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HHS Proposes New Rules To Eliminate Drug Rebates and Encourage Direct Discounts for Federal Beneficiaries

On January 31, 2019, the United States Department of Health and Human Services’ (HHS) Office of Inspector General (OIG) announced a proposed rule, which would eliminate certain drug rebates and encourage direct discounts for federal beneficiaries. Specifically, the rule would:

  • Eliminate Anti-Kickback Statute (AKS) safe harbor protection for rebates paid by drug manufacturers to pharmacy benefit managers (PBMs), Medicare Part D plans and Medicaid managed care plans,
  • Create a new safe harbor for drug discounts offered to patients at the point of sale, and
  • Create a new safe harbor for PBM fees charged to drug manufacturers.[1]

The proposed rule has the potential to cause significant disruption to the status quo of the drug supply chain. PBMs interact and affect all stakeholders throughout the prescription drug supply chain and markets, including prescription drug benefit plans (e.g., Medicare Part D plans, Medicaid managed care plans and commercial plans, including employer-sponsored plans), pharmaceutical manufacturers and pharmacies. PBMs’ role is to help these plans manage cost and drug utilization by negotiating with manufacturers and pharmacies to facilitate beneficiary access to appropriate medications, while managing the costs to the plan.

HHS Secretary, Alex Azar, stated that “[t]his proposal has the potential to be the most significant change in how Americans’ drugs are priced at the pharmacy counter, ever, and finally ease the burden of the sticker shock that millions of Americans experience every month for the drugs they need.” The Trump administration believes that eliminating the AKS discount safe harbor protection for rebates based on list prices of drugs will reduce incentives for drug manufacturers to increase list prices and result in out-of-pocket savings for federal beneficiaries. This approach assumes that the estimated 26 to 30 percent of drug list price attributed to rebates that are provided to Medicare Part D plans, Medicaid managed care plans and PBMs will be passed on directly to patients to alleviate their out-of-pocket costs.

The proposed rule is part of a larger Trump administration initiative to tackle drug cost and spending through a variety of policy and legislative initiatives, including enhanced government negotiation of discounts for Medicare-covered drugs, prohibiting pharmacy gag clauses, adopting real-time benefit access, drug re-importation and facilitating generic and biosimilar competition against brand drugs.[2]

The proposed rule will be open to public comment for 60 days following its publication in the Federal Register.

What Does the Discount Safe Harbor Currently Allow?

Currently, the AKS discount safe harbor allows drug manufacturers to pay rebates to PBMs with protection against enforcement actions for AKS violations when the conditions set forth in the safe harbor are met.[3] The discount safe harbor has been relied upon, for example, to permit a PBM to exclusively cover a manufacturer’s product or favor a product through prescription benefit plan design, such as via inclusion of a drug on the plan formulary or via providing lower co-pays to plan beneficiaries.[4] If made final, the proposed rule would, among other things, eliminate drug manufacturers’ and PBMs’ ability to rely on the safe harbor for rebate arrangements.

The crux of the HHS proposed rule would add language to the AKS discount safe harbor (42 CFR § 1001.952(h)) that would specifically exclude rebates offered by drug manufacturers to PBMs, Medicare Part D plans and Medicaid managed care plans from protection under the AKS safe harbor. The change would exclude (i) any rebates or price concessions required by law (e.g. state Medicaid rebates or Medicaid “best price” rules), and (ii) rebates paid by manufacturers to pharmacies, physicians, drug wholesalers or hospitals. If finalized, this portion of the proposed rule would go into effect for plan year 2020.

The proposed rule also creates two new AKS safe harbors. The first new safe harbor protects discounts offered by drug manufacturers at the point of sale provided that the discount is fixed, set in advance, paid directly to the pharmacy, and the discount is reflected in the patient’s out-of-pocket cost. The second new safe harbor protects fee arrangements between PBMs and drug manufacturers provided that there is a written contract that lists all the services provided by the PBM, payment is fixed and not based on percentage sales, price, volume or value, and that the PBM provides a written disclosure of the services to each health plan. Under the proposed rule, each of the new AKS safe harbors would go into effect 60 days following the publication of the final rule.

Response to the Proposed Rule

Critics of the proposed rule, including the Pharmaceutical Care Management Association (PCMA), which represents the interests of PBMs, claim that there is evidence to support the notion that rebates offered to PBMs, Part D plans and Medicaid managed care plans and protected under the current AKS safe harbor are working to reduce drug prices. PCMA expressed concern that the Trump administration’s proposed rule lacks a viable alternative for PBMs to negotiate on behalf of beneficiaries, which could result in increased drug costs, higher premiums, and elevated out-of-pocket costs for federal beneficiaries and ultimately adversely impact beneficiaries’ access to affordable prescription drugs.[5]

We will continue to monitor and report on developments related to the proposed rule.


[1] Department of Health and Human Services. Office of Inspector General, RIN 0936-AA08, Fraud and Abuse; Removal of Safe Harbor Protection for Rebates Involving Prescription Pharmaceuticals and Creation of New Safe Harbor Protection for Certain Point-of-Sale Reductions in Price on Prescription Pharmaceuticals and Certain Pharmacy Benefit Manager Service Fees (January 31, 2019). It is expected to be published in the Federal Register on February 6, 2019.

[2] See Department of Health and Human Services. American Patients First. (May 2018).

[3] See 42 CFR 1001.952(h).

[4] See

[5] See Pharmaceutical Care Management Association. PCMA Statement on Administration’s Prescription Drug Rebate Proposed Rule. (January 31, 2019).

© 2022 Foley & Lardner LLPNational Law Review, Volume IX, Number 36

About this Author

Benjamin Daniels, Foley Lardner, healthcare lawyer
Special Counsel

Benjamin M. Daniels is a special counsel and business lawyer with Foley & Lardner LLP. He focuses his practice in the health care field, where he advises health care providers, investors, and lenders on transactional matters and regulatory compliance, including mergers and acquisitions, recapitalizations, buyouts, restructurings, joint ventures, and broad range of commercial transactions. He is a member of the firm's Health Care Industry Team.

Prior to Foley, Mr. Daniels was an assistant general counsel to Fresenius Medical Care North America. While at...

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