On January 31, 2019, the Trump Administration announced proposed changes to safe harbor protections under the Anti-Kickback Statute (AKS), which could impact the pharmaceutical market and indirectly the 340B Discount Drug Program. The Department of Health and Human Services (HHS) proposed modifications which would exclude pharmaceutical manufacturer rebates (and other price reductions) provided to plan sponsors under Medicare Part D or managed Medicaid, or to pharmacy benefit managers (PBMs) under contract with them. In addition, HHS proposed two new safe harbors for point-of-sale reductions in price on prescription pharmaceutical products and PBM service fees. The overall goals of the proposed rule are to lower out-of-pocket costs for consumers and reduce government drug spending in federal health care programs. The proposed rule can be found here. Comments are due April 8, 2019.

In the press release for the proposed rule, HHS Secretary Alex Azar, the former President of pharmaceutical company Eli Lilly’s American operations, identified PBMs and plans as “middlemen” and blamed the rebate system for the rising costs of drug prices for patients. In the preamble to the proposed rule, HHS described how rebates reduce costs for plans but may not reduce out-of-pocket costs for beneficiaries since out-of-pocket costs may be based on the list price of the product before the rebate adjustment. Additionally, HHS voiced concerns regarding the lack of transparency in the rebate systems, requesting stakeholder feedback on the issue and the lack of compliance with program rules. HHS proposed that the removal of the manufacturer rebates from the AKS safe harbors go into effect January 1, 2020.

HHS also plans to add two new safe harbors to the AKS, including for point-of-sale reductions on drugs and for payments for services to PBMs from manufacturers. HHS argues that point-of-sale reductions pose less risk of fraud to federal health care programs and could incentivize giving discounts directly to consumers. HHS would require that the price reduction be set in advance, not involve any rebates, and be completely reflected in the price charged to the consumer at the point-of-sale. For the new safe harbor for services fees to PBMs, HHS would allow manufacturers to pay PBMs for services furnished directly to the manufacturer but not for services related to the PBM’s work with health plans. For this safe harbor to apply, the PBM and the manufacturer would need to have a written agreement in place that meets certain standards. Additionally, the payments must be consistent with fair market value, be fixed and not based on a percentage of sales, and not be determined in a manner that accounts for the volume or value of any referrals or business.

Abolishing plan and PBM rebates could indirectly impact covered entities in the 340B Drug Discount Program although nothing in the proposed rule would make direct changes to the program or the way in which 340B ceiling prices are calculated. PBMs have frequently justified reducing reimbursement for 340B drugs on the grounds that manufacturers would not pay them a privately negotiated rebate on those drugs (note that nothing in the proposed rule affects rebates required by law, like Medicaid rebates). If the rebates are replaced with other incentives lacking a volume-based component, manufacturers might not have a way to reduce payments based on 340B utilization.  If rebates are eliminated entirely, the “lost rebate” rationale for reimbursement cuts would be eliminated but the PBMs likely would seek other sources of revenue or savings to replace the lost rebate revenue. 340B covered entities should remain vigilant. If you have any questions or concerns, please contact Michael Glomb at mglomb@feldesman.com.