HHS Proposed Bill Could Revolutionize Current Rebate Pricing Model

Removal of Drug Rebate Safe Harbor Protection

The U.S. Department of Health and Human Services (HHS) issued the proposed rule to remove the safe harbor protection rebates involving prescription pharmaceuticals on January 31, 2019.

The proposed rule is looking to disrupt the current incentive structure of the drug payments, particularly to Pharmacy Benefit Managers (PBMs). The Administration believes the proposed regulation  would “…create incentives to lower list prices and reduce out-of-pocket spending on prescription drugs” and described the proposal “… to be the most sweeping change to how Americans’ drugs are priced at the pharmacy counter, ever, by delivering discounts directly to patients at the pharmacy counter and bringing much-needed transparency to a broken system.” In theory, I do not disagree but the question we always ask is what the downstream or unintended consequences are. Let’s look at a few of the details.

The existing discount safe harbor would be amended to exclude reductions in price paid by drug manufacturers to plan sponsors under Medicare Part D or Medicaid managed care plans, either directly or through PBMs. Currently, drug companies will negotiate with PBMs (on behalf of plan sponsors) for rebates off the list price to achieve a lower net price, in exchange for volume or market-share criteria and often for an advantageous formulary placement.  But who benefits from these rebates – well the PBMs for sure and plans pay less than the list price.  Rebates are usually paid to the PBM after the transaction at the point-of-sale (POS) and are usually not passed on to the member- at least directly.  Some will argue that the premiums are kept down in part- from the rebate savings. 

Creation of New Safe Harbor Rules

The proposal would create two new safe harbors, the first one would protect discounts offered to patients at the pharmacy counter, as long as three conditions are met:

  1. The reduction is price must be set in advance with the plan sponsor under Medicare Part D, a Medicaid MCO, or a PBM. CMS proposes that “set in advance” would mean that the terms of the reduction in price would be fixed and disclosed in writing to the plan sponsor under Medicare Part D or the Medicaid MCO by the time of the initial purchase.
  2. The reduction is price may not involve a rebate, unless the full value of the reduction in price is provided to the dispending pharmacy through a chargeback. CMS is defining “chargeback” as a payment made directly or indirectly by a manufacturer to a dispending pharmacy so that the total payment t the pharmacy for the prescription is at least equal to the agreed upon price in writing.  CMS is seeking comments to this definition.
  3. The reduction is price must be completely reflected in the price the pharmacy changes to the beneficiary at the POS. This price reflection would enable the dispensing pharmacy to have the necessary information to appropriately charge a beneficiary who owes coinsurance, even if the manufacturer ultimately tenders the dispensing pharmacy a payment through a chargeback to reflect this negotiated price with the payor.

The second safe harbor would protect certain fixed fee arrangements between manufacturers and PBMs if the following conditions are met:

  1. The PBM and the pharmaceutical manufacturer must have a written agreement that: (i) covers all of the services the PBM provides to the manufacturer in connection with the PBM’s arrangements with health plans for the term of the agreement, and (ii) specifies each of the services to be provided by the PBM and the compensation for such services.
  2. Compensation paid to the PBM must: (i) be consistent with fair market value in an arm’s-length transaction; (ii) be a fixed payment, not based on a percentage of sales; and (iii) not be determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties, or between the manufacturer and the PBM’s health plans, for which payment may be made in whole or in part under Medicare, Medicaid, or other Federal health care programs.
  3. Fees cannot be determined in a manner that takes into account the volume or value of any referrals or other business generated.
  4. The PBM must disclose in writing to each health plan with which it contracts at least annually, and to the Secretary upon request, the services it rendered to each pharmaceutical manufacturer that are related to the PBM’s arrangements with that health plan and the associated costs for such services.

Impact on the Pharma/PBM Industry

  1. The system would develop a new type of per-prescription, plan specific rebate or retail discounts applied at point-of-service (POS).
  2. PBMs and plans would prefer a product, portfolio of products, or therapeutic category with the lowest net price rather than the largest rebate.
  3. Formulary placement would be determined by net discounted price, the number of competitors, and other factors. When comparing two comparably priced drugs, the incentive to select the one with the high-list/high-rebate over the lower list price drug is removed.
  4. Increasing the list price by drug manufacturers for a drug to offer a larger rebate in order to obtain better formulary placement would be eliminated.
  5. Price increases to list price could be limited to current business and economic conditions.

Impact on Medicare Advantage

  1. Impact on plan bids would see the removal of the drug rebate pool from a plan’s revenue stream, eliminating the use of those dollars to buy down premiums or cost-sharing.
  2. Plan benefit design would change in favor of high utilizers who would experience a great POS rebates translated as lower cost-share. The greatest impact would be on the high-dollar/high-rebate drugs such as specialty and brand name drugs.
  3. Direct and Indirect Remuneration (DIR) reporting would be impacted. Although the proposed change has not yet been sufficiently developed to understand the real world impact, based on the current reconciliation model, reinsurance subsidy would be impacted.
  4. The Star Ratings impact CAHPS scores is a wild card. If most members experience increased premiums and cost-sharing, masses of dissatisfied members unhappy with their plans are a likely sequelae.


How this all shakes down, and when is to be determined. The goal is to create incentives to lower list prices and reduce out-of-pocket spending on prescription drugs. But, getting from where we are now to achieve this goal is not a simple path. Let’s face it, all entities impacted are in the business of making money and when squeezed in one area may look to recoup in another. 

Even the Administration appears to be uncertain about the downstream effects of the AKS safe harbor removal and has stated as such in the proposed rule.  Actuarial analysis have predicted savings or $190 billion to losses of $100 billion in rebate dollars. They acknowledge the complexity and uncertainty of stakeholder behavior.  CMS is open to comments regarding the proposed rule and the aggressive timeline proposed.