On July 18, 2018, the Office of Inspector General (OIG) of the Department of Health and Human Services (HHS) submitted to the Office of Management and Budget (OMB) for regulatory review a proposed rule entitled “Removal Of Safe Harbor Protection for Rebates to Plans or PBMs Involving Prescription Pharmaceuticals and Creation of New Safe Harbor Protection.” This proposed rule, if released, appears to follow through on various statements made by HHS Secretary Azar suggesting that safe harbor protection under the Federal Anti-Kickback Statute should be removed for prescription drug rebates—a potential action on which HHS requested comment in the Administration’s Drug Pricing Blueprint.

At this stage we have a few initial observations:

  • While a proposed rule could be at OMB for hours or for months before being released (or might never be released), we note that the period for submission of comments on the Drug Pricing Blueprint ended on July 16, 2018, only two days prior to the submission of this proposed rule to OMB. As such, this rule must have been in the works for some time, and the Administration does not appear to have waited to review and consider comments before deciding to move forward with it.
  • We will of course need to see the text of the proposed rule to evaluate it from a substantive perspective. It is noteworthy that the title refers not only to the removal of safe harbor protection but also to “creation of new safe harbor protection.” Secretary Azar and the Drug Pricing Blueprint have referred to replacing rebates with “a fixed price for a drug over the contract term”; while we’re not aware of the Administration providing any explanation of what that means or how it would work, the idea may be that rebates would still be paid to payors, but in an amount equal to the difference between the contracted-for fixed (net) price and the drug’s list price. That said, it is not clear whether the proposed new safe harbor will contain those or other requirements.
  • The title in the OMB submission does not refer to which safe harbor(s) would be modified to “remove” safe harbor protection—e.g., OIG may propose to modify the shared risk exception at 42 CFR 1001.952(t) and/or the discount safe harbor at 42 CFR 1001.952(h).
  • There are significant questions relative to OIG’s authority to effectively prohibit manufacturer rebates to payors through changes to the anti-kickback safe harbor regulations. These include:
    • The Anti-Kickback Statute contains a statutory exception for “a discount or other reduction in price obtained by a provider of services or other entity under a Federal health care program if the reduction in price is properly disclosed and appropriately reflected in the costs claimed or charges made by the provider or other entity under a Federal health care program.” Manufacturers and payors may seek to rely upon this statutory exception as permitting rebates, even if the regulatory safe harbor promulgated by OIG is more restrictive.
    • The “non-interference clause” included in the part of the statute establishing the Medicare Part D program provides that the Secretary of HHS, “[i]n order to promote competition under this part and in carrying out this part … may not interfere with the negotiations between drug manufacturers and pharmacies and [Part D plan] sponsors.” OIG regulations which would mandate “fixed price” contracts of the sort described in the Blueprint, or which otherwise proscribe discounting structures, might be deemed to run afoul of this statutory restriction.
  • The rule would apparently be subject to a comment period before it is finalized, inasmuch as it is identified in the OMB notice as a proposed rule. If and when the rule would be finalized is unclear, as is the effective date of any final rule.

Given the importance of payor rebates to the current drug pricing system, these types of regulatory changes could potentially have significant impacts on various parts of the health care industry, depending upon the specifics. One thing that is certain is that industry and observers will be watching closely for the release of this proposed rule—as will we.