This rule, issued by the Office of the Inspector General, reversed a c. 1992 opinion that drug rebates in Medicare Part D paid by manufacturers to Pharmacy Benefit Managers would not violate the anti-kickback statutes.
Rebates have contributed significantly to the divergence between drug gross and net prices and have increasingly become the pharmaceutical industry’s favorite excuse for drug price inflation. For that reason, PhaRMA and its members have lobbied hard for the elimination of drug rebates for years.
The Pharmacy Benefit Manager industry group, known as the Pharmaceutical Care Management Association, has countered the drug lobby with claims that Medicare Advantage premiums would increase were the rebates eliminated. Their claims found their mark last year when the White House “withdrew” its preliminary rule that did precisely what they finalized last week.
The new rule:
- Eliminates the safe harbor protection for reduction in price in connection with the sale or purchase of prescription drugs from manufacturers to plan sponsors under Part D, either directly or through PBMs, unless the reduction in price is required by law.
- Finalizes a new safe harbor for certain POS reduction in price offered by manufacturers on prescription drugs that are payable under Part D or by a Medicaid managed care organization when the following conditions are met:
- Manufacturer and plan sponsor, Medicaid MCO or the PBM acting under contract with either, set the price reduction in advance, in writing.
- Reduction in price does not involve a rebate unless the full value is provided to the dispensing pharmacy by the manufacturer, directly or indirectly, through a point of sale chargeback or series of point of sale chargebacks.
- Reduction in price must be completely reflected in the price of the prescription drug at the time the pharmacy dispenses it.
- Creates a new safe harbor for payment of a fixed fee to PBMs when the following conditions are met:
- The PBM has a written agreement with the drug manufacturer that covers all services the PBM provides to the manufacturer.
- Services performed under the agreement do not involve the counseling or promotion of a business arrangement or other activity that violates any state or federal law.
- The compensation paid the PBM is:
- Consistent with fair market value in an arm’s length transaction
- Is a fixed payment, not based on a percentage of sales.
- Is not determined in a manner that considers the volume or value of any referrals or business otherwise generated between the parties, or between the manufacturer and the PBMs health plans for which payment is made under a federal health program.
- The PBM discloses in writing to each health plan with which it contracts the services rendered to each pharmaceutical manufacturer related to the PBMs services; and to the Secretary upon request the services rendered to each PBM related to the PBMs arrangements to furnish PBM.
Medicare Part D spends about $130 billion a year on drugs. The OIG estimates about 25% of drug spending is diverted in the form of “direct and indirect remuneration” a major portion of which are manufacturer rebates.
The amount of money that will move from PBMs and their associated health plans to the pockets of Part D beneficiaries is not inconsequential – probably something on the order of $25-$30 billion, although no one seems to know for certain. A lot will depend on how much of the rebate dollars manufacturers will retain. The HHS Office of the Actuary has estimated approximately 15%.
One result is likely to be higher MA premiums as the insurance industry threatened in 2019. We are not sure they will make good on that to the extent they would like. Medicare Advantage is one of the few possibilities for member growth given current economic conditions. It is also a very competitive landscape with most beneficiaries having several plans to choose from.
Raising premiums may also prove difficult considering the finalized Most Favored Nation Rule (more on that tomorrow) which is likely to reduce overall Medicare spending.
Another unanswered question is the impact the safe harbor rule will have on employer sponsored plans. While the savvier market participants have been successful in negotiating pass-through of rebates, others have not. There are persistent complaints among plan sponsors about the opaqueness of these arrangements even when they get some benefit of the rebates.
The rule is effective Jan. 1, 2022. Given the long lead time for MA plans to develop bids, the effects ought to begin to make themselves known in Q2 and perhaps work their way into guidance and other commentary by midyear.
Of course, there will be lawsuits. The administration supposed “withdrawal” of the rule in 2019 that was never formalized in the Federal Register will be a target of the arguments. However, given the wide latitude we have seen the courts give the Trump administration, we cannot be certain they will prevail.
Call with questions.
Emily Evans
Managing Director – Health Policy
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