In the US, the rebates paid to Pharmacy Benefit Managers (PBMs) have come under scrutiny. The recent amendment to the discount safe harbor under the Anti-Kickback Statute (“AKS”) specifically targets the rebates paid between drug manufacturers and PBMs. To fully appreciate the issue, we will take a closer look at the role played by PBMs in the US pharmaceutical supply chain, the benefit design and administration of Medicare Part D, and the rationale and design of the anti-rebate rule and related new safe harbors.
The Role of PBMs – What are the controversies?
PBMs often serve as a broker, without fiduciary obligations, representing payers and employers in the selection, purchase, and distribution of prescription drug benefits. Specifically, PBMs play several key roles:
• Developing and maintaining prescription drug formularies for insurance plans to provide tiered coverage for branded and generic prescription drugs.
• Negotiating discounts from manufacturers on behalf of insurance plans, in exchange for preferred formulary placement. Discounts generally come in the form of rebates. A survey by the Pew Charitable Trust found that 91% of the manufacturer rebates were passed through to plan sponsors by PBMs in 2016 (up from 78% in 2012). But many small insurers and employers say they do not receive this share of savings. Additionally, rebates are not shared with plan beneficiaries, but they may help reduce beneficiaries’ insurance premium.
Much of the debates are over whether PBMs should keep any portion of the rebates which are often kept confidential. Drug manufacturers argue the growing rebates ($39.7 billion in 2012 to $89.5 billion in 2016) are forcing them to raise list prices. It is also argued that PBMs may have an incentive to favor high-priced drugs because they often receive rebates as a percentage of the manufacturers’ list prices.
Currently, the Anti-Kickback Statute discount safe harbor enables a pharmaceutical manufacturer to provide rebates to health plans and PBMs if the rebates are disclosed to the buyer, and the buyer discloses the rebates to the Department of Health and Human Services (“HHS”) on its annual cost report.
• Creating pharmacy networks and negotiating dispensing fees to dispense prescription drugs. PBMs negotiate a reimbursement rate for each drug product, and a separate dispensing fee. This arrangement has allowed PBMs to create a controversial “spread pricing” profit, i.e., reimbursed by plan sponsors at a higher price for generic drugs than what the PBMs pay pharmacies for these drugs. PBMs can also impose penalty fees on pharmacies that do not achieve contracted performance goals (e.g., rate of generic dispensing).
Notably, a recent supreme court ruling has upheld an Arkansas law that bans PBMs from reimbursing pharmacies at lower rates than the cost required to dispense the drug. The law also allows pharmacies to refuse to sell a drug if the upper limit a plan will pay for it is too low, potentially paving the way for other states to do the same.
Medicare Outpatient Prescription Drug Coverage – Part D Plans
Medicare is the largest single payer in the US, providing health care coverage for those age 65 years and older --regardless of income or medical history-- and those under the age of 65, with permanent disabilities or end-stage renal disease.
Medicare coverage is sub-divided into four parts (Part A to D). Part D offers voluntary outpatient prescription drug coverage for beneficiaries eligible for Part A (inpatient hospital services) or enrolled in Part B (outpatient services). Beneficiaries may obtain prescription drug coverage through a stand-alone prescription drug plan (“PDP”) under traditional Medicare or through Part C, aka Medicare Advantage (“MA”). MA combines Part A and Part B benefits, and most must offer coverage for outpatient prescription drugs (“MA-PDs”). MA-PDs generally must comply with Part D requirements.
The Centers for Medicare and Medicaid Services (CMS) contract with private plan sponsors to administer the PDP and MA-PD benefits. As such, which prescription drug products are covered under individual Part D plans are determined by the plan sponsors, subject to coverage restrictions placed by Medicare. Part D plans must also be reviewed and approved by CMS.
Though Part D drug benefits vary depending on a particular plan’s benefit structure, there is a standard plan health plans can offer. In 2020, the standard benefit included a $435 deductible and 25% coinsurance for the cost of drug products between $435 and $4,020. Beneficiaries then enter the coverage gap, no coverage was provided - referred to as the “doughnut hole”, until they reach the catastrophic limit and out-of-pocket threshold of $6,350. After reaching the catastrophic limit, beneficiaries pay the higher of either a 5% coinsurance or a set amount per prescription. It’s worth noting the provisions of the Patient Protection and Affordable Care Act (ACA) has essentially eliminated the “doughnut hole” as of 2020, i.e., beneficiaries are responsible for only the 25% coinsurance until they reach the catastrophic limit.
Unlike reimbursement under Medicare Part A and Part B, the federal government does not play a role in determining the calculation for drug product reimbursement under Part D. Instead, plan sponsors usually contract with Pharmacy Benefit Manager (PBMs) to negotiate prices with manufacturers. The Medicare statute prohibits the federal government from interfering with Part D price negotiations or establishing a required formulary or reimbursement formula for Part D drug products.
Amendment to Discount Safe Harbor for Part D
The amendment to discount safe harbor issued on November 20, 2020 by the Department of Health and Human Services (“HHS”) and the HHS Office of Inspector General (“OIG”) specifically targets rebates paid to PBMs by manufacturers for Part D plans. If implemented, it will remove safe harbor protection under the AKS for rebates pharmaceutical manufacturers pay to Part D plan sponsors directly or through PBMs. The Final Rule has a delayed implementation date of January 1, 2022 anticipating its significant impact on current business practices.
Accompanying the amendment, HHS stated its rationale for the anti-rebate rule: (i) rebates incentivize drug manufacturers to maintain a high list price, and (ii) disadvantage part D beneficiaries, who commonly pay coinsurance based on a drug’s price that does not reflect the full universe of rebates.
