Senate Hearings on Drug Pricing: PBMs Pass Blame Back to Drug Makers

If you thought that the Senate hearings on pharmaceutical rebates and pricing was going to help clarify what might be the best avenue for the administration to promote biosimilar access, well, you should have known better. With enough finger pointing to go around, the pharmacy benefit managers and health plans represented at these hearings passed the ball about as well as the Harlem Globetrotters during their pregame routines. It was entertaining but not very elucidating.

Senate hearings on pharmaceutical rebates

One interesting view expressed by Steve Miller, MD, former CMO of Express Scripts and now Executive Vice President and Chief Clinical Officer for the PBM’s new parent Cigna, said that the problem was that marketing exclusivity was too long for the reference biologics. “One of the biggest problems facing the industry is the lack of biosimilars that have come to the marketplace,” he pointed out, placing the blame on the overwhelming patent issues. 

The hearing held on April 9 was chaired by Senator Chuck Grassley (R-IA) and co-led by Senator Ron Wyden (D-OR). Senator Wyden said, “This morning the committee is going to be looking at one of the most confounding gnarled riddles in American health care today…whether pharmacy benefit managers bring any value to the taxpayers is a mystery.”

At a previous hearing in February at which the pharmaceutical companies provided their side of the story, the drug makers pointed to the PBMs and the need for rebates, alleging that they failed to pass through the contracted discounts to patients.

On the other hand, the PBMs blamed the pharmaceutical companies for the high list prices and limited discounts, which require rebating tactics to gain an equitable net price. In its defense, CVS Health claimed that its ability to obtain significant rebates is “a powerful tool to offset” the WAC prices set by drug makers. In response to attacks on the confidentiality of rebating deals, which benefit plans and PBMs rather than patients, they responded that these negotiations do not contribute to higher drug costs. Instead, they help secure the deal-making power of the plan or PBM.

The PBMs did argue a strong case against drug licensing and pay-for-delay deals, which extend beyond generic drugs into the biosimilar space (e.g., AbbVie on Humira). The health plan representatives also emphasized once again that stripping away the rebates would likely result in higher premiums.

One would not call the hearings “clarifying” in any respect. However, it did provide the companies a more public forum to state their positions with regard to the rebate issue and as to the value of their negotiations to the health system in general.

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.”

DRUG REBATE SAFE HARBORS: BEGINNINGS AND ENDINGS

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.

WILL THE RESULT BE LOWER DRUG PRICES?

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.

Secretary Azar Announces Plan to Remove Safe Harbor Protection for Drug Rebates

One of the more challenging lines of attack on high pharmaceutical pricing has been solving the “rebate trap.” Although not a singular item in the Trump administration’s Biosimilar Action Plan, Secretary of Health and Human Services (HHS) Alex Azar had begun the process of reviewing how to begin the offensive against the current system of pharmaceutical rebating last summer. On January 31, HHS announced that they have a plan. An open question is how that plan will affect biosimilar access.  

Health and Human Services Secretary Alex Azar

“We are taking action to encourage the industry to shift away from the opaque rebate system and provide true discounts to patients at the point of sale,” Secretary Azar told the New York Times.

What Is Known to Date

In releasing its proposed rule, HHS will seek to strip pharmaceutical rebates from the existing safe harbor legislation pertaining to public plans, such as Medicaid, Medicare Advantage, and part D providers. The rule “proposes to amend the safe harbor regulation concerning discounts, which are defined as certain conduct that is protected from liability under the Federal anti-kickback statute, section 1128B(b) of the Social Security Act (the Act),” according to the announcement. “The amendment would revise the discount safe harbor to explicitly exclude from the definition of a discount eligible for safe harbor protection certain reductions in price or other remuneration from a manufacturer of prescription pharmaceutical products to plan sponsors under Medicare part D, Medicaid managed care organizations as defined under section 1903(m) of the Act (Medicaid MCOs), or pharmacy benefit managers (PBMs) under contract with them.” The expectation is that, although the rule would apply to federal health benefits, it would trickle down to private payers.

At the same time, HHS is proposing to establish two new safe harbors. To encourage the passing of rebates or other discounts directly to patients at the pharmacy counter, the first safe harbor “would protect certain point-of-sale reductions in price on prescription pharmaceutical products.” A second proposed move would protect “certain PBM service fees” under a safe harbor. This alludes to the use of contracts between a PBM and manufacturer in which the PBM receives a fixed fee in return for services that assist manufacturers (in other words, not for services provided to payers).

The pharmaceutical rebating safe harbor would be eliminated in January 2020, if the rule is enacted as written. The public comment period began immediately and will end on March 31. It will take far less time before the stakeholders publicize their views. According to the Pharmaceutical Care Management Association (a trade association representing the PBM industry), the elimination of the current safe harbor protection could create access problems. ““While we are reviewing the proposed rule, we stand ready to work with the Administration to achieve our shared goal to reduce high drug costs. Pharmacy benefit managers (PBMs) are part of the solution to high cost prescription drugs. Drug makers alone set and raise prices,” stated JC Scott, President and CEO of the Association.

The trade association for pharmaceutical manufacturers stated that the proposal would benefit patient access, by lowering the cost of medications like insulin.

