[Federal Register Volume 84, Number 25 (Wednesday, February 6, 2019)]
[Proposed Rules]
[Pages 2340-2363]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-01026]



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Vol. 84

Wednesday,

No. 25

February 6, 2019

Part II





Department of Health and Human Services





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Office of Inspector General





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42 CFR Part 1001





 Fraud and Abuse; Removal of Safe Harbor Protection for Rebates 
Involving Prescription Pharmaceuticals and Creation of New Safe Harbor 
Protection for Certain Point-of-Sale Reductions in Price on 
Prescription Pharmaceuticals and Certain Pharmacy Benefit Manager 
Service Fees; Proposed Rules

  Federal Register / Vol. 84 , No. 25 / Wednesday, February 6, 2019 / 
Proposed Rules  

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Office of Inspector General

42 CFR Part 1001

RIN 0936-AA08


Fraud and Abuse; Removal of Safe Harbor Protection for Rebates 
Involving Prescription Pharmaceuticals and Creation of New Safe Harbor 
Protection for Certain Point-of-Sale Reductions in Price on 
Prescription Pharmaceuticals and Certain Pharmacy Benefit Manager 
Service Fees

AGENCY: Office of Inspector General (OIG), Department of Health and 
Human Services (HHS).

ACTION: Proposed rule.

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SUMMARY: In this proposed rule, the Department of Health and Human 
Services (Department or HHS) proposes to amend the safe harbor 
regulation concerning discounts, which are defined as certain conduct 
that is protected from liability under the Federal anti-kickback 
statute, section 1128B(b) of the Social Security Act (the Act). The 
amendment would revise the discount safe harbor to explicitly exclude 
from the definition of a discount eligible for safe harbor protection 
certain reductions in price or other remuneration from a manufacturer 
of prescription pharmaceutical products to plan sponsors under Medicare 
Part D, Medicaid managed care organizations as defined under section 
1903(m) of the Act (Medicaid MCOs), or pharmacy benefit managers (PBMs) 
under contract with them. In addition, the Department is proposing two 
new safe harbors. The first would protect certain point-of-sale 
reductions in price on prescription pharmaceutical products, and the 
second would protect certain PBM service fees.

DATES: To ensure consideration, comments must be delivered to the 
address provided below by 5 p.m. Eastern Standard Time on April 8, 
2019.

ADDRESSES: In commenting, please reference file code OIG-0936-P. 
Because of staff and resource limitations, we cannot accept comments by 
facsimile (fax) transmission. However, you may submit comments using 
one of three ways (no duplicates, please):
    1. Electronically. You may submit electronically through the 
Federal eRulemaking Portal at http://www.regulations.gov. (Attachments 
should be in Microsoft Word, if possible.)
    2. By regular, express, or overnight mail. You may mail your 
printed or written submissions to the following address: Aaron Zajic, 
Office of Inspector General, Department of Health and Human Services, 
Attention: OIG-0936-P, Room 5527, Cohen Building, 330 Independence 
Avenue SW, Washington, DC 20201.
    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By hand or courier. You may deliver, by hand or courier, before 
the close of the comment period, your printed or written comments to: 
Aaron Zajic, Office of Inspector General, Department of Health and 
Human Services, Cohen Building, Room 5527, 330 Independence Avenue SW, 
Washington, DC 20201.
    Because access to the interior of the Cohen Building is not readily 
available to persons without Federal Government identification, 
commenters are encouraged to schedule their delivery with one of our 
staff members at (202) 619-0335.
    Inspection of Public Comments: All comments received before the end 
of the comment period will be posted on http://www.regulations.gov for 
public viewing. Hard copies will also be available for public 
inspection at the Office of Inspector General, Department of Health and 
Human Services, Cohen Building, 330 Independence Avenue SW, Washington, 
DC 20201, Monday through Friday from 8:30 a.m. to 4 p.m. To schedule an 
appointment to view public comments, phone (202) 619-0335.

FOR FURTHER INFORMATION CONTACT: Aaron Zajic, (202) 619-0335.

