Rumblings About Drug Rebates and Safe Harbors at AMCP

The environment in which managed care has grown since the 1980s is changing at a pace not seen since the introduction of Medicare Part D. Just a couple of years ago, I visited San Diego (where the meeting was held March 25–28, 2019), and the city was very much pleasantly unchanged compared with many visits in the past. This year, an infestation of electronic, dockless scooters and powered bicycles littered the sidewalks everywhere you turned. Some leaning on kickstands, many laid broadsides on busy sidewalks. Inexperienced tourists and seemingly professional riders zoomed through streets and walkways at top speed, menacing pedestrians and sightseers alike. A rapid change with potentially dramatic consequences. The same can be said for the payer environment today.

Although the potential removal of the drug rebate safe harbor was the focus of conversation, many others reverberated in the presented sessions and tableside discussions. We heard plenty on posting drug list prices on direct-to-consumer advertising (and tell me why the US allows DTC advertising in the first place?). The Trump Administration’s strange decision to renew support for a judicial effort at repealing the Affordable Care Act. The imminent departure of Scott Gottlieb, the best friend biosimilar manufacturers may ever have. The latest integration of payers, the Centene–Wellcare transaction.

However, the drug rebate safe harbor question did take center stage. Most payers are convinced that something definitive will now take place after completion of the comment period (deadline is April 6th). Ross Margulies, JD, MPH, Senior Associate from the law firm Foley Hoag LLP, provided a review of action so far. He believes the February 6th proposed rule could be “the biggest change [to Medicare] since implementation of Part D.”


Ross Margulies
Ross Margulies, JD

Mr. Margulies noted that the current drug rebating environment is the result of a 1990s settlement between pharmacies, who sued the pharmaceutical industry and wholesalers, arguing that drug rebates violated the Robinson–Patman Act, which prevents price discrimination. The settlement allowed rebates only when it was connected with marketshare.

Last year, the Department of Health and Human Services complained that rebates are problematic because they can be retained by plans and PBMs, and not reaching the consumer; the rebate is not considered when consumers’ cost sharing is calculated; and may be at the root of the rebate trap, which is a threat to biosimilar uptake.

The Trump Administration sought to address the problem through the anti-kickback statute, which applies to Medicare Part D and Medicaid managed care. The rebate is an inducement to convince the plan and PBM to sell more of the product, said Mr. Margulies. Today, 28 safe harbors protect these parties from persecution, created by the Office of the Inspector General.

According to Mr. Margulies, the proposed new rule amends the drug rebate safe harbors by eliminating the protection for these manufacturer payments to PDPs, MA-PDPs, PBMs, and Medicaid MCOs. The Administration also proposed the creation of two new safe harbors: (1) for fixed PBM service fees that are set out in writing in advance and based on fair market value and (2) for price reductions taken at the point of sale (i.e., at the pharmacy counter), meaning the rebate is completely passed through to the patient.

These changes would be implemented in 2020. “HHS’s goal is to get the WAC price reduced all the way down to net,” said Mr. Margulies. However, it may not lower the cost of drugs overall, per President Trump’s desire. “It may change some behaviors, though, as plans would not be incented to prefer high price/high rebate drugs.” He pointed out that moving towards a point-of-sale discount would represent a new model. “It is a major change for how pharmacies will be paid,” he noted, and would likely involve the pharmacy receiving the patient’s copayment, a reimbursement from the health plan, and then a retrospective chargeback to the manufacturer to make the pharmacy whole.


How the manufacturers react will be the subject of some interesting conjecture. Mr. Margulies stated that the federal government hopes 15% of the former rebates will be retained by the manufacturer, with 75% to be applied as discounts at the point of sale. The remaining amount would then go towards a reduced list price. He said, “Manufacturers could theoretically make the WAC price the net price (no discount), which would cost the system a great deal. Patients with fixed copays will not likely see much or any difference.” On the other hand, premiums could rise as much as 25% to compensate for lost rebates at the plan level. However, it would not be reasonable to believe at this time that the drug manufacturers would simply lower their prices 15% en masse.

He doesn’t believe that Medicaid will be affected, as their rebates are already passed directly through to the states (Medicaid beneficiaries have very low or no copays).

In the end, Mr. Margulies explained, Health and Human Services has no legal authority to prohibit drug rebates. Any final proposal must go through Congressional action before it can be enforced as law. Pharmaceutical contracting is moving head long into a new era, much like personal transportation in San Diego. I hope neither turns out to be accident prone.