Prescription drug prices are one of the biggest drivers of rising health care costs. To address this issue, the Trump administration issued its Executive Order on Lowering Prices for Patients by Eliminating Kickbacks to Middlemen (the “Order”) on July 24, 2020. The Order is in fact the latest chapter in a saga over drug prices that has been going on for several years and which had culminated in February 2019 with a proposed rule by the United States Department of Health and Human Services (“HHS”) which aimed to rewrite the existing Anti-Kickback Statute (“AKS”) safe harbor for discounts (“Discount Safe Harbor”). Specifically, the rule proposes to eliminate the protection of rebates provided by pharmaceutical manufacturers to Medicare Part D prescription drug plan (“PDP”) sponsors and their pharmacy benefit managers (“PBMs”) and shift those discounts to consumers at the point of sale. The Order directs HHS to finalize the proposed rule but requires that the final rule not “increase Federal spending, Medicare beneficiary premiums, or patients’ total out-of-pocket costs.”[1] Questions remain, however, as to whether HHS has the legal authority to carry out the Order and, if it does, whether it can do so in a manner that will not increase costs. This article provides a background on the legal issues surrounding HHS’s approach to the use of rebates by pharmaceutical manufacturers, then addresses the February 2019 proposed rule in light of the Order, and concludes with a discussion of future considerations.
Pharmaceutical Manufacturer Rebates and Medicare Part D.Currently, PDP sponsors negotiate discounts with pharmaceutical manufacturers in exchange for placement of a manufacturer’s drugs in the plan’s formulary. These negotiations are typically administered by PBMs, and these discounts often take the form of a percentage-based rebate to the PBM based on the volume of drugs used by the PDP’s beneficiaries. The percentage for the rebate is based on the wholesale or “list” price of the drug. The PDP’s payments to pharmacies dispensing the drug, and consequently the beneficiary’s cost-sharing amounts, i.e., deductible credit, co-pay and co-insurance, are also based on the list price because the rebate is not paid to the PBM until after the beneficiary receives the drug. As a result, the rebates do not reduce beneficiaries’ out-of-pocket costs at the pharmacy counter. PBMs may pass a portion of the rebate on to the PDP sponsors to reduce spending and associated premiums, but PDP sponsors have expressed concern over a lack of transparency which limits their ability to leverage the rebates to lower costs. Moreover, PBMs are often compensated based on the size of the rebate, but not necessarily on lower net drug prices (i.e., list price minus rebate). Thus, PBMs are incentivized to negotiate higher rebates and manufacturers are incentivized to raise list prices in order to maintain comparable net prices. The increase in list prices raises overall drug spending and patient cost-sharing amounts.
The AKS and Discounts: Safe Harbor and Exception.The current AKS Discount Safe Harbor can be found at 42 C.F.R. § 1001.952(h). To understand the safe harbor, a brief overview of the AKS is necessary. The AKS makes it a criminal offense to knowingly and willfully offer, pay, solicit, or receive any remuneration, directly or indirectly, to induce or reward referrals, purchases, leases, recommendations or orders of items or services reimbursable by a Federal health care program.[2] The statute covers any arrangement where “one purpose” of the remuneration is to obtain money for the referral of services or to induce further referrals.[3] Current rebate practices described above where pharmaceutical manufacturers pay rebates to PBMs in return for placement on PDP formularies implicate the AKS.
Violation of the AKS can lead to criminal prosecution resulting in fines, prison and exclusion from Federal health programs.[4] It can also lead to administrative enforcement including penalties and potential exclusion from Federal health programs.[5] Finally, a violation of the AKS can lead to civil liability under the False Claims Act (“FCA”) for treble damages, penalties and costs.[6]
HHS’s Office of Inspector General (“OIG”) is responsible for enforcing the AKS. In this role, the OIG promulgates regulatory safe harbors that define practices that, when followed completely, protect a party from prosecution under the statute.[7] A financial arrangement does not have to satisfy a regulatory safe harbor in order to comply with the AKS, however. In fact, the OIG has found on several occasions that an arrangement which did not meet the requirements of a safe harbor should nevertheless not result in liability under the statute.[8]
The OIG issued the Discount Safe Harbor in 1991. At that time, the OIG stated the safe harbor was “intended to encourage price competition that benefits the Medicare and Medicaid programs.”[9] The safe harbor defines the term discount as “a reduction in the amount a buyer (who buys either directly or through a wholesaler or a group purchasing organization) is charged for an item or service based on an arms-length transaction.”[10] A discount may “take the form of a specified price break, or the inclusion of an extra quantity of the item purchased ‘at no extra charge.’”[11]
In 1999, the OIG revised the Discount Safe Harbor. The final rule clarified the definition of “rebates” as discounts that are set forth in writing at the time of the purchase, but are not given to the purchaser until later.[12] In addition, the revised safe harbor requires that participants to the discount arrangement must meet certain disclosure and notification requirements which depend on the participant’s place in the arrangement (offeror, purchaser, seller) and ensure that the benefit of the discount inures to Medicare or other Federal health program.[13]
The AKS also has a statutory exception for discounts (“Discount Exception”).[14] The Discount Exception protects “a discount or other reduction in price obtained by a provider of services or other entity under a Federal health care program if the reduction in price is properly...