SUPPLEMENTARY INFORMATION: 

------------------------------------------------------------------------
       Social Security Act citation          United States Code citation
------------------------------------------------------------------------
1128B.....................................  42 U.S.C. 1320a-7b.
1128D.....................................  42 U.S.C. 1320a-7d.
1102......................................  42 U.S.C. 1302.
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I. Purpose and Need for Regulatory Action as Determined by the 
Secretary

    Pursuant to section 14 of the Medicare and Medicaid Patient and 
Program Protection Act of 1987 and its legislative history, Congress 
required the Secretary of Health and Human Services (the Secretary) to 
promulgate regulations setting forth various ``safe harbors'' to the 
anti-kickback statute, which would be evolving rules that would be 
periodically updated to reflect changing business practices and 
technologies in the health care industry. In accordance with this 
authority, OIG published a safe harbor to protect certain discounts and 
reductions in price.\1\ The purpose of this proposed rule is to update 
the discount safe harbor to address the modern prescription drug 
distribution model and ensure safe harbor protections extend only to 
arrangements that present a low risk of harm to the Federal health care 
programs and beneficiaries.
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    \1\ Medicare and State Health Care Programs: Fraud and Abuse; 
OIG Anti-Kickback Provisions, 56 FR 35952 (July 29, 1991). We note 
that to qualify as a ``discount,'' the remuneration must involve a 
reduction in price to a buyer. The safe harbor acknowledges that a 
``rebate'' may qualify as a discount. However, some payments, while 
labeled as ``rebates,'' may not have the effect of reducing the 
price of an item or service to a buyer.
    The determination of whether a particular payment is a protected 
discount depends on the circumstances. Rebates paid by drug 
manufacturers to or through PBMs to buy formulary position are not 
reductions in price. In the Secretary's view, such a payment would 
not qualify as ``a discount or other reduction in price.'' 42 U.S.C. 
1320a-7b(b)(3)(A).
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A. Rebates to Medicare Part D and Medicaid Managed Care Plans

    Since 2010, the prices of existing drugs have been rising in the 
United States much more rapidly than warranted either by inflation or 
costs.\2\ Since 2016, the prescription drug component of the consumer 
price index grew 2 percent less than inflation, and one official 
measure of drug price inflation was actually negative in 2018, for the 
first time in almost 50 years. Nevertheless, this January, drug 
companies once again announced large price increases--by one analysis 
averaging around 6 percent per drug. The Department's research shows 
that these price increases are largely unsupported by objective 
economic criteria (e.g., inflation, increased costs of goods sold, 
increased demand) and reflect significant distortions in the 
distribution chain.\3\
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    \2\ Schondelmeyer SW. Purvis L. Trends in Retail Prices of 
Prescription Drugs Widely Used by Older Americans: 2006 to 2015. 
AARP Public Policy Institute. December 2017.
    \3\ Observations on Trends in Prescription Drug Spending. U.S. 
Department of Health and Human Services. Assistant Secretary for 
Planning and Evaluation. March 8, 2016.
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    Prescription drug manufacturers prospectively set the list price 
(i.e., wholesale acquisition cost) of the drugs they sell to 
wholesalers and other large purchasers. Manufacturers also 
retrospectively pay PBMs or other entities in the drug supply chain, 
under rebate arrangements, that meet certain volume-based or market-
share criteria. Industry parlance refers to the ``net price'' of a drug 
as the drug's list price absent the rebate amount. Since the passage of 
the anti-kickback statute and

[[Page 2341]]

