HHS has proposed a new rule targeting drug rebates given by pharmaceutical manufacturers to sponsors under Medicare Part D, Medicaid MCPs and the PBMs contracting with them. Todd Edgar, Precision for Value Senior Vice President, shares his insights in Radar on Specialty Pharmacy.

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HHS finally released a long-awaited proposed rule that, if implemented, stands to have a wide-reaching impact on the pharmaceutical industry. The proposal targets drug rebates provided by pharmaceutical manufacturers to plan sponsors under Medicare Part D and Medicaid MCOs and to PBMs contracting with them. The approach would pose an array of logistical challenges to multiple stakeholders but also would shed some light on a practice that has been in the crosshairs recently.

The proposed rule, released Jan. 31 and scheduled to be published in the Federal Register Feb. 6, would do away with the safe harbor protection in the anti-kickback statute for rebates negotiated between manufacturers and PBMs. It also would add two safe harbors: one protecting some point-of-sale price reductions, allowing those savings to be provided directly to beneficiaries when they are filling a prescription, and a second protecting PBM service fees provided to manufacturers as opposed to health plans.

In remarks at the Bipartisan Policy Center Feb. 1, HHS Secretary Alex Azar claimed that in 2017, rebates within Part D totaled more than $29 billion.

The proposal includes scenarios from actuarial studies performed by the Office of the Actuary, Wakely Consulting Group and Milliman, which drew different conclusions about the rule’s effect on issues like premiums, out-of-pocket costs and government spending. “There are significant differences in the assumptions the respective actuaries used to estimate stakeholder behavior,” it concedes.

When HHS unveiled the American Patients First blueprint, President Donald Trump said the administration would address the ability of “middlemen to pocket rebates” (RSP 5/18, p. 1). Specifically, the blueprint said, a “further opportunity” for savings would be “measures to restrict the use of rebates, including revisiting the safe harbor under the Anti-Kickback statute for drug rebates,” as well as “additional reforms to the rebating system.”

Azar: Extend Approach to Private Sector

And while the new proposal would directly impact only Medicare Part D and Medicaid managed care, Azar contended that “Congress has an opportunity to follow through on their calls for transparency, too, by passing our proposal into law immediately and extending it into the commercial drug market.”

The proposal states that there is a need for regulation because (1) the rebates manufacturers pay to PBMs may be one reason why invoice prices are increasing faster than inflation, and (2) the rebates are incentivizing PBMs to favor more expensive drugs with higher rebates, discouraging the use of lower-cost brand drugs and biosimilars, which in turn boosts costs for consumers and the government. Manufacturer rebates within Medicare have grown from about 10% of gross drug costs in 2008 to about 20% in 2016. By 2027, HHS projects they will hit 28%.

“The rationale for the proposed rule is sound,” asserts Elan Rubinstein, Pharm.D., principal at EB Rubinstein Associates. The objectives — eliminating rebates, lowering list prices and reducing spending by consumers and the government — “are also sound….This proposed rule, its rationale, potential implications and concerns called out for stakeholder input are well thought out.”

Proposal Represents ‘Significant Change’

“Overall, the proposal represents a significant change in the way pharmaceuticals will be delivered in the United States within the Medicare population,” maintains Todd Edgar, senior vice president at Precision for Value. “However, the majority of the stakeholders have influential lobbying arms, so what has been proposed is unlikely to be the final product. Furthermore, it is expected that there will be litigation once the final rule is proposed.”

If implemented, the rule potentially would impact PBMs, Medicare Advantage (MA) plans, patients, the government and manufacturers, says Junko Saber, a managing principal at Innopiphany, a strategy consulting firm in the life sciences arena. For instance, she points out that the proposal contains “a clear warning to Medicare Advantage plans which also offer commercial plans…to not have commercial negotiations influence formulary or favorable placement on MA plans.” Some of these plans “may create a ‘Chinese wall’ between negotiation groups to ensure no conflicts of interests, while others may choose a no-rebate policy for their commercial plans,” she tells AIS Health. “It likely depends on how these organizations are structured and the composition of the commercial and Medicare lives that they cover.”

In addition, “PBMs will need to renegotiate their contracts with manufacturers and MA plans to ensure that there is a smooth exit from a rebate-based model,” Saber says. “Those who do not have renegotiation provisions are at higher risk for negative impact.”

“Beneficiaries are likely to experience increased premiums, with projections of $2.70 to $5.64 per month,” says Edgar.

“Overall, the proposal is expected to generate reduced costs for beneficiaries as the out-of-pocket savings will, in total, more than offset the increased premiums,” he says. “Those beneficiaries using more drugs, and more expensive drugs, should experience reduced out of pocket costs in excess of their premium increases, unless they are utilizing a high-cost agent with minimal rebates.”

