating Kickbacks to Middlemen” (the “Order”).

According to the Order, the high cost of prescription drugs is in large part related to the fact that the law, through the AKS protections afforded to such discount arrangements through the Discount Safe Harbor, encourages drug manufacturers to enter into discount and rebate arrangements with middlemen – PBMs, Medicare Part D sponsors, and Medicaid MCOs – as opposed to consumers.  Moreover, since there is no legal obligation to push down the financial benefits of such business-to-business discounts and rebate arrangements to consumers at the pharmacy counter, the middlemen enjoy the benefits of both discounted drug acquisition costs and ever-increasing drug retail costs. Therefore, the Order directs HHS to finalize the Proposed Rule but requires that the Final Rule not “increase Federal spending, Medicare beneficiary premiums, or patients’ total out-of-pocket costs.”

Given the language of Order, it is not surprising that the November 20, 2020 Press Release (“Press Release”) announcing the publication of the Final Rule quotes HHS Secretary Alex Azar as describing the current Discount Safe Harbor as creating a, “shadowy system of kickbacks” that can only be fixed through regulatory action designed to deliver “big discounts” to consumers at the pharmacy counter.  The Final Rule, including its changes to the Discount Safe Harbor and creation of two new safe harbors, is such regulatory action.

1. Discount Safe Harbor

Effective January 1, 2022, the Final Rule amends the Discount Safe Harbor to remove safe harbor protection for pharmaceutical manufacturer discounts and rebates offered to Medicare Part D plan sponsors, either directly or indirectly through PBMs under contract with Medicare Part D plan sponsors, unless such discounts are required by law.  In addition to the foregoing, the preamble to the Final Rule notes that the Discount Safe Harbor will continue to protect discounts on prescription pharmaceutical products offered by pharmaceutical manufacturers to other entities, including, but not limited to, wholesalers, hospitals, physicians, pharmacies and third-party payors in other Federal health care programs.

A noted above, the Final Rule did not stray too far from the Proposed Rule.  However, in the case of the Discount Safe Harbor amendments, there is a significant difference between the Proposed Rule language and the Final Rule language.  As drafted in the Proposed Rule, the Discount Safe Harbor amendments applied not only to Medicare Part D plan sponsors but also to Medicaid MCOs.  As evidenced by the comments submitted in response to the Proposed Rule, a number of commenters objected to the inclusion of Medicaid MCOs, noting that their inclusion would result in increased Medicaid costs (for both states and the federal government) without lowering out-of-pocket costs to Medicaid beneficiaries.  Commenters noted that Medicaid beneficiaries’ cost-sharing obligations are de minimus (if not zero) under existing Medicaid rules, regulations and policies, so the underlying principal that discounts should be passed along to consumers does not fit when applied in the Medicaid context.  Apparently, the OIG agreed with this conclusion since discounts offered to MCOs are still protected by the Discount Safe Harbor.

2. New Safe Harbors; Point-Of-Sale Safe Harbor and the PBM Service Fee Safe Harbor

In addition to amending the Discount Safe Harbor to eliminate protections offered to “middleman” discounts, the Final Rule adopts two new safe harbors to be effective on January 29, 2021 – 60 days after the publication of the Final Rule.

a. The Point-of-Sale Safe Harbor

According to the OIG, the Point-of-Sale Safe Harbor is designed to promote the use of discounts that are passed directly to consumers and, in turn, lower the out-of-pocket drug expenses experienced by Medicare and Medicaid beneficiaries at the point-of-sale – e.g., the pharmacy counter.

More specifically and as described by the OIG in the Final Rule, the Point-of-Sale Safe Harbor protects reductions in price on prescription pharmaceutical products offered to Medicare Part D plan sponsors, MCOs, or through a PBM acting under contract with either if: (1) the reduction in price is set in advance; (2) the reduction in price does not involve a rebate, unless the full value of the price reduction is accomplished through chargebacks or is a rebate required by law; and (3) the reduction in price is completely reflected in the price the pharmacy charges to the beneficiary at the point of sale.

Finally, in response to public comments made to the Proposed Rule, the Final Rule states that reductions in price offered to Medicare Part D plan sponsors or MCOs based on formulary placement are not protected by the Point-of-Sale Safe Harbor or any other safe harbor.

b. The PBM Service Fees Safe Harbor

Under the PBM Service Fees Safe Harbor, qualifying fixed fee arrangements between pharmaceutical manufacturers and PBMs for the provision of PBM services to one or more health plans are protected from AKS scrutiny.  In order to qualify for such protection, the fee arrangement must meet certain requirements including:

  1. The PBM has a written agreement with the pharmaceutical manufacturer, signed by the parties, 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 of the services to be provided by the PBM and the compensation associated with such services;

  2. The compensation paid to the PBM is (i) consistent with fair market value in an arm’s-length transaction; (ii) a fixed payment, not based on a percentage of sales; and (iii) not determined in a manner that takes into account the volume or value of any referrals or business otherwise generated 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; and

  3. The PBM discloses in writing to each health plan with which it contracts at least annually the services rendered to each pharmaceutical manufacturer related to the PBM’s arrangements to furnish pharmacy benefit management services to the health plan and to the HHS Secretary, upon request.

The Final Rule And Future Litigation?

