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.