Entities May See Decreased Revenues

Part D plan sponsors, PBMs, manufacturers, pharmacies and wholesalers “will experience increased operational costs to implement the proposed system,” he says. Plan sponsors and PBMs may have decreased revenues due to the loss of rebates, and “assuming the point-of-sale rebates generate a lower negotiated drug price, pharmacies may see reduced compensation per prescription.”

However, manufacturers that retain “some of the rebate (or other components such as administrative fees)…may actually see an improvement in their net revenue. Longer term, it is possible that the enhanced transparency under the new system may lead to increased downward pricing pressure, particularly in more competitive categories,” Edgar tells AIS Health.

For its part, “CMS has significant variability in terms of potential impact,” he notes. “In the proposed rule, there are six scenarios presented. Cost impacts over the years 2020 to 2029 range from a $78 billion savings, to spending an additional $196 billion.”

If rebates are passed on to consumers at the point of sale, asks Rubinstein, how might this “impact insurer/PBM combined companies (e.g., United/OptumRx, Aetna/CVS and Cigna/Express Scripts) and pharmacy chains (e.g., Walgreens)? In the case of a pharmacy chain not owned by an insurer/PBM — that is, for instance, with respect to Cigna/Express Scripts or Walgreens — I wonder if the balance of power might shift somewhat in favor of the pharmacy chain. In the case of a pharmacy chain owned by an insurer/PBM — Aetna/CVS — I wonder if this change might empower the overall organization at the pharmacy-patient interface, providing it a potential competitive advantage over non-vertically integrated entities.”

“An important question is how this rule change will change drug pricing in the U.S., including commercial business,” says Rubinstein. “That is, will it cause the entire market to flip? Medicare’s and Medicaid’s combined large market share may drive manufacturers to change their overall pricing behavior.”

John Miller, executive director of the MidAtlantic Business Group on Health, says that “while self-insured commercial health care purchasers are not directly affected by this move, they could be impacted by a cost shift if, in fact, this goes through as planned. Also, though usually these moves are initiated by the commercial side, then picked up by CMS — see value-based purchasing — in this case CMS is taking the lead, and commercial purchasers will likely follow.”

Miller tells AIS Health that “while commercial purchasers are still largely uninformed about this issue as it applies to them, there is a growing call for elimination of rebates by [their] consultants and coalition leaders in the National Alliance of Healthcare Purchaser Coalitions. In a call last week, the coalitions were very much in favor, though skeptical that PBMs wouldn’t find some way out, such as using a different name for rebates. In spite of consultant and coalition advice, commercial purchasers remain ‘addicted’ to rebates and don’t want to account for the change: justify that savings on spend equaled rebates.

“At the same time,” he continues, “we are seeing a shift toward straightforward pricing, from manufacturers like Amgen with Repatha and AbbVie with Mavyret. Commercial payers see this as a positive move” (see story, p. 1).

Commercial purchasers “are becoming aware of the potentially perverse incentives presented by the rebate market,” he says. “The analogy I use is that rebates can be like cash-back credit cards, influencing you to shop at Tiffany’s for your dinnerware in order to get a bigger cash reward. So this guidance aligns with that new perspective.”

The proposal calls for the change to take effect Jan. 1, 2020. So is that enough time for stakeholders to prepare? “In my opinion, no,” responds Edgar. “Once the rule is published, there is a 60-day comment window, which would be anticipated to end early April. Assuming there is no litigation, which is not likely, at that point, Medicare plans have approximately two months to change their bid approach. Additionally, while many Medicare plans have point-of-sale rebate capability, others will have to build it. This will require time. Finally, the system for managing chargebacks to pharmacies will need to be built or modified, although it may be possible to address through the point-of-sale rebate system. An implementation date of Jan. 1, 2021, seems more realistic, given the magnitude of the proposed change.”

“If the final rule is essentially the same as the proposed rule, and if it is issued in fourth-quarter 2019, that does not allow much time for stakeholders to make contractual and system adjustments, assuming stakeholders wait until the matter is finalized,” says Rubinstein. “But that seems unlikely. Some stakeholders have already begun to adjust, and others would not be wise to wait, since the Administration’s intention with respect to drug rebates was clearly indicated in the American Patients First plan.”

View the proposed rule at https://bit.ly/2HGOAk0. Contact Edgar through Tess Rollano at trollano@coynepr.com, Miller at john.miller@mabgh.org, Rubinstein at elan.b.rubinstein@gmail.com and Saber at junko.saber@epiphanomics.co.

by Angela Maas