the establishment of the various safe harbors, the list prices of 
branded prescription drugs, and the ``rebate'' payments by 
manufacturers to PBMs, have grown substantially.\4\ The phenomenon of 
list prices rising faster than ``net prices'' is referred to as the 
``gross to net bubble.'' \5\
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    \4\ 2018 Annual Report of the Boards of Trustees of the Federal 
Hospital Insurance and Federal Supplementary Medical Insurance Trust 
Funds 143 (2018); see also Jared S. Hopkins, Drugmakers Raise Prices 
on Hundreds of Medicines, Wall St. J. (Jan. 1, 2019).
    \5\ New Data Show the Gross-to-Net Rebate Bubble Growing Even 
Bigger. Drug Channels Institute. June 14, 2017.
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    The prominence of rebate arrangements in the prescription drug 
supply chain has been cited as a potential barrier to lowering drug 
costs.\6\ For instance, the system may create incentives for 
manufacturers to raise list prices and discourage manufacturers from 
reducing their list prices or, in some cases, penalize them if they 
do.\7\ Often, a portion of PBM compensation is derived from the savings 
they create, or the gap between the list price and ``net price.'' This 
compensation may be derived from retaining a portion of the rebate, as 
well as receiving ``price protection'' payments from manufacturers.\8\ 
Rebates and price protection payments increase when list prices 
increase.\9\ Thus, there may be a greater incentive for a PBM to 
encourage the use of drugs with higher list prices, typically via 
preferred formulary placement, than the use of lower price drugs that 
would generate lower rebates or price protection payments. A 
manufacturer choosing to lower the list price of a drug would be 
reducing the gap between list price and ``net'' price, which would 
reduce either the size of the rebate or price protection guarantee. 
This could result in a drug being removed from the formulary or being 
placed in a less-preferred formulary tier. As a result, the current 
system works to the disadvantage of beneficiaries, and the Federal 
health care programs.
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    \6\ E.g., A perspective from our CEO: Gilead Subsidiary to 
Launch Authorized Generics to Treat HCV. Gilead Pharmaceuticals. 
https://www.gilead.com/news-and-press/company-statements/authorized-generics-for-hcv.
    \7\ Letter from David A. Balto on Behalf of Consumer Action to 
Federal Trade Commission (Dec. 6, 2017). https://www.ftc.gov/system/files/documents/public_comments/2017/12/00303-142565.pdf.
    \8\ Price protection provisions in PBM contracts provide a cost 
or growth-rate threshold above which a manufacturer provides an 
additional payment to the PBM. If a manufacturer increases its price 
beyond the cost or rate specified, the PBM is held harmless for some 
or all of the increase. These payments may be for multiple years, 
and may or may not be described as rebates in PBM contracts with 
plan sponsors.
    \9\ ``Under this proposed structure, the PDP sponsor achieves 
cost control with less earnings volatility while the manufacturer 
achieves increased volume and regular revenue increases.'' Pharmacy 
manufacturer rebate negotiation strategies: A common ground for a 
common purpose. Milliman. November 17, 2015.
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1. The Rebate-Based System Harms Beneficiaries
    There are significant concerns about the ways in which the current 
rebate framework may be increasing financial burdens for beneficiaries. 
Many rebates do not flow through to consumers at the pharmacy counter 
as reductions in price. In these instances, beneficiaries experience 
out-of-pocket costs more closely related to the list price than the 
rebated amount during the deductible, coinsurance, and coverage gap 
phases of their benefits.\10\ More often, they are applied to reduce 
premiums for all enrollees. However, beneficiaries may not be fully 
benefitting from these premium reductions. Part D plan sponsors include 
estimates of the amount of rebates they expect to receive in their 
