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Takeaway: Rule completely eliminates spread-linked price reductions in Medicare & Medicaid; replaces with flat service fee; commercial implicated also


The Office of the Inspector General released the long awaited safe harbor regulation on drug manufacturer rebates this afternoon.

Notwithstanding behind the scenes tussle between political people in the White House and policy people at HHS, the final rule that emerged is quite aggressive, more so than even we imagined.

The proposal would:

  • Eliminate the safe harbor for price reductions on prescription drugs from manufacturers to plan sponsors under Medicare Part D and Medicaid Managed Care, effective Jan. 1, 2020.
  • Add a new safe harbor to protect discounts between manufacturers and plan sponsors in Medicare Part D and Medicaid Managed Care offered at the point of sale to beneficiaries, effective 60 days after finalization of rule.
  • Add another safe harbor designed to protect fees pharmaceutical manufacturers pay to PBMs for services rendered to the manufacturers on a flat fee basis, (i.e. not tied to price of any drug), effective 60 days after finalization of rule.

The elimination of the safe harbor would end the use of any price reduction in the manufacturers’ price whether those price reductions are called rebates, concessions, dispensing fees, etc. All price reductions must be realized by the dispensing pharmacy and thus passed on to the beneficiaries in both reduced cost and lower cost-sharing.

The proposed rule reiterates that price reductions offered to one payer but not Medicare or Medicaid as an inducement for the purchase of federally reimbursable products is prohibited. For example, a manufacturer offering a rebate to an insurer for its commercial plans conditioned on the product’s favorable placement on a Part D formula would not be allowed.

That prohibition, along with the practice of PBMs negotiating with manufacturers across all books of business, suggests that the new safe harbor provisions will be adopted by commercial plans. Violations of the safe harbors bring with them potentially criminal penalties. Given the consequences, we see it as very likely the new safe harbor standards will be adopted by commercial payers as well.

A likely industry response is to be increases in Part D premiums. However, those increases are not likely to be great – Part D is a pretty competitive business in most markets – and the OIG has relied on several studies that suggest the hikes will be manageable.

We are examining the impact analysis and will have more on that later.

Call with questions. We got ‘em so we know you do too.

Emily Evans
Managing Director – Health Policy


Thomas Tobin
Managing Director


Andrew Freedman, CFA
Managing Director