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HHS Proposes Changes to Prescription Drug Rebates and Discounts Kickback Safe Harbors

On January 31, 2019, the United States Department of Health and Human Services (HHS) Office of Inspector General (OIG) announced a proposed rule that would significantly change the federal Anti-Kickback Statute (AKS) regulatory safe harbors regarding prescription drug rebates and discounts.

The proposed Rule would eliminate the current AKS safe harbor protection for rebates on prescription drugs paid by manufacturers to pharmacy benefit managers (PBMs), Medicare Part D plans, and Medicaid managed care organizations.  The Proposed Rule would create two new safe harbors:  protection of discounts offered to patients at the pharmacy counter and protection for fixed-fee services arrangements between manufacturers and PBMs.

Current Safe Harbor for Prescription Drug Rebates

The current AKS discount safe harbor permits drug manufacturers to pay rebates to PBMs with protection against enforcement actions for AKS violations when the discount or other reduction in price obtained by a provider of services or other entity under a federal health care program (i.e., Medicare or Medicaid) is properly disclosed and appropriately reflected in the costs claimed or charges made by the provider or entity, and all of the requirements of the regulatory safe harbor are met. [1]

The Proposed Rule would exclude discounts on prescription drugs offered by PBMs to Medicare Part D plans or Medicaid managed care organizations from safe harbor protection unless the price reduction is required by law (such as rebates required under the Medicaid Drug Rebate Program). HHS has stated it does not intend for the revisions set forth in the Proposed Rule to apply to PBM discounts offered to entities such as wholesalers, hospitals, physicians, pharmacies, and third-party payors in other federal health care programs.

HHS proposes the removal of the AKS discount safe harbor for drug manufacturer rebates from PBMs to take effect January 1, 2020.

New Safe Harbor for Certain Price Reductions on Prescription Drugs

The first new safe harbor announced by HHS in the Proposed Rule would protect certain arrangements when a prescription drug manufacturer offers a reduction in price of a prescription drug to a Medicare Part D Plan, a Medicaid managed care organization, or PBM if the following conditions are satisfied:

  1. The reduced price must be set in advance under a contract with any of the types of organizations identified above.

  2. The reduction in price may not involve a rebate, as defined in 42 C.F.R. 1001.952(h), 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 the pharmacy charges to the beneficiary for the prescription drug at the point of sale.

The Proposed Rule defines the term “chargeback” as “the payment made directly or indirectly by a manufacturer to a dispensing pharmacy so that the total payment to the pharmacy for the prescription pharmaceutical product is at least equal to the price agreed upon in writing” between the Medicare Part D Plan, the Medicaid managed care organization, or a PBM acting under contract with either organization, and the manufacturer of the prescription drug.

HHS proposes the new safe harbor for price reductions on prescription drugs take effect 60 days after publication of the final rule.

New Safe Harbor for Certain PBM Service Fees

The second new safe harbor announced by HHS in the Proposed Rule would protect fixed fees manufacturers pay to PBMs for services rendered to drug manufacturers when those services relate to the PBMs' arrangements to provide pharmacy benefit management services to health plans meeting the following conditions:

  1. The PBM and drug manufacturer must have a written agreement that covers all services the PBM provides to the manufacturer in connection with the PBM’s arrangements with health plans for the term of the agreement. The agreement must specify each of the services to be provided by the PBM and the compensation for such services.

  2. Compensation paid to the PBM must: (i) be consistent with fair market value in an arms-length transaction; (ii) be a fixed payment, not based on a percentage of sales; and (iii) not be 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.

  3. Fees cannot be determined in a manner that takes into account the volume or value of any referrals or other business generated.

  4. The PBM must disclose in writing to each health plan with which it contracts at least annually, and to HHS upon request, the services it rendered to each drug manufacturer that are related to the PBM’s arrangements with that health plan and the associated costs for such services.

The safe harbor applies only to payments for services provided to a manufacturer and not to a health plan sponsor.  For example, PBMs may provide services to pharmaceutical manufacturers to prevent duplicate discounts on 340B claims.  Because the service is for the benefit of the manufacturer but relies on information from the health plan sponsor, the service could qualify for protection under the proposed safe harbor.  However, it remains to be seen how a health plan sponsor’s restrictions on PBM’s use of health plan sponsor data could impact arrangements that may fit the proposed safe harbor.  HHS did not propose an effective date for this safe harbor.

The Proposed Rule was published in the Federal Register on February 6, 2019, and public comments on the proposals are due 60 days later. The Proposed Rule can be found here, and the HHS Factsheet summarizing the policy objectives of the Proposed Rule is available here.

The amendments to the AKS safe harbors are sweeping changes to the existing regulatory landscape and should be reviewed in detail by those entities involved in the prescription drug supply chain.  

[1] See 42 CFR 1001.952(h).

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About this Author

Stacey A. Borowicz, Regulatory, Health care industry, attorney, Dinsmore Shohl,

Stacey Borowicz is an accomplished attorney who dedicates the majority of her business and regulatory practice to health care providers. Stacey brings with her more than a decade of front line experience in the health care industry as she acquired a rare set of skills as a medical researcher/scientist prior to entering the practice of law.

Stacey's experience in the healthcare representation is diverse and includes Medicare/Medicaid audit and overpayment appeals, voluntary disclosures and refunds. Stacey also brings a wealth of experience in...

Jared Bruce, Dinsmore Law Firm, Cincinnati, Corporate and Health Care Law Attorney

Jared focuses his practice on various health care law matters, including regulatory compliance, transactional matters and cybersecurity.  His prior experience includes serving as in-house counsel for a large non-profit managed care plan.

He drafts and negotiates complex health care-related contracts involving information technology (software licenses and professional service agreements), provider agreements, data sharing agreements and Business Associate Agreements. Jared’s practice includes advising payers, hospitals and providers on compliance and transactional matters related to government-sponsored health insurance plans such as Medicare and Medicaid. Additionally, he has experience representing clients in administrative appeals, Ohio Medicaid State hearings and provider reimbursement disputes.

Brian Murray, healthcare lawyer, Dinsmore

Bryan focuses his practice on health care law and provides legal counsel to health care industry clients on a range of issues, such as specialty and mail-order pharmacy operations, provider networks and reimbursement, regulatory compliance, contract review and preparation and 340B programming. He has experience analyzing pharmaceutical trade issues affected by state and federal regulatory frameworks, including pharmacy practice acts, the anti-Kickback Statute, the Drug Supply Chain Security Act, the Stark Law and the Health Insurance Probability and Accountability Act. ...

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