In an effort to respond to prescription drug pricing concerns, on January 31, 2019, the Office of Inspector General (OIG) of the U.S. Department of Health and Human Services (HHS) released a highly anticipated, 123-page proposed rule that would remove protection under the Anti-Kickback Statute’s (AKS) discount safe harbor for pharmaceutical manufacturer rebates to Medicare Part D plan sponsors and Medicaid managed care organizations, including those paid through pharmacy benefit managers (PBMs).  Also, the proposed rule would establish a new AKS safe harbor for certain drug discounts given directly to a federal healthcare program beneficiary at the point of sale, along with a separate safe harbor shielding certain flat-fee payments for administrative services that PBMs provide to pharmaceutical manufacturers.

According to HHS Secretary Alex Azar, this proposal “has the potential to be the most significant change in how Americans’ drugs are priced at the pharmacy counter, ever, and finally ease the burden of the sticker shock that millions of Americans experience every month for the drugs they need.”1  The proposed rule, which capitalizes on a concept that was floated in the 2018 HHS Blueprint to Lower Drug Prices and Reduce Out-of-Pocket Costs, has the potential to radically alter the manner in which pharmaceutical pricing and reimbursement mechanisms operate.2  PBMs play a central role in drug pricing by contracting with health plans, HMOs and employers to administer their prescription drug benefits, manage drug utilization and spending, and negotiate payment rates with pharmacies.  PBMs also contract with pharmaceutical manufacturers for placement of products on the formulary for their client health plans and obtain retrospective rebates from manufacturers that are often tied to meeting certain volume-based or market-share criteria.

The discount safe harbor traditionally has been relied upon to protect from prosecution under the AKS rebates from pharmaceutical manufacturers paid to PBMs on behalf of their client health plans.3  However, in the preamble to the proposed rule the OIG criticizes the current rebate framework on grounds that it potentially contributes to pharmaceutical list price inflation without providing any corresponding benefit to patients. In particular, the OIG contends  the following:

  • The rebate system harms federal healthcare program beneficiaries because many rebates do not flow through as reductions in price at the pharmacy counter, thereby resulting in higher out-of-pocket costs to patients in the deductible, coinsurance and coverage gap phases of their benefits. Relying on a 2011 OIG study, the OIG also claims that Medicare Part D prescription drug plans (PDPs) may often underestimate the amounts they expect to receive from manufacturer rebates when submitting their bids to the Centers for Medicare and Medicaid Services (CMS), which results in higher beneficiary premiums.
  • The current reliance on rebates may skew PBMs’ formulary decisions by creating a financial incentive for PBMs and health plans to make such determinations based on rebate potential, rather than the quality or effectiveness of the drug.
  • The incentives built into the rebate structure may result in increased costs to the federal healthcare programs, which runs contrary to the purpose and spirit of the statutory discount exception and regulatory safe harbor to the AKS. More specifically, the OIG asserts that rebates may be fueling list price increases, preventing competition to lower drug prices, and discouraging the use of lower-cost brand or generic drugs.
  • The rebate system is not transparent, which could potentially impede parties’ ability to disclose, report and otherwise account accurately for rebates as required under the discount safe harbor. The OIG notes that Medicare Part D PDPs and Medicaid managed care organizations (MCOs) often lack information about the percentage of rebates passed on to them versus the percentage retained by the PBM.

Proposed Reforms to the AKS Safe Harbors

The proposed rule contains three core provisions, which are as follows:

  • Exclusion of Discount Safe Harbor Protection for Certain Rebates. The proposed rule would explicitly exclude from the definition of a “discount” price reductions from pharmaceutical manufacturers to Medicare Part D PDPs or Medicaid MCOs, whether paid directly or through PBMs acting on their behalf.  This carve-out would not apply to price concessions required by law (g., under the Medicaid Drug Rebate Program).  Further, the preamble clearly reflects OIG’s intention that the discount safe harbor continue to protect price reductions offered to other entities, including wholesalers, hospitals, physicians, pharmacies, and third-party payors in other federal healthcare programs.  The OIG proposes that, if finalized, this amendment would be effective on January 1, 2020.
  • New Safe Harbor for Point-of-Sale Price Reductions. The proposed new safe harbor would protect price reductions made available at the point of sale by pharmaceutical manufacturers on prescription drugs payable under Medicare Part D or by Medicaid MCOs as long as the discount is fixed and disclosed in writing to the plan sponsor at the time of the initial purchase; paid in full to the dispensing pharmacy if structured as a rebate; and reflected in the patient’s out-of-pocket cost.  If adopted, this new safe harbor would be effective 60 days after the final rule’s publication.
  • New Safe Harbor for Flat-Fee PBM Administrative Service Payments. Lastly, the OIG proposes a new safe harbor that would protect flat fees paid by pharmaceutical manufacturers to PBMs for administrative services rendered to the manufacturer, for its benefit, when those services relate in some way to the PBM’s arrangements to provide pharmacy benefit management services (g., network pharmacy contracting, utilization review, formulary development) to health plans.  This safe harbor would require that the parties have a written agreement covering all of the services the PBM provides to the manufacturer over the term and specifying the compensation for each service; that the payments be consistent with fair market value, not based on a percentage of sales, and not determined in a manner that takes into account the volume or value of federally reimbursable business; and that the PBM annually disclose in writing to its client health plans the services rendered to each pharmaceutical manufacturer and associated costs.

