Alerts and Updates

PBMs Must Say Goodbye to Manufacturer Rebates

December 7, 2020

Given that the discount safe harbor has not been amended in 18 years, since 2002, these amendments to the existing anti-kickback safe harbors are overdue.

Pharmacy benefit managers (PBMs) play a significant role in U.S. drug pricing, yet their existence is little known outside of the pharmaceutical and insurance arenas. Over the past few years, PBMs have been scrutinized for their role in rising U.S. drug costs.

In an effort to modify one of the largest drivers in increasing drug costs―rebates paid to PBMs by drug manufacturers―the U.S. Department of Health and Human Services (HHS) on November 20, 2020, published three final rules amending certain safe harbors and creating new ones for the anti-kickback statute.

Under the existing rebate framework for prescription drugs, manufacturers often pay rebates to PBMs in return for favorable formulary placement. PBMs control the drug formularies of the health insurers that hire them to manage prescription drug benefits. Drug formularies are lists of drugs that insureds have access to under their health plans.

Manufacturers typically pay the rebates retrospectively, after initially selling a drug at a wholesale list price that is substantially higher than the net price, post-rebate. In implementing its final rules, HHS explained that this PBM-created “rebate… [structure] may be harming Federal health care programs by increasing list prices, preventing competition to lower drug prices, discouraging the use of lower-cost brand or generic drugs, and skewing formulas used to determine reimbursement or Medicaid rebates.” To address its concerns with the current system, after a significant comment period, HHS published three revisions to the anti-kickback statute safe harbors:

Removal of Safe Harbor Protection for PBM Rebates

HHS amended the discount safe harbor regulation (42 C.F.R. 1001.952(h)) that protects “discounts” from anti-kickback enforcement action, which includes criminal and civil penalties for knowingly and willfully offering, paying, soliciting or receiving remuneration to induce or reward the referral of business reimbursable under federal health care programs (i.e., Medicare and Medicaid).

The final rule excludes from the definition of “discounts” all price reductions from drug manufacturers on prescription drug products in connection with their sale to or purchase by plan sponsors under Medicare Part D, Medicaid managed care organizations or PBMs acting under contract with plan sponsors under Medicare Part D or Medicaid managed care organizations (i.e., rebates paid by drug manufacturers).

This amendment becomes effective January 1, 2022.

New Safe Harbor for Point-of-Sale Discounts

HHS added a new safe harbor to the anti-kickback statute to protect reductions in price that are given at the point of sale and passed on to the beneficiary. This safe harbor will protect reductions in price on prescription drug products offered to plan sponsors under Medicare Part D, Medicaid managed care organizations or through a PBM acting under contract with either if:  (1) the reduction in price is set in advance; (2) the reduction in price does not involve a rebate, unless the full value of the price reduction is paid back to the dispensing pharmacy; and (3) the reduction in price is completely reflected in the price the pharmacy charges to the beneficiary at the point of sale.

This amendment becomes effective January 29, 2021.

New Safe Harbor for Service Fees

The final rules also create a new safe harbor to protect certain fees paid to PBMs by drug manufacturers. The protected fees are for payments a manufacturer makes to a PBM for services the PBM provides to the manufacturer, for the manufacturer’s benefit, when those services relate to the PBM’s arrangements to provide pharmacy benefit management services to health plans.

This safe harbor would protect only a drug manufacturer’s payment for those services that a PBM furnishes to the manufacturer, and not for any services that the PBM may be providing to a health plan. The compensation paid to the PBM must be consistent with fair market value in an arm’s-length transaction, be a fixed payment not based on a percentage of sales and 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 under Medicare, Medicaid or other federal health care programs. 

Additionally, in an effort to increase transparency of such payment to PBMs, this safe harbor requires the PBM to make annual written disclosures to each health plan with which it contracts regarding the services rendered to each drug manufacturer related to the PBM’s arrangement to provide pharmacy benefit management services to the health plans, and make such disclosures to the Secretary of HHS upon request.

This amendment becomes effective January 29, 2021.

Conclusion

Given that the discount safe harbor has not been amended in 18 years, since 2002, these amendments to the existing anti-kickback safe harbors are overdue. Certainly, the existing regulation is no longer reflective of current market practices and has allowed the current rebate system that “may be harming Federal health care programs” to exist and persist.

About Duane Morris

Duane Morris attorneys will continue to monitor developments in this area and other related issues and report on the key details for the industry in subsequent Alerts.

For More Information

If you have any questions about this Alert, please contact Jonathan L. Swichar, Bradley A. Wasser, any of the attorneys in our Pharmacy Litigation Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.