bids, which in turn drive premiums. A 2011 OIG study found that Part D 
plan sponsors commonly underestimated rebates in their bids. When this 
occurs, ``beneficiary premiums are higher than they otherwise would 
be.'' \11\
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    \10\ See, e.g., Medicare Program; Contract Year 2019 Policy and 
Technical Changes to the Medicare Advantage, Medicare Cost Plan, 
Medicare Fee-for-Service, the Medicare Prescription Drug Benefit 
Programs, and the PACE Program, 82 FR 56336, 56419 (Nov. 28, 2017); 
MedPAC, Status Report on the Medicare Prescription Drug Program 403 
(Mar. 2017); CMS, Medicare Part D--Direct and Indirect Remuneration 
(DIR) (2017), https://www.cms.gov/newsroom/fact-sheets/medicare-part-d-direct-and-indirect-remuneration-dir; Nicole M. Gastala et 
al., Medicare Part D: Patients Bear the Cost of `Me Too' Brand-Name 
Drugs, 35 Health Affairs (2016).
    \11\ OIG, Concerns with Rebates in the Medicare Part D Program 
(2011).
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    In addition, OIG work shows that the increases in costs for Part D 
brand-name drugs have led to higher out-of-pocket spending for some 
beneficiaries. OIG found that beneficiaries' out-of-pocket costs for 
drugs with an average price of more than $1,000 per month in 
catastrophic coverage increased by 47 percent from 2010 to 2015. While 
beneficiaries paid an average of $175 per month in 2010 for each high-
priced drug in catastrophic coverage, this amount increased to $257 per 
month in 2015.\12\ OIG also found that ``the percentage of 
beneficiaries who were responsible for out-of-pocket costs of at least 
$2,000 per year for brand-name drugs nearly doubled [between 2011 and 
2015],'' \13\ some of which is potentially driven by changing drug mix 
and some by increases in list prices.
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    \12\ OIG, High-Price Drugs Are Increasing Federal Payments for 
Medicare Part D Catastrophic Coverage, supra note 24, at 10.
    \13\ OIG, Increases in Reimbursement for Brand-Name Drugs in 
Part D, supra note 16, at 9.
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    The following is one example in the context of a branded 
prescription drug dispensed at a retail pharmacy. In this example, a 
drug has a Wholesale Acquisition Cost (WAC)/list price of $100. A 
manufacturer sells the drug to a wholesaler at a 2 percent discount off 
of the WAC. Thus, the drug is sold to the wholesaler at $98. The 
wholesaler in this example sells the drug to a pharmacy for $100. A PBM 
negotiates on behalf of a plan both a negotiated reimbursement rate 
with a pharmacy that dispenses the drug and a rebate from the 
manufacturer for including the drug on the plan's formulary, tier 
placement within the formulary, etc. Under its contract with the PBM, 
the pharmacy agrees to be paid a negotiated rate such as, by way of 
example only, 1.20 x WAC/list price minus 15 percent plus a $2 
dispensing fee.
    When a patient has a prescription for the medication, the pharmacy 
files a claim on behalf of the patient to the patient's prescription 
insurance. This claim is processed by the plan and/or the PBM on the 
plan's behalf. The PBM determines what they pay the pharmacy and the 
amount remaining for the patient to pay the pharmacy. In this instance, 
the pharmacy is paid $104 for the drug. After the transaction, the plan 
and/or PBM may also receive rebates from the manufacturer, and in some 
cases, pay the pharmacy less than the original amount.
    In this example, the PBM has negotiated a rebate with the 
manufacturer, of 30 percent of the WAC/list price ($30), which is 
passed on entirely to the plan sponsor. Thus, in this example, the plan 
receives back $30 in rebates, reducing its net cost for the drug to $74 
(i.e., $104-$30). This rebate does not reduce the price charged at the 
pharmacy counter or the beneficiary's out-of-pocket cost, and the 
beneficiary's $26 coinsurance is actually 35 percent of the net cost of 
the drug ($104-$30), compared to the 25 percent coinsurance described 
in the benefits summary (which is based on negotiated pharmacy 
reimbursement and not net price.

