On February 6, 2019, the Office of Inspector General (OIG) of the Department of Health and Human Services (HHS) published a notice of proposed rulemaking that would amend the safe harbor for discounts. Anti-Kickback Statute regulations currently provide a safe harbor for certain discounts and rebates within the prescription drug distribution chain. OIG has determined that, while intended to encourage price competition that would benefit federal health care programs, this safe harbor has not improved per beneficiary spending and may, in fact, have increased Medicare and Medicaid costs. OIG notes that this is antithetical to the original purpose of the safe harbor and that these arrangements are not innocuous.

The current rebate and discount framework is complex and, in most cases, highly opaque. The players—manufacturers, wholesalers, pharmacy benefit managers (PBMs), insurers, pharmacies and ultimately, patients—are connected in a complicated web of payments, discounts and rebates—many of which are protected by the current safe harbor. These discounts tend to accumulate profits towards the top of the chain and incentivize PBMs to encourage the use of drugs with higher list prices (through preferred formulary placement). That is because the rebates accrued by PBMs tend to increase as list price increases. These drive up the cost to federal programs, private insurers and beneficiaries who pay larger coinsurances for their prescription medications.

The proposed changes to the current safe harbor would exclude discounts from manufacturers to plan sponsors—directly or through PBMs—in connection with the sale or purchase of prescription pharmaceutical products unless required by law. The proposed rule would leave unchanged the provision making it impermissible to offer reductions to one payor but not to a federal program. This prevents a manufacturer from offering a rebate for private plans in exchange for preferred formulary placement across all plans—including federal programs.

In order to preserve arrangements that OIG has deemed beneficial that would otherwise be excluded by this change, OIG has proposed two new narrow safe harbors. The first would apply to point-of-sale reductions for prescription pharmaceuticals. This safe harbor would allow manufacturers to offer price reductions for particular products to plan sponsors under Medicare Part D, a Medicaid MCO or through a PBM acting under contract with either. The following conditions would apply:

  1. The reduced price must be set in advance, prior to the first purchase at the reduced price.
  2. The sale may not involve a rebate unless the full value of the reduction is provided to the dispensing pharmacy through a chargeback or is required by law.
  3. The reduction in price must be completely applied to the price of the prescription pharmaceutical as charged to the beneficiary at the point of sale.

An additional narrow safe harbor has been proposed for certain fixed service fees that manufacturers pay to PBMs. OIG recognizes that certain services—such as the PBM ensuring that duplicate 340B discounts are not applied—are beneficial and would otherwise be impermissible with the proposed changes to the existing discount safe harbor. This proposed safe harbor would not protect any services provided by a PBM to a health plan. The conditions of this safe harbor are:

  1. The PBM and manufacturer must have a written agreement with the manufacturer covering 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. Each service and corresponding compensation must be included.
  2. Compensation must be:
    1. Consistent with fair market value in arms-length transactions;
    2. A fixed payment—not a percentage of sales; and
    3. Not determined in a way that takes into account volume or value of referrals or business generated between the manufacturer and the PBM’s health plans.
  3. The PBM must disclose in writing to each health plan with which it contracts the services it rendered to each pharmaceutical manufacturer that are related to the PBM’s arrangements with the health plan as well as the associated cost. These disclosures must also be made available, on request, to HHS.

As this is a notice of proposed rulemaking, OIG has invited public comment, which is due by 5:00 p.m. Eastern Standard Time on April 8, 2019. In addition to sharing comments with the agency, stakeholders should review their policies and current arrangements as the changes would become effective 60 days after publication of the final rule. Given the fact that this safe harbor, as currently written, affects participants at all points in the distribution chain, the ramifications of a final rule may be felt broadly. Therefore, stakeholders are encouraged to consider upstream and downstream effects of these changes when reviewing their current arrangements.