Industry Reaction to the Proposed Reforms

Key industry groups were quick to respond to the proposed rule.  The responses fell into two distinct camps with the pharmaceutical industry praising the proposed rule, as compared to highly critical comments coming from the respective industry associations representing PBMs and health insurance plans.

Specifically, the Pharmaceutical Care Management Association (PCMA), which represents PBM interests, expressed concern over the elimination of PBM-negotiated rebates and the associated impact on Medicare beneficiaries’ access to affordable prescription drugs.  Pointing to studies which appear to support the cost-reducing benefits of rebates in the Medicare Part D sector, PCMA warned of “higher premiums and out-of-pocket expenses unless there is a viable alternative for PBMs to negotiate on behalf of beneficiaries.”4

Trade group America’s Health Insurance Plans (AHIP) similarly urged the administration to “go back to the drawing board” on the proposed rule, contending that pharmaceutical manufacturers have “been working nonstop to deflect attention from outrageously high prices by convincing Americans that health insurance providers and their PBM partners are the problem.”5

By contrast, pharmaceutical manufacturers expressed enthusiasm for the proposals.  For example, industry group Pharmaceutical Research and Manufacturers of America (PhRMA) applauded the administration for helping to “fix the misaligned incentives in the system that currently result in insurers and [PBMs] favoring medicines with high list prices” and “ensure that the $150 billion in negotiated rebates and discounts are used to lower costs for patients at the pharmacy.”6

Questions Remain about Impact of the Proposed Rule

While the OIG is soliciting comments on several aspects of the proposed reforms, including key definitions and potential unintended consequences, important questions remain about whether and how the proposed changes would achieve the intended aim of reducing prescription drug costs.  For example, what incentives would pharmaceutical manufacturers have to offer point-of-sale discounts consistent with the new safe harbor, and how would other legal restrictions (e.g., precedent under the antitrust laws) potentially hamper those efforts?  Would removing safe harbor protection for rebates negotiated by and paid to PBMs actually influence pharmaceutical manufacturers’ pricing strategies and, as the administration hopes, lead to lower list prices?

Moreover, Medicare Part D PDPs currently use the savings generated from rebates to reduce premiums for their enrollees, and thus the proposed revisions to the discount safe harbor inevitably will impact beneficiary spending on premiums.  Although HHS engaged CMS’s Office of the Actuary and two independent actuarial firms to assess the potential impact of the proposed changes on both premiums and out-of-pocket spending, HHS appears to acknowledge that it cannot predict with any degree of certainty manufacturer and other stakeholders’ behavior in response.

Finally, neither the proposed modification to the discount safe harbor nor the new safe harbor for point-of-sale discounts addresses price concessions in the commercial sector.  The OIG does caution that nothing in the proposed rule amends the discount safe harbor provision that excludes from protection price reductions offered to one payor, but not to Medicare or Medicaid.  Thus, if a manufacturer offered a rebate on a product to an insurer for its commercial plans explicitly or implicitly conditioned on the product’s favorable formulary placement across all plans – including Medicare Part D PDPs – such remuneration would clearly fall outside the discount safe harbor.

Beyond those clear-cut examples, however, the proposed rule creates some uncertainty whether rebates will continue to be offered on commercially reimbursed drugs and provides no mechanism for encouraging direct discounts to private pay patients.  Notably, the administration appears to acknowledge the proposed rule’s attenuated implications for the private market.  On February 1, 2019, Secretary Azar in a speech at the Bipartisan Policy Center expressly challenged Congress to “follow through on their calls for transparency, too, by passing our [rebate] proposal into law immediately and extending it into the commercial drug market.”7

The proposed rule is scheduled for publication in the Federal Register on February 6, 2019, with a 60-day public comment period.  Given the far-reaching implications the proposed revisions would have for pharmaceutical pricing, contracting and operations at all levels of the supply chain, these reforms will be subject to considerable public debate and scrutiny.

Bass, Berry & Sims will continue to monitor these proposals and issue periodic updates.  In the meantime, entities that are interested in obtaining assistance with preparing comments on the proposed rule may contact attorneys in our Healthcare Practice Group.

1  Trump Administration Proposes to Lower Drug Costs by Targeting Backdoor Rebates and Encouraging Direct Discounts to Patients, U.S. Department of Health & Human Services (Jan. 31, 2019),

2  83 Fed. Reg. 22,692, 22,698 (May 16, 2018).

3  42 C.F.R. § 1001.952(h).

4  PCMA Statement on the Administration’s Prescription Drug Rebate Proposed Rule, Pharmaceutical Care Management Association (Jan. 31, 2019),

5  AHIP Comments on Proposed Rule Impacting Drug Pricing Rebates, America’s Health Insurance Plans (Jan. 31, 2019),

6  PhRMA Statement on the Administration’s Proposed Rule to Reform the Rebate System, Pharmaceutical Research and Manufacturers of America (Jan. 31, 2019),

7  Trump Health Chief Presses Congress to Pass Drug Discount Plan, The Hill (Feb. 1, 2019),