Vasilios "Bill" Kalogredis. Vasilios “Bill” Kalogredis.

On Jan. 31, the Department of Health and Human Services (HHS) proposed new rules aimed at addressing some of the Trump administration’s concerns about drug pricing. Specifically, the proposed rules would remove from the “discounts” safe harbor (DSH) of the federal anti-kickback statute (AKS) certain rebates paid by the manufacturers of pharmaceuticals to middlemen known as pharmacy benefit managers (PBMs). The proposed change would expressly remove from AKS’s DSH certain discounts, rebates, and other remuneration given by a pharmaceutical manufacturer to plan sponsors under Medicare Part D, Medicaid Managed Care Organizations (MCOs) and PBMs acting under a contract with such manufacturers. Excepted from this are rebates required under the Medicaid rebate program. The proposed rules were formally published on Feb. 6, and will be open to public comment until April 8.

AKS is contained within the Social Security Act at Section 1128B(b). In simple terms, it provides criminal and civil penalties for knowingly and willfully offering, paying, soliciting or receiving remuneration for referrals of federal health care program business. Currently, AKS has a variety of safe harbors set forth in the regulations at 42 C.F.R. Section 1001.952. An arrangement need not fall squarely within one of the stated safe harbors to be compliant with AKS, but the safe harbors offer some guidance and confidence to those who are unsure whether their business arrangement will expose them to liability. DSH is the eighth safe harbor listed in the regulations. It addresses discounts by excluding a reduction in drug price from the definition of remuneration. The definition is far more detailed than that and we encourage the reader to review it at length to better understand the proposed rule change, but a common understanding of the word “discount” is adequate for the purposes of this article. What the proposed rules intend to do is expressly remove from the DSH any discounts that pharmaceutical makers give in the situations mentioned above.

It would be fair to ask how removing protection from liability for drug discounts is aimed at lowering drug prices. To address this, it makes sense to focus attention on PBMs in particular. As noted above, PBMs serve as middlemen between drug makers and health plans. As with any transaction, the buyer wants a low price, the seller wants a high price, and the middleman will take a cut of whatever price is agreed upon. A common scenario has the middleman negotiating with the manufacturer to arrive at a price that the buyer will pay. Part of those negotiations include a rebate. Rather than a discount that the buyer enjoys, the rebate has the manufacturer return to the middleman a portion of the price paid by the buyer. This seems innocuous enough, given that a middleman should get paid for services rendered.

However, the concern is with the incentives that this arrangement creates on the parts of the manufacturer and the PBM. Specifically, the drug maker knows ahead of time that it will be required to give the PBM some sort of rebate, so it is incentivized to increase the pre-negotiation price of its drug to build in that rebate. The PBM is incentivized to negotiate the highest price that the buyer will pay because the PBM will earn a larger rebate that way. In effect, negotiating a discounted price for the buyer in this scenario can serve, by virtue of the incentive structure, to increase the price of the drug. In fact, the first footnote to the proposed rule provides that the secretary of HHS, Alex Azar, finds that drug manufacturer rebates paid to PBMs are not, in certain circumstances, reductions in price and therefore would not qualify as discounts.

Addressing what HHS sees as a negative incentive structure is not all that the proposed rules attempt to do. In addition to neutralizing negative incentives, the proposed rules also introduce two new AKS safe harbors. These new safe harbor proposals recognize both that manufacturer discounts can be a good thing and PBM middlemen still deserve payment for their services. As to the former issue, the proposed rules introduce a new safe harbor that shifts the discount to the point of sale. Specifically, discounts are permitted if they are set in advance, are not rebates (unless provided to the pharmacy as a chargeback), and are charged in their entirety to the beneficiary at the point of sale. The proposed definition of “chargeback” is “a payment made directly or indirectly by a manufacturer to a dispensing pharmacy so that the total payment to the pharmacy for the prescription pharmaceutical product is at least equal to the price agreed upon in writing between the plan sponsor under Part D, the Medicaid MCO, or a PBM acting under contract with either, and the manufacturer of the prescription pharmaceutical product.” HHS takes the position that the current rebate arrangement falls outside this definition because, as discussed above, the dispensing pharmacy is not receiving the full value of the price reduction.

As to the latter issue, HHS proposes a second new safe harbor aimed at the fees that PBMs earn for services performed for a pharmaceutical manufacturer in connection with benefits management services furnished to a plan. This safe harbor requires that the PBMs get paid pursuant to a written agreement with terms that reflect a fair market value fixed fee as opposed to one based on referral volume. The safe harbor also requires the PBMs to annually disclose the fee arrangements to the health plans with which they contract and, whenever requested, to the HHS Secretary.

While the two new safe harbors only address federal programs and do not include private insurance arrangements, HHS saw fit to remind us of a definitional limit on discount. Specifically, the AKS discount safe harbor, as currently in force, limits the definition of discount to exclude price reductions given to one payor but not to Medicare or Medicaid, particularly when such a price reduction induces the purchase of federally reimbursable products. Though the proposed rules do not affect this safe harbor limitation, the proposed rules may increase its relevance and applicability.

As one may expect, the proposed rules have divided the industry and given rise to passionate endorsements and arguably more passionate oppositions. If you or your clients feel strongly one way or the other, remember that comments remain open until April 8.

Andrew Stein, an associate at Lamb McErlane who focuses his practice on health and business law, assisted with preparing this article.

Vasilios J. Kalogredis is chairman of Lamb McErlane’s health law department. He represents many medical and dental groups and thousands of individual physicians and dentists.