In response to the publication of both the Proposed Rule and the Final Rule, commenters have been quick to point out potential grounds for future legal challenge.  The following are two such grounds:

1. The Final Rule Exceeds HHS’ Statutory Authority and is Invalid and Unenforceable

In comments to the Proposed Rule (See, Final Rule at 85 FR 76681), some questioned HHS’ authority to promulgate the Proposed Rule and, in turn, the Final Rule.  Since HHS can only promulgate regulations that are consistent with Federal statutory law, one commentor argued that HHS cannot enforce the amended Discount Safe Harbor since the Final Rule amendments put the Discount Safe Harbor in conflict with the AKS statutory discount exception at 42 U.S.C. §1320a-7b(b)(3) (the “Discount Exception”).

Pursuant to the Discount Exception, the AKS does not apply 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.”  In light of Congress’ intent and enactment of the Discount Exception – which is broad in scope – the commentor and others argue that HHS has exceeded its legal authority by amending the Discount Safe Harbor to limit its scope and eliminate the protections it provided to various rebate and other arrangements.  Therefore, they conclude, the Final Rule cannot be enforced by HHS.

In response to the above comments, HHS states that the safe harbor regulations are voluntary.  According to HHS, “[i]ndividuals and entities that choose to comply with a particular safe harbor have assurance that their business practice will not be subject to an anti-kickback enforcement action. However, the safe harbor regulations ‘impose[] no requirements on anyone’ and therefore do not put stakeholders in a position where they cannot comply with both a safe harbor and a Federal law.” In the absence of such a conflict, HHS concludes that the Discount Safe Harbor amendments are enforceable by HHS as a permissible exercise of HHS’ statutory authority to promulgate regulations in furtherance of Congress’ intent.

2. Secretary Azar’s Financial Impact Statement is Faulty

As described above, the Order requires that the Final Rule be drafted and implemented so as not to increase Federal spending, Medicare beneficiary premiums, or patients’ total out-of-pocket costs. Notwithstanding this admonition and the Order’s requirement that Secretary Azar, “confirm—and make public such confirmation—that the [Final Rule] is not projected to increase Federal spending, Medicare beneficiary premiums, or patients’ total out-of-pocket costs,” many industry insiders have said that the Final Rule, like the Proposed Rule before it, does not meet this essential requirement.  In fact, they argue, data from the Centers for Medicare and Medicaid Services (“CMS”) support this conclusion

In comments submitted in response to the Proposed Rule, the American Benefits Council, the Pew Charitable Trusts, and other industry stakeholders cited to an August 30, 2018 CMS Office of the Actuary (“OA”) report in which the OA concluded that the proposed changes to the Discount Safe Harbor would increase premiums for Medicare Part D enrollees.  According to the OA, “[o]ver the 10-year period 2020-2029, overall drug spending net of rebates and the new chargeback discounts would increase by approximately $137 billion, and Federal spending would increase by $196 billion,” and while, “overall spending by households would decrease by $43 billion due to a $93-billion reduction in out-of-pocket spending (defined as spending paid directly by the consumer at the point-of-sale,…premiums for households would increase by $50 billion—an expense that would be borne by Medicare Part D enrollees.”  Finally, in its review of the Proposed Rule, the Congressional Budget Office (“CBO”) issued its analysis in May 2019 in concurrent with the conclusions reached by the OA.

With the above concerns as a backdrop and in response to the Order’s requirement that the Final Rule not increase drug costs to program beneficiaries, Secretary Azar issued a separate statement in which he confirmed his conclusions that the Final Rule will lower Medicare Part D drug costs.  Pointing to his own “two decades of deep experience in pharmaceutical pricing, payment, and reimbursement,” including his time as a senior executive at Eli Lilly, Secretary Azar concluded that the Final Rule will not increase drug costs for Medicare Part D enrollees because Medicare Part D sponsors “will go to great lengths to avoid increasing Part D beneficiary premiums and placing themselves at a competitive disadvantage.”

In making the above statement, Secretary Azar did not rely on any new government or private sector findings that would contradict the conclusions reached by the OA, the CBO, and others regarding the negative financial impact of the Proposed Rule and, in turn, the Final Rule.  As a result, some have argued that the specific form of Secretary Azar’s confirmation could be used to support possible future legal challenge to the rule.[1]  By failing to rely on any data to support his confirmatory statement, future litigants could argue that the lack of data to support Secretary Azar’s statement makes the Final Rule arbitrary and capricious and potentially unenforceable under the Administrative Procedure Act.

Whether the Final Rule spawns future litigation remains to be seen.  Although the authors are unaware of any court filings to challenge the Final Rule, it could be that potential plaintiffs are waiting to see what happens under the Biden Administration.  Since the Discount Safe Harbor amendments are not effective until January 1, 2022, there is plenty of time for the new administration to change direction on this aspect of the Final Rule.  As always, time will tell.


[1] “Administration Finalizes Drug Pricing Rebate Rule At The Last Minute,” by Rachel Sachs, Health Affairs Blog (November 23, 2020) at https://www.healthaffairs.org/do/10.1377/hblog20201122.985836/full/.

Copyright © 2023, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume X, Number 337

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Kenneth Yood Healthcare Attorney SheppardMullin

Ken is a partner in the Corporate practice group in the firm's Los Angeles office. Chambers USAranks him highly for Healthcare, where he was commended for his "broad-based ability in the regulatory area." Clients appreciate that "his explanations are clear, and he understands the business side of things," notes Chambers 2016.

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Melissa Gertler, Sheppard Mullin Law Firm, Corporate Law Attorney, Century City

Melissa Gertler is an associate in the Corporate Practice Group in the firm's Century City office.