Gottlieb: We Can Still Address Rebate Safe Harbors Through Congress

During his time as FDA Commissioner, Scott Gottlieb, MD, was an ardent proponent of the biosimilar industry. He, along with Health and Human Secretary Alex Azar, introduced several proposals to improve biosimilar access and competition for biologics in an effort to reduce the cost of these expensive complex molecules.

biosimilar naming
Scott Gottlieb, MD

Now, as a Resident Fellow of the American Enterprise Institute, Dr. Gottlieb is still pressing for a biosimilar-friendly environment. A column in the Wall Street Journal continues to advocate for several of the initiatives he introduced at FDA, including those comprising the Biosimilar Action Plan.

The proposal that may have caused the most disruption to the biologic status quo was the removal of the safe harbor for pharmaceutical rebate contracts. The safe harbor protected drug makers from the antikickback statute (section 1128B[b] of the Social Security Act) and helped proliferate rebate contracts between pharma and the payers, distributors, and health systems, usually in exchange for preferred positioning or even nonpreferred formulary coverage.

As discussed in this space in previous months, several stakeholders besides the biosimilar manufacturers (including payers) were heartened by the prospects for removal of the safe harbor. However, fears of rising Medicare premiums for beneficiaries pulled the plug on hopes for the repeal of the safe harbor.

Peter Bach, MD, at Mount Sinai Medical Center, New York, co-authored a recent commentary in the same newspaper, expounding on the belief that price controls on biologics beyond their marketing exclusivity term would be a more effective and efficient tool than biosimilars to save money for the health system. In response to this column, Dr. Gottlieb raised the notion that Congress could raise the safe harbor repeal from the dead.

“Among other dangers, this could trigger shortages of the drugs,” he wrote of Dr. Bach’s proposal. “It would also discourage investment in manufacturing.”

Dr. Gottlieb also pointed out that biosimilar development could be assisted by prohibiting biologic manufacturers from withholding samples of their agent from prospective biosimilar makers through either astronomical pricing or claiming that a REMS program prohibits this type of distribution. These actions would help encourage very early stage biosimilar development. They would do little to help encourage competition (and thus lower prices) once a biosimilar is approved, however.

On the other hand, if drug rebates were taken off the table, biosimilars and biologics would have to compete on list price and discounts solely, a move that would decisively even the playing field. It would also remove the heavy incentive payers currently have to maintain existing formulary coverage for reference biologics.

Barring the removal of the safe harbor and thus the rebate tool, biosimilar manufacturers would have nothing to convince payers to cover them other than tremendous price discounts. In a marketplace like that for the G-CSFs at present and the very crowded trastuzumab marketplace in the near future, this will inevitably mean a race to the bottom in pricing and withdrawal of some competitors. That will result in far less interest in developing biosimilars for newly expiring biologics.

Trump Administration Does About-Face on Drug Rebate Safe Harbors: Opportunity Lost for Biosimilar Competition

It seemed like the best opportunity biosimilar manufacturers had in a long time to gain a competitive foothold upon launch. Secretary of Health and Human Services Alex Azar had promised a repeal of the drug rebate safe harbor as a key component of the Trump Administration’s move to obtain lower drug prices. Today, the Administration reversed its course, leaving the biosimilar industry hanging in the balance.

drug rebate safe harbor
HHS Secretary Alex Azar

According to reports, Health and Human Services found itself between a rock and a hard place. If the drug rebate safe harbor was removed, Medicare part D premiums could rise (plans would compensate for lost rebate revenue by raising consumer costs). There was also no guarantee that lower prices would be passed on to consumers at the pharmacy. Loss of drug rebates would also place great pressure on pharmacy benefit managers (PBMs) to maintain or reduce net drug costs for their plan and employer clients. Accordingly, the removal of the drug rebate safe harbor was opposed by many stakeholders and not supported by enough interests (or with sufficiently influential lobbyists).

The result is a critical missed opportunity for increased access to biosimilars and their attendant savings. Drug rebates can only have value for payers if marketshare exists. In other words, a reference drug manufacturer who holds 100% marketshare before biosimilar launch can offer rebates on every prescription filled—that adds up to millions of dollars for individual PBMs and plans. A biosimilar drug without any marketshare at launch can offer a 50% rebate, but this is meaningless to the payer unless it captures significant marketshare immediately. Without rebates in the equation, biosimilars can compete against reference products on price alone, a much fairer fight for a new drug entering the fray.

Thus, the “rebate trap” will remain a barrier to access. This episode also makes one wonder which trial balloons given flight by the Administration will not come back to Earth. The idea of using the Federal Trade Commission to cut through patent thickets was recently floated and shot down by Texas Senator John Cornyn on the Senate Judiciary committee. We’ve heard about the plan to pin Medicare drug prices to either an international price index or to “most favored nations” pricing, or perhaps even both? Improving the utility of the Purple Book, to actually include useful information about key patent expirations and market exclusivity periods seems simple enough, but even this will take some doing. Interchangeability guidelines published in final form? Well, that should have been completed a couple of years ago.

Despite the approval of 21 biosimilars in the US, the industry does seem to be an awful lot to be worried about. Add in the looming concern in federal appeals court about whether the Affordable Care Act can withstand ongoing attacks concerning the individual mandate, which can then undercut the entire regulatory pathway for biosimilar approval. I know I’m not the only person shaking his or her head. The repeal of the drug rebate safe harbor was a real opportunity to turn the tide.

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.”


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.

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?