The OIG’s Proposed Change to Rebates and the Effect on Stakeholders

Manufacturers and payers, including managed care organizations, have been entering into agreements to discount drug prices in exchange for formulary placement, volume commitments, and administrative services for decades. Following a lawsuit in the 1990s, manufacturers agreed to offer the same discounts to pharmacies and payers but only if the entity receiving the discount demonstrated an ability to move market share. Policy makers have suggested that this post-settlement rebate structure encourages manufacturers, plans, and pharmacy benefit managers (PBMs) to raise drug prices and increase costs.

Last month, the Office of Inspector General (OIG) published a proposed rule in the Federal Register that amends the discount safe harbor regulation to eliminate protection for price reductions, including rebates, that are offered by pharmaceutical manufacturers to plan sponsors under Medicare Part D, Medicaid managed care organizations (MCOs), or PBMs under contract with them. If finalized, this could have a major impact on the current drug supply chain and result in significant cost transfers for Medicare and Medicaid. The deadline to submit a comment on this is April 8.

During a presentation at the AMCP Annual Meeting, Ross D. Margulies, JD, MPH, senior associate at Foley Hoag LLP, in Washington, D.C., discussed this proposed rule and its implications.

In 1991, a ruling finalized safe harbor protections for rebates. The OIG has since proposed to amend the discount safe harbor by eliminating safe harbor protections for price reductions for prescription drugs to Medicare Part D and Medicaid MCOs unless the price reduction is required by law. This proposed amendment would take effect on January 1, 2020.

The PBM safe harbor would protect fixed fees that manufacturers pay to PBMs for services rendered to manufacturers that meet a set of specified criteria, including:

  • Be set in advance
  • Based on fair market value
  • Be disclosed to health plans and the Secretary

The point-of-sale safe harbor would protect price reductions offered by manufacturers for products that are paid by Medicare Part D or Medicaid MCOs that meet specified criteria. However, to be protected under the Anti-Kickback Statute, these payments must:

  • Be set in advance
  • Not involve a rebate
  • Be fully transparent to the beneficiary

It is anticipated that lower list price drugs will result in savings for some beneficiaries who have coinsurance or deductible requirements. But patients with fixed copayments may not see changes in their cost-sharing obligations. Medicaid enrollees would also be unlikely to experience cost savings due to limitations on cost sharing.

If the rule increases premiums, federal spending on premium subsidies will increase, which could outweigh the estimated federal savings associated with the proposal.

The impact analysis notes that much of the success of the proposal will depend on the ability of Medicare Part D plans and PBMs to achieve additional price concessions from manufacturers in the absence of rebates.

Mr. Margulies concluded by noting some key questions that remain surrounding the proposed rule, including how broadly it will apply, the impact on existing value-based arrangements, Centers for Medicare & Medicaid Services regulations, impact on Medicare Part D premiums and enrollment, and more.

Presentation L6: The Current Status of Safe Harbor Protection for Rebates: Is the End Near? AMCP Annual Meeting 2019.