On November 20, 2020, the Trump administration announced plans to scrap the Medicare Part D “rebate safe harbor,” which currently permits insurance middlemen called Pharmacy Benefits Managers (“PBMs”) to charge manufacturers substantial fees in exchange for the PBM allowing the manufacturer’s drugs to be included in the PBMs’ list of approved drugs—on “formulary”. A new rebate rule will replace the “safe harbor”, with the goal of reformulating the rule to benefit patients. In doing so, President Trump believes that it “will save American seniors billions of dollars by preventing [PBMs] from ripping off Medicare patients with high prescription prices.”
In short, the new rule will, effective sixty (60) days after the new rule is published in the Federal Register, only shield Medicare Part D rebates from anti-kickback statute enforcement where: (i) discounts are offered to patients at the point of sale; and (ii) fixed service fees are paid by manufacturers to PBMs for services rendered. The new rule will also remove existing discount safe harbor protection for Medicare Part D rebates (unless the reductions are in fact price reductions required by law), effective January 1, 2020. While the new rebate rule may be a significant step towards lowering drug prices, many stakeholders across the healthcare industry have scrutinized the administration for finalizing the rule without adequately considering the complexities surrounding drug pricing and the dynamics among various stakeholders. Frier Levitt’s Plan Sponsor Practice Group
conducted an in-depth review of the new rebate rule and provides its concerns.
By way of brief background, the Department of Health and Human Services (“HHS”) issued a “notice of proposed rulemaking” on the rebate rule in 2018, but immediately faced intense pushback from the PBMs, the PBM lobby group—Pharmaceutical Care Management Association, and certain Plan Sponsors. In an unexpected turn of events, in July 2019 the Trump administration suddenly withdrew the proposed rule from consideration. The withdrawal was announced on the heels of the Congressional Budget Office’s estimate that implementing the proposed rule would have increased federal spending by $177 billion over the next decade. Interestingly, the withdrawal notice was not published in the Federal Register. Thereafter, the Trump administration touted, through a flurry of executive orders issued in September 2020, that HHS will be publishing a finalized rebate rule.
The proposed rebate rule issued on November 20, 2020 removes safe harbor protection for rebates paid by manufacturers to Medicare Part D Plan Sponsors (either directly or indirectly through PBMs under contract with them). The new rule creates two new safe harbors protecting discounts provided at the point of sale and protecting certain fixed fees paid by manufacturers to PBMs for services rendered to manufacturers. In other words, rebates paid by manufacturers to Plan Sponsors under Medicare Part D could be targeted under the Federal Anti-Kickback law, where they fall outside the new narrower safe harbor.
Falling outside a safe harbor presents dangers to stakeholders. The Federal Anti-Kickback Statute provides for criminal penalties for whoever knowingly and willfully offers, pays, solicits, or receives remuneration to induce or reward, among other things, the referral of business reimbursable under any of the Federal health care programs, including Medicare and Medicaid. Similarly, the civil monetary penalties law provides for the imposition of penalties against any person who offers or transfers remuneration to a Medicare or State health care program beneficiary that the person knows or should know is likely to influence the beneficiary’s selection of a particular provider, practitioner, or supplier for the order or receipt of any item or service for which payment may be made by Medicare or a State health care program. Actions within the safe harbor are protected from prosecution, which is why the removal of the safe harbor is so consequential.
Notwithstanding, the newly announced rebate rule is missing key components that should not be overlooked. First, the rebate rule fails to demonstrate how discounts available at point of sale to the patients will be implemented, and by whom. Manufacturer rebates on prescription drugs are a significant part of the complex drug distribution chain. Since the passage of the Anti-Kickback Statute and the establishment of the various safe harbors, the list prices of branded prescription drugs, and the rebates paid by manufacturers to PBMs, have grown substantially. This phenomenon of list price of drugs rising faster than net price is called gross-to-net bubble. In 2019, the gross-to-net bubble climbed to a record high $175 Billion.