Leveling the Playing Field for Biosimilars

The move away from drug rebates may actually create problems for health plans, which had professed that the portion of the rebates passed through to them from PBMs had enabled plans to subsidize care costs. Therefore, the removal of the rebates may result in premium increases for Medicare beneficiaries. On the other hand, HHS believes that removal of the safe harbor could result in lower out-of-pocket costs for Medicare patients. Mr. Azar believes these lower costs could exceed 30% for not only insulin but for drugs to treat other chronic diseases.

As written on these pages many times in the past, the rebate trap significantly disadvantages biosimilar manufacturers who continually fight a battle for market access. It is at the heart of Pfizer’s lawsuit against Janssen Biotech for the infliximab business. Stripping away the safe harbor does not automatically improve access to biosimilars, as the manufacturers for reference products can simply compensate by lowering their retail prices or increasing discounts. However, it does take away the impetus for payers to favor reference manufacturers because of the rebate revenue they receive. In the long run, this would level the playing field for biosimilar manufacturers, and the effect would be amplified if these rebating practices also withered for private payers. We do know that many actions by those with the best intentions can be subverted by unintended consequences. As an expert in the pharmacy field once told me, if rebates are disallowed, “the PBMs will still find a way to make their money.” Health plan premiums may rise as PBM fees increase to compensate, and this could result in greater numbers of uninsured overall. At least in this case, it may be more difficult to see a potential downside for biosimilar makers.

Anti-kickback Safe Harbors, Drug Rebates, Biosimilars, and FDA

Over the next couple of weeks, I’ll be issuing a series of posts to further analyze some of the Food and Drug Administration’s (FDA’s) new Biosimilars Action Plan.

Drug rebate contracts Outside of patent litigation, the greatest barrier to biosimilar access is the current drug rebate contracts agreed to by pharmaceutical companies, health plans, and pharmacy benefit managers (PBMs). This contracting system persuades payers to maintain coverage of a heavily rebated biosimilar rather than providing access to a lower retail priced drug. Scott Gottlieb, MD, FDA Commissioner, has said that payers will need to start considering whether their rebate revenue on originator biologics are more valuable than the viability of the biosimilar industry overall. The real question is, what can the federal government do about drug rebate contracts?

Dr. Gottlieb believes that they are anticompetitive and cause higher drug prices over time; drug rebate contracts may be in direct conflict with the intent of the federal anti-kickback statues that allow them in the first place. In May, he and Health and Human Services (HHS) Secretary Azar indicated that they may ask for a review of the safe harbors provided for drug rebates.

Anti-kickback Safe Harbors and Drug Rebate Contracts

The anti-kickback statute has been in place since 1971, but these specific safe harbors, protecting drug companies from anti-kickback laws, were introduced more than 2 decades ago. The federal government provides an excellent resource for information about these safe harbors at the Federal Register website. In brief, the safe harbors define exceptions to situations where organizations are receiving “remuneration” for providing goods or services. A rebate given as an incentive to provide a drug (i.e., on formulary) or to utilize more of a product (i.e., “performance rebates”) would currently qualify for safe harbor protection.

Last week, HHS moved on this issue, filing the proposed rule “Removal of Safe Harbor Protection for Rebates to Plans or PBMs Involving Prescription Pharmaceuticals and Creation of New Safe Harbor Protection.” Although the content of the filing has not yet been released, the title and previous statements on the matter by Secretary Alex Azar, do not bode well for drug rebate contracts and payers and the PBM industry tied to them.

America’s Health Insurance Plans, a national trade group for payers, supported a study supported that disputes one of these assertions. The study, conducted by Milliman, concludes that among part D plans studied, rebates did not independently cause higher drug costs. The greatest rebates were found in drug categories with the most competition from other brands (not generics). Instead, Milliman found that the use of rebates was in direct proportion to the degree of competition in a drug category. “Over the four-year period from 2013 to 2016, brand drugs with manufacturer rebates in 2016 had higher price trends than brand drugs without rebates,” according to the report. In other words, the rebates helped mitigate the price increases.

Although a bold move by the Department of Health and Human Services, removing drug-rebate safe harbors will be tricky. It will threaten the bottom lines of the PBM industry. Rebates comprise a significant portion of their revenue. Health plans also receive a portion of that revenue; they claim that these rebates are used to hold down premium costs. In any case, plans and insurers will need to evaluate how to account for less rebate monies but perhaps lower drug prices. For these reasons, we can expect quite a pushback from these sectors should the federal government proceed.

Specialty Drugs Mostly Under the Medical Benefit

Furthermore, all biosimilars (approved and investigational) are classified as specialty drugs by their cost, storage needs, and/or route of administration. This means that they are more likely covered under the medical benefit than the pharmacy benefit. It is thus also likely that the PBM’s specialty pharmacy units or their specialty pharmacy partners will be directly affected by any biosimilar-targeted changes in the anti-kickback laws.

The Trump administration also indicated the desire to move several drugs from coverage under Medicare part B to part D. Whereas Medicare does not currently negotiate prices with pharmaceutical manufacturers, private Medicare insurers can. This may enable price negotiation under part D providers and Medicare Advantage plans. Ironically, might this be a rebate-related negotiation?