However, HHS acknowledges that given the dynamic nature of potential stakeholder responses, the amendment could result in either savings of $100 billion or increased costs of up to $196 billion.
Important to note the discount safe harbor amendment only applies to Medicare Part D and not Medicaid managed care organizations (“Medicaid MCOs”) as did in the January 2019 proposed rule. It also does not apply to rebates negotiated in connection with other government health programs, including Medicare Part B fee for service, the Department of Veteran Affairs, or the TRICARE program administered by the Department of Defense.
Two New Safe Harbors
Simultaneously, HHS has created two new safe harbors, both available starting January 29, 2021, to protect:
price reductions given by pharmaceutical manufacturers at the point-of-sale passed through to beneficiaries.
fixed fees paid by manufacturers to PBMs for PBM services.
New Point-of-Sale Safe Harbor
Under the safe harbor, a pharmaceutical manufacturer may offer a rebate to a Medicare Part D plan sponsor, Medicaid MCO, or PBM acting on behalf of either entity if three criteria are satisfied:
Advance Agreement. The price reduction must be in writing, in advance of the first purchase of the product at a reduced price.
No Rebates. The reduction in price may not involve a rebate, unless the full value of the rebate is provided by the manufacturer to the dispensing pharmacy, directly or indirectly, through point-of-sale chargebacks or required by law.
Real-Time Reduction. The cost-sharing obligation of the beneficiary must reflect the reduction in price at the time the drug is dispensed.
HHS further clarified price reductions contingent on formulary placement of a drug can qualify for protection under the new point-of-sale safe harbor if the reduction in price is not contingent on the provision of services to the manufacturer, such as marketing or switching, and the above three conditions are satisfied.
HHS also expects manufacturers to maintain sufficient documentation to demonstrate chargebacks were in an amount equal to the agreed-upon point-of-sale reduction in price.
PBM Service Fee Safe Harbor
The new safe harbor protects fixed fees a manufacturer pays to a PBM in exchange for services provided by the PBM. To qualify for the safe harbor:
The PBM must have a written agreement with the pharmaceutical manufacturer that covers all the services the PBM provides to the manufacturer
The services do not involve the counseling or promotion of a business arrangement or other activity that violates any State or Federal law
The compensation paid to the PBM must be:
consistent with fair market value.
fixed, and not based on a percentage of sales, and
does not consider the volume or value of referrals or business generated between the parties (or between the manufacturer and the PBM’s health plan customers) for which payment may be made under a federal health care program.
The PBM also must disclose to each of its health plan customers the services it provides to each of its manufacturer clients as they relate to the PBM’s arrangements with the health plan. HHS may also request PBM service fee information.
Discussion
The discount safe harbor amendment for Part D and the two new safe harbors are clearly designed to target current rebate practices between drug manufacturers and PBMs. Beyond the uncertain impact of the final rules on federal health care spending, and the likelihood the incoming Biden administration may pause their implementation as a result, we see additional issues:
(1) The current rebate system ties reimbursement primarily to the volume rather than the value of prescription drugs. As such, any policy simply re-directs the flow of rebates will, at best, introduce short-lived savings for the recipient, yet miss the opportunity to bring long-term value and cost efficiency to the health care ecosystem.
(2) Any new policy initiatives need to consider the consolidation within the PBM industry. Currently, three PBMs – Express Scripts, CVS Caremark and OptumRx – control an estimated 71% of Medicaid and Medicare Part D beneficiaries and 86% of the private market. Additionally, these PBMs have some form of common ownership with large retail chains and/or specialty pharmacies, as well as payers: CVS Caremark is affiliated with CVS and Aetna; Express Scripts is affiliated with Accredo and Cigna; and OptumRx is affiliated with BriovaRx and UnitedHealthcare. This consolidation and common ownership may reduce transparency in the financial relationships among PBMs, payers and other participants in the drug supply chain.
(3) Removing discount safe harbor may not lower list prices. Like in other major markets, the US list prices, are often benchmarks for countries that operate reference pricing systems. This can be an important consideration for manufacturers.
For instance, in the UK, when a new innovative product does not meet the National Institute for Health and Care Excellence (NICE)’s cost-effectiveness criteria, a drug supplier may submit a Patient Access Scheme (PAS), a formal pricing agreement that makes a product more affordable through price discounts, rebates, free-stock or outcome-based pricing to effectively lower the list price to meet NICE’s cost-effectiveness threshold while allowing manufacturers to keep the commercial details confidential.
Thus, narrowly targeted regulatory policies that pay little attention to product value and the intricacies of the global supply chain operations may fall short in the grand scheme of things.
References:
1. Health Systems in Transition Vol. 15 No. 3 2013, United States of America, Health system review, European Observatory of Health Systems and Policies
2. Pricing and Reimbursement, USA 2020, Covington, https://www.globallegalinsights.com/practice-areas/pricing-and-reimbursement-laws-and-regulations/usa, Accessed 12/8/20
3. Pharmacy Benefit Managers and Their Role in Drug Spending, April 22, 2019, The Commonwealth Fund, https://www.commonwealthfund.org/publications/explainer/2019/apr/pharmacy-benefit-managers-and-their-role-drug-spending, Accessed 12/18/20
4. Supreme Court upholds Arkansas law regulating pharmacy benefit managers, December 20, 2020, Fierce Healthcare, https://www.fiercehealthcare.com/payer/supreme-court-upholds-arkansas-law-regulating-pharmacy-benefit-managers, Accessed 12/22/20
5. Cutting Out the “Middleman”? HHS Resurrects Anti-Rebate Rule for Medicare Part D, December 9 2020, Ropes & Gray LLP, https://www.lexology.com/library/detail.aspx?g=5bb271c1-e86e-4af5-af54-4d0bdfe9a52f, Accessed 12/18/20