Medicare Part D – HHS Issues Final Rule on Pharmaceutical Manufacturer Rebates


Medicare Part D – HHS Issues Final Rule on Pharmaceutical Manufacturer Rebates

Newport, RI – The Department of Health and Human Services (HHS) published a final ruling in the Federal Register on November 30, 2020 that is applicable to January 1, 2023 plan years.  This new rule amends the Federal Anti-Kickback Statute (AKS) to remove an exemption for rebates and similar price concessions made by pharmaceutical manufacturers to Part D plan sponsors or Pharmacy Benefit Managers (PBMs) contracted on their behalf.

The final rule does the following for Part D Medicare plans only:

  1. Removes rebates and similar drug price concessions paid by drug makers to PBMs from exemption from the AKS.
  2. Creates a new safe harbor under the AKS for rebates, discounts and similar price concessions made at the point-of-sale to plan members (must be agreed to in advance in writing, must represent the full value of the discount, must be made instantly at point-of-sale, must be 100% reflected in the price of the drug, must be paid in full to dispensing pharmacy and passed on to the member).
  3. Applies new safe harbor protections under the AKS for fixed fees paid by drug makers to PBMs for contracted services provided that meet certain requirements (must be agreed in advance in writing, must be at fair market prices, must be fixed dollar and cannot change based on volume).

This is a very significant change for self-funded Employer Group Waiver Plans (EGWPs).  It will also necessitate the separation of Medicare retiree health plans from being bundled into a single PBM contract or lumped into a joint RFP with active employee plans.  Bidding out Medicare healthcare contracts separately from active employee benefit contracts is a position long advocated by KTP.

Before this new ruling, drug makers operated under shelter from the AKS when negotiating ever deeper discounts with PBMs.  This created large distortions in the pricing of prescription drugs.  Essentially, to appease their clients, PBMs have offered bigger and bigger discounts to drug prices.  In turn, PBMs have demanded larger and larger rebates from drug makers to maintain PBM profitability.  To save their own margins, and faced with inelastic demand for many prescription medications, drug makers have simply artificially raised the list price of the drugs. Over the years this has caused an irrational, upward spiral on drug prices.  

If 100% of pharmaceutical manufacturer rebates were passed on to the plan sponsor or the individual health plan member it would not be as big a problem, but they are not.  Even if they were, rebates would still create price distortions in the market for those without coverage.  The problem is particularly acute with very expensive specialty drugs that often have co-insurance, leaving a large portion of the artificially high list price to be paid by the member.  The problem is also acute at the low end of the pricing spectrum because low-cost generics often have actual prices that are less than a plan’s co-pay.  This is why platforms like GoodRx were created and made successful.

There are many implications from this new rule. 

  1. First, PBM contracts based in whole or in part on rebates and discounts off Average Wholesale Price (AWP) must be renegotiated or more likely replaced.  This will eliminate the long, confusing, convoluted PBM contracts that focus on these rebates and discounts as the primary pricing metrics.  This is good news for plan sponsors and members because AWP and list prices are artificial metrics, with little or no correlation to actual drug costs or prices and rebates are defined differently by each PBM.  If a plan sponsor’s PBM contract says the plan sponsor will receive 100% of the rebates as defined under the PBM contract, it is virtually guaranteed that some revenue from drug makers is being classified or defined outside of the “rebate” definition.  
  2. Second, provided that PBMs don’t find a clever way to skirt these new rules and provided they are not revised or eliminated by Congress, these rule changes will mean modifications to formularies because PBMs won’t skew covered drugs to favor drug makers providing the biggest rebates.  It might also mean changes to plan designs depending on a plan sponsor’s utilization. 
  3. Third, fully-insured EGWPs will continue to be more attractive than self-funded EGWPs.  The competition in the Medicare market, particularly for Medicare Advantage, MA-PD and EGWP plans, is EXTREMELY high.  This heightened competition almost always results in a lower price and no risk for the same benefit plan when it is fully insured versus self-funded.  In a fully insured plan, the price is the price, there is no ability for PBMs to play games with the rebates, discounts and drug tier classifications (e.g. proprietary brand-generic algorithm to determine a drug’s tier day-by-day).  This makes a fully-insured solution lower cost without the claims risk.

Overall, the new rules should result in lower out-of-pocket costs for most Medicare individuals and lower total costs for most plan sponsors.  The fact that the Pharmaceutical Care Management Association (PCMA), the trade group and lobbying arm of the PBM industry, filed a lawsuit on January 12, 2021 challenging the new rules is not surprising and further evidence that the Rx market is not transparent and PBMs like it that way.