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------------------------------------------------------------------------
            Transaction                  Brand              Notes
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List Price........................            $100  (A).
Pharmacy Reimbursement............            $104  (P).
Rebates to Health Insurer.........           ($30)  (B) = 30% Rebate
                                                     from Manufacturer *
                                                     (A).
Net Drug Cost.....................             $74  (C) = (P)-(B).*
Patient Coinsurance...............           ($26)  (D) = 25% * (P).
Net Cost to Health Insurer........             $48  (E) = (C)-(D).
Patient Coinsurance...............             $26  (D)
Gross Drug Cost...................            $104  (P).
Net Drug Cost.....................             $74  (C).
Share of Gross Cost...............             25%  (H) = (P)/(A).
Share of Net Cost.................             35%  (I) = (D)/(C).
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* The Federal Government shares in the rebates received by PBMs and Part
  D plan sponsors. See also: https://www.cms.gov/newsroom/fact-sheets/medicare-part-d-direct-and-indirect-remuneration-dir.

    Under the current rebate-based system, beneficiaries may not 
receive the benefits of reduced prices and costs that other parties do. 
The Department recognizes that parties to prescription drug sales are 
frequently paid based on a percentage of the WAC/list price and 
therefore, as the list price increases, so does the revenue to these 
parties. For example, in the context of branded prescription drugs, the 
absolute net revenue to the PBM and manufacturer generally may increase 
as the WAC increases.\14\ The net revenue to the pharmacy also may 
increase, but that would be contingent on the pharmacy's contract with 
the PBM. While the insurer's costs will increase as the WAC increases, 
under the current system, PBMs often offset the increase for insurers 
via a higher rebate from the manufacturer. In contrast, when a 
beneficiary is in the deductible phase, their out-of-pocket spending is 
more closely related to the WAC price than the net price. The rebate 
from the manufacturer is not utilized to offset beneficiary costs. 
Similarly, the beneficiary's coinsurance, which is often partly a 
percentage of WAC, will often increase as list price increases. Under 
the current system, rebates are often not applied at the point of sale 
to offset the beneficiary's deductible or coinsurance or otherwise 
reduce the price paid at the pharmacy counter.
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    \14\ Perverse Market Incentives Encourage High Prescription Drug 
Prices. Garthwaite and Scott Morton. Pro-Market: The blog of the 
Stigler Center at the University of Chicago Booth School of 
Business. November 1, 2017.
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    Beyond the effects of rebates on beneficiary cost-sharing, the 
rebate system could be skewing decisions on which drugs appear on a 
beneficiary's drug formulary, and a drug's placement on the formulary. 
It may also have a paradoxical effect on competition, which would 
normally be expected to decrease prices among competitors. The use of 
rebates creates a financial incentive to make formulary decisions based 
on rebate potential, not the quality or effectiveness of a drug.\15\ 
Research suggests that in many therapeutic classes, the approval of a 
new drug leads to higher list prices not just for the new drug, but for 
the existing drugs as well.16 17 18 Comments submitted in 
response to a Request for Information \19\ from the Department 
reiterate these concerns, suggest that PBMs may favor drugs with higher 
rebates over drugs with lower costs, and raise new concerns about 
``bundled'' rebates \20\ discouraging the adoption of new, lower-cost 
brand drugs and biosimilars.
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    \15\ Shire, Pfizer antitrust lawsuits could rewrite the rules 
for formulary contracts: report. Arlene Weintraub. Fierce Pharma. 
October 10, 2017.
    \16\ Hartung DM, et al. The cost of multiple sclerosis drugs in 
the US and the pharmaceutical industry: Too big to fail? Neurology 
2015; 84(21):2185-92.
    \17\ https://www.achp.org/wp-content/uploads/Rheumatoid-Arthritis_Final.pdf.
    \18\ https://www.achp.org/wp-content/uploads//Diabetes_FINAL_Revised-12.7.15.pdf.
    \19\ https://www.federalregister.gov/documents/2018/05/16/2018-10435/hhs-blueprint-to-lower-drug-prices-and-reduce-out-of-pocket-costs.
    \20\ Some manufacturer-PBM contracts tie the rebates or 
formulary position of one product, to the rebate or formulary 
position of other products made by the same manufacturer. These 
agreements may discourage PBM adoption of a lower-cost competitor in 
one therapeutic class because they would forgo manufacturer payments 
for the other drugs.
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2. High List Prices Harm Federal Health Care Programs
    The current rebate framework for prescription pharmaceutical 
products does not appear to translate into lower Medicare and Medicaid 
per beneficiary spending on prescription drugs, when age and inflation 
are accounted for, and, to the extent that the rebate structure fuels 
high list prices, may in fact increase Medicare and Medicaid costs, 
which is antithetical to the purposes of both the discount exception 
and the discount safe harbor. This issue is particularly salient for 
the Centers for Medicare & Medicaid Services (CMS), the single largest 
payor of prescription drugs in the nation.
    The Medicare Part D and Medicaid programs, as purchasers of health 
care items and services, stand to benefit from robust competition on 
both the cost and quality of the products they cover. The cost to the 
Medicare Part D program and the Medicaid program for certain brand and 
specialty prescription pharmaceutical products has been rising at a 
rate far greater than the rate of general inflation.21 22
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    \21\ See, e.g., OIG, INCREASES IN REIMBURSEMENT FOR BRAND-NAME 
DRUGS IN PART D 5 (2018); MEDICAID AND CHIP PAYMENT AND ACCESS 
COMMISSION, MEDICAID PAYMENT FOR OUTPATIENT PRESCRIPTION DRUGS 
(2018), https://www.macpac.gov/wp-content/uploads/2015/09/Medicaid-Payment-for-Outpatient-Prescription-Drugs.pdf.
    \22\ Generic drugs prices have generally decreased over the last 
decade, save for a period of price increases in 2013-2014. See 
Schondelmeyer SW. Purvis L. Trends in Retail Prices of Prescription 
Drugs Widely Used by Older Americans: 2006 to 2015. AARP Public 
Policy Institute. December 2017.
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    In 2016, gross drug spending in Medicare Part D was $146 billion, 
of which Part D plans paid $90 billion and beneficiaries paid $49.7 
billion (excluding the coverage gap discount program).\23\ OIG recently 
released a report finding that from 2011 to 2015, reimbursement for 
Part D brand drugs increased by 77 percent, despite a 17 percent 
decrease in the number of prescriptions for these drugs.\24\ In another 
recent report, OIG found that Federal payments for catastrophic 
coverage under Part D more than tripled from 2010 to 2015, growing from 
$10.8 billion to $33.2 billion.\25\ With respect to catastrophic 
coverage in particular, OIG found that spending for high-priced drugs, 
those with average prices of more than $1,000 per month, contributed