Part D Sponsors engage PBMs to administer and manage pharmacy benefits as well as negotiate with and retain rebates from drug manufacturers. PBMs are then supposed to pass such rebates onto the Plan Sponsors. It is imperative to note that each of the big three PBMs in the country — Express Scripts, Caremark and Optum are also vertically integrated with Plan Sponsors. The portion of the rebates actually relayed by the PBM to the Plan Sponsors depends on the contractual terms and the arrangement. Frier Levitt, through litigation, has discovered in the Medicare Part D space, that PBMs own “Rebate Aggregators” that siphon a substantial portion of rebates out of the system. Thus, these “rebates” are a profit center for PBMs and their wholly owned “Rebate Aggregators”. Clearly, the system needs to be fixed, but in the right way.
Second, replacing drug rebates with fixed service fees under the safe harbor does not fix the systematic issues in the Medicare Part D space. More specifically, when calculating a Part D Sponsor’s overall drug spending, CMS only looks at the total amount fees noted in the DIR Reports. In other words, CMS does not take into consideration rebates that were retained by PBMs and Third-Party Administrators such as Rebate Aggregators, which are often owned or affiliated with PBMs. Using the DIR reports, CMS will ultimately conduct the reconciliation of the risk corridor, reinsurance, coverage gap discount program, and low-income cost-sharing subsidy under Medicare Part D. Thus, in the event that PBMs and Rebate Aggregators secretly retain significant amounts of Manufacturer Rebates, Part D Sponsors will likely bear financial responsibility to CMS. Yet, in the new rule, HHS provides that “[d]eterminations of what services are or are not reported as price concessions are the purview of CMS, which administers the Part D Program.” In addition, HHS stated that safe harbor protection is offered only for service fees related to pharmacy benefit management services provided by the PBMs to Part D Sponsors. This is problematic as PBMs have been delegating rebate aggregation/administration function to Rebate Aggregators and the governing contract between PBMs and Rebate Aggregators often does not specify that Rebate Aggregators are performing rebate aggregation/administration for the PBMs’ customers, i.e., Part D Sponsors. Medicare plans, however, have an opportunity to “verify” the PBM’s conduct in the rebate realm. For Medicare Part D Sponsors, the Centers for Medicare and Medicaid Services (“CMS”) requires Part D Sponsors to submit a Direct and Indirect Remuneration (“DIR”) report each year. PBMs are compelled to provide accurate rebate data to Medicare Plans. In the DIR report, Part D Sponsors must include all fees, payments, or payment adjustments made after the point-of-sale that change the cost of Part D covered drugs for the Part D Sponsors or such payments retained by PBMs must be reported to CMS. The reporting requirements are codified in 42 CFR §§ 423.514(d) and (e). However, even under the current rule and proposed rebate rule, there remain provisions that would allow non-transparent PBMs from syphoning rebates from the Plan Sponsors at the expense of the patients, the taxpayers, and the Plan Sponsors. Thus, Medicare plans are wise to consult with knowledgeable counsel on these reports and may even be able to “audit” the PBMs and their “rebate aggregators”.
Furthermore, the new rebate rule provides that the fixed service fees should be fair market value of services provided by the PBMs to the manufacturers and that such fees should not be contingent upon volume, referrals, or potential businesses that would’ve been generated between the parties. It seems that the service fees include “bona fide service fees,” which has been an area of PBM abuse, allowing PBMs to convert costs and lost revenue to service fees. However, HHS explicitly stated that they are not adopting the CMS’ terminology nor its definition of “bona fide service fees.”
In sum, the new rebate rule falls short of establishing clear administrative mechanism in implementing point of sale discounts and demanding complete transparency from PBMs of their rebate aggregation. We project that, even with the new rebate rule, the drug prices will continue to rise and PBMs will continue to generate massive revenue through manufacturer rebates. In anticipation of this grim outlook on drug pricing, there are strategies that Plan Sponsors can implement to reduce the total drug spending and Medicare beneficiaries’ out-of-pocket expenses. The strategies available to Plan Sponsors range from regulatory overhaul to commencing legal challenges to stop the proposed rule from taking effect. Therefore, it is extremely important that Plan Sponsors seek counsel from knowledgeable industry experts.
How Frier Levitt Can Help
Frier Levitt’s Plan Sponsor Practice Group provides a panoply of legal services to Plan Sponsors including, without limitation, healthcare policy review and analysis, and contacting the legislature to assert the Plan Sponsor Clients’ stance on the policies, and auditing PBMs to verify that Plans have been paid the proper rebates. If your organization is a Plan Sponsor, contact us