May 21, 2019

May 20, 2019

Subscribe to Latest Legal News and Analysis

HHS Proposes to Remove Drug Rebate Protections

On January 31, 2019, the U.S. Department of Health & Human Services (HHS) issued a proposed rule that would amend the discount safe harbor under the Anti-Kickback Statute (AKS) to eliminate protection for certain drug discounts paid by manufacturers to plan sponsors or their pharmacy benefit managers (PBMs) under Medicare Part D, and Medicaid managed care organizations (MCOs). Additionally, the proposed rule would create two new safe harbors to protect: (i) certain point-of-sale discounts on prescription pharmaceutical products; and (ii) certain fixed fee service arrangements between manufacturers and PBMs.

Amendment to the Discount Safe Harbor

Under the proposed rule, the existing discount safe harbor would be amended to eliminate protection for prescription drug price reductions paid by manufacturers to plan sponsors under Medicare Part D or Medicaid MCOs, either directly or through PBMs, unless the reduction in price is required by law. The proposed effective date for the discount safe harbor amendment is January 1, 2020.

HHS notes that it intends for the discount safe harbor to continue to protect discounts on prescription pharmaceutical products offered to other entities, including, but not limited to, wholesalers, hospitals, physicians, pharmacies, and third party payors in other Federal health care programs. However, the Department is concerned about potential unintended loopholes, where price reductions could be channeled to parties as a substitute for rebates, which under the proposed rule, would no longer qualify for safe harbor protection. As such, HHS is soliciting comments regarding whether the proposed amendment should further exclude reductions in price that are not currently contemplated.

More than once in the proposed rule, HHS references its concern over arrangements that treat Federal health care programs differently and says that if a manufacturer offers a rebate to an insurer for its private pay plans conditioned (explicitly or implicitly) on a prescription pharmaceutical product’s favorable formulary placement for all of the insurer’s plans (including Federal), the rebate could be considered remuneration that would implicate the AKS and would not be protected by the discount safe harbor.

Safe Harbor for Point of Sale Rebates

The first proposed safe harbor would protect certain arrangements where a manufacturer offers a reduction in price on a 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 three conditions are met:

  1. The reduction in price must be set in advance with the plan sponsor under Medicare Part D, a Medicaid MCO, or a PBM.
  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 reflected in the price the pharmacy charges to the beneficiary at the point of sale.

HHS proposes to define “chargebacks” in a way that guarantees that a pharmacy is paid an amount that is at least equal to the price agreed upon in writing by the plan sponsor and the manufacturer.  HHS does not address how this would interact with the definition of “negotiated price” in the Part D program. The proposed effective date for this safe harbor is sixty days after the publication of the final rule.

Safe Harbor for Certain PBM Service Fees

The second proposed safe harbor would protect payments from pharmaceutical manufacturers to PBMs for services the PBMs provide to the pharmaceutical manufacturers, when such services relate to the PBMs’ provision of pharmacy benefit management services to health plans. The proposed safe harbor would not protect payment for the services that the PBM may provide to a health plan. Under the proposed rule, the safe harbor would only protect such payments if the following conditions are met:

  1. The PBM and the pharmaceutical manufacturer must have a written agreement that: (i) 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 (ii) specifies 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 arm’s-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 the Secretary upon request, the services it rendered to each pharmaceutical manufacturer that are related to the PBM’s arrangements with that health plan and the associated costs for such services.

Financial Impact

HHS explains that it obtained three separate actuarial opinions, from the CMS Office of the Actuary, Wakely Consulting Group, and Milliman, to try to determine what the likely financial impact of the proposed changes would be on government spending, plan spending, and beneficiary cost.  All projections concluded that premiums would likely rise, and that beneficiary point of sale cost sharing would likely decrease. The magnitude of the projected changes varied greatly. HHS seems to have concluded that all beneficiaries would see increased premiums and some beneficiaries would see reduced cost sharing, but the actual reductions in cost sharing would depend on drugs a beneficiary currently takes and whether such drugs are brand or generic.

©1994-2019 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.


About this Author

Susan Berson, Public Health Service Attorney, Mintz Levin Law Firm

Susan is Managing Member of the firm’s DC office, and she also serves on the firm’s Policy Committee. Her practice focuses on advising private and public health care service providers, including managed care organizations, pharmaceutical services providers such as PBMs, behavioral health companies, specialty care companies, and integrated delivery systems, often in the context of strategic affiliations and complex service agreements.

Susan has advised some of the nation’s largest government health programs and has negotiated some of the nation’s...

Theresa Carnagie, Health Law Attorney, MIntz Levin Law Firm

Theresa’s practice involves a variety of transactional, regulatory, and fraud and abuse matters.

Her transactional experience focuses on advising health care clients on joint ventures, mergers and acquisitions, service agreements, and corporate stock and asset acquisitions. She has served as corporate and regulatory counsel to retail pharmacy chains, pharmacy benefit managers, and health care providers in acquisitions, which included due diligence, licensing, change of ownership, Medicare and Medicaid state certification, and contracting. She has deep experience preparing and negotiating pharmacy network agreements, pharmaceutical purchase and distribution agreements, and rebate agreements.

She also advises health care clients on a variety of regulatory issues, such as Medicare compliance and reimbursement, federal and state anti-kickback and self-referral laws, and state regulatory issues, including corporate practice of medicine and fee-splitting prohibitions.

Theresa assists in the defense of clients subject to federal investigation for violation of the federal anti-kickback law and provides compliance advice to clients in structuring proposed transactions and business arrangements to comply with the anti-kickback and Stark fraud and abuse laws as well as other applicable state and federal regulatory requirements. Theresa has counseled a range of health care providers, including pharmacies, renal dialysis providers, physicians and physician groups, mental health providers, laboratories, hospital systems, practice management companies, and life sciences companies.

Tara Swenson-Dwyer, Health Care, Attorney, Mintz Levin, Law Firm

Tara focuses on advising private and public health care services entities, including managed care organizations, pharmaceutical services providers such as PBMs, and integrated delivery systems, on mergers and acquisitions, joint ventures, and complex service arrangements. She works closely with Medicare Advantage Organizations (MAOs) and Medicare Part D Plan Sponsors, including Employer Group Waiver Plans (EGWPs), and first tier and downstream entities to address regulatory and compliance matters that arise as a result of participating in Medicare Parts C and D. Tara has experience...


Matt advises health care clients on regulatory and transactional matters, including fraud and abuse, HIPAA privacy and security, and general contracting.

Prior to joining Mintz, Matt worked as in-house counsel at an independent hospital and outpatient facility, where he provided guidance on a range of fraud and abuse issues, including compliance with the Stark Law, the Anti-Kickback Statute, and the False Claims Act. He also counseled on HIPAA privacy and security as well as other regulatory matters. Matt handled the structuring and negotiation...