Administration Proposes Changes to the Drug Rebate Program

February 5, 2019

Author(s)

On Jan. 31, 2019, the Department of Health and Human Services' (HHS) Office of the Inspector General (OIG) issued a long-awaited proposed rule that would, if finalized, remove the existing legal "safe harbor" that protects rebates currently negotiated between pharmaceutical manufacturers and Medicare Part D prescription drug plans and Medicaid plans. In its place, the agency would create two new "safe harbor" exemptions. The exemptions include 1) Point-of-sale (POS) reductions in price to plan sponsors that are applied at the POS to benefit the beneficiary and 2) certain fixed service fees that pharmaceutical manufacturers pay to pharmacy benefit managers (PBMs). Under the proposed rule, the existing discount safe harbor would be amended to eliminate protection for prescription drug price reductions paid by manufacturers to plan sponsors under Medicare Part D or Medicaid MCOs, either directly or through PBMs, unless the reduction in price is required by law.

If finalized, the rule would dramatically alter the current structure of drug price negotiations and payments between drug manufacturers, PBMs, health plans, and pharmacies in public programs. This is the first proposal from the Administration that directly challenges the role of PBMs. The agency will accept comments through Monday, April 8. If implemented, the rule could go into effect Jan. 1, 2020.

HHS Secretary Alex Azar noted that under the current rebate system, PBMs pay on average 26 to 30 percent less than a drug's list price, but that those savings do not show up in patients' costs. Instead, the administration argues that the proposal would encourage negotiated discounts to be reflected in cost-sharing methods. The impact of the proposed rule is likely to vary for patients, with some patients paying more in premiums while others, particularly users of higher-priced drugs, seeing lower cost sharing.

Although the proposed rule largely addresses Medicare Part D and Medicaid drug spending, if finalized, it could also have a significant impact on the commercial marketplace. In its statement, the Administration also called on Congress to take further action. However, the measure already faces opposition from some in the industry and Democratic leadership. Additionally, the range of feedback requested by HHS indicates that it is unlikely to be implemented as presented or by the proposed 2020 effective date. Changes may include the addition of safe harbors to protect value-based arrangements, the expansion of the rebate prohibitions to additional plans, additional transparency requirements and revised or additional definitions of terms.