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significantly to the growth in payments during this phase of 
coverage.\26\
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    \23\ Analysis by the CMS Office of the Actuary.
    \24\ OIG, Increases in Reimbursement for Brand-Name Drugs in 
Part D 5 (2018).
    \25\ OIG, High-Price Drugs Are Increasing Federal Payments for 
Medicare Part D Catastrophic Coverage 6 (2017).
    \26\ Id. at 7.
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    Although the introduction and changing utilization patterns of new 
drugs and biologicals can contribute to a rise in Part D spending, 
increasing prices of existing drugs and biologicals also play a 
critical role. For example, of the 10 high-priced drugs responsible for 
nearly one-third of all spending in Part D catastrophic coverage in 
2015, OIG found that 6 were not new to the market but had large 
increases in their average price per month, ranging from 29 percent to 
145 percent.\27\ The remaining four were new to the market.\28\ OIG has 
also recently found that of the brand-name drugs reimbursed by Part D 
in every year from 2011 to 2015, 89 percent had some unit cost increase 
(on average 29 percent), and nearly half had an increase in unit cost 
of at least 50 percent (significantly greater than general inflation 
over this same time period).29 30
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    \27\ Id. at 10.
    \28\ Id. at 9.
    \29\ OIG, Increases in Reimbursement for Brand-Name Drugs in 
Part D, supra note 16, at 6.
    \30\ MEDPAC, The Medicare Prescription Drug Program (Part D): 
Status report. Report to the Congress: Medicare Payment Policy, 
(Mar. 2018).
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    Although the precise amounts are difficult to isolate, the Medicare 
program also incurs costs for drugs furnished under prospective payment 
(e.g., the inpatient prospective payment system) and those covered by 
Medicare Advantage plans under Part C. In 2016, gross spending on 
prescription drugs in retail and non-retail settings by CMS and its 
beneficiaries exceeded $235 billion, more than half of total United 
States gross expenditures on prescription drugs of approximately $450 
billion.31 32
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    \31\ CMS' spending estimate is the sum of Part D gross drug 
costs, Part B spending on outpatient drugs, and Medicaid gross drug 
costs.
    \32\ IQVIA Institute for Human Data Science, Medicine Use and 
Spending in the U.S.: A Review of 2016 and Outlook to 2021, May 
2017.
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    In 2016, CMS and State Medicaid programs spent $64 billion ($29.1 
billion net rebates) on drugs covered under Medicaid. For brand-name 
drugs, manufacturers must pay rebates to Medicaid equal to 23.1 percent 
of the average manufacturer price (AMP) or the AMP minus the ``best 
price'' provided to most other purchasers, whichever is greater. 
Manufacturers must also pay additional rebates to Medicaid if drug 
prices rise higher than general inflation. However, rebates, discounts, 
or other financial transactions paid by manufacturers to PBMs are 
excluded from AMP and best price, and the maximum rebate (including the 
inflation penalty) is capped at 100 percent of the average manufacturer 
price. As a result, Medicaid is deprived of the lower costs or higher 
mandatory rebates that could result if rebates paid to PBMs were 
included in AMP or best price, and the inflation penalty no longer 
serves as an effective brake on list price increases for drugs already 
exceeding the 100 percent AMP cap.33 34 Because Medicaid is 
a much smaller drug market than Medicare Part D and commercial 
insurance coverage, it may be advantageous for manufacturers to 
increase list prices and pay rebates to PBMs in these markets.
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    \33\ Horn and Dickson. Modernizing and Strengthening Existing 
Laws to Control Drug Costs. Health Affairs Blog. March 31, 2017. 
https://www.healthaffairs.org/do/10.1377/hblog20170331.059428/full/.
    \34\ Comments to the HHS Blueprint to Lower Drug Prices and 
Reduce Out-of-Pocket Costs. Georgetown Health Policy Institute 
Center for Children and Families. June 29, 2018.
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    Though proponents of the current system describe rebates as 
discounts that lower drug costs, HHS believes that rebates have proven 
to be ineffective at and counterproductive to putting downward pressure 
on drug prices. Indeed, rebates may be harming Federal health care 
programs by increasing list prices, preventing competition to lower 
drug prices, discouraging the use of lower-cost brand or generic drugs, 
and skewing the formulas used to determine pharmacy reimbursement or 
Medicaid rebates.
3. The Rebate System Is Not Transparent
    In some or many instances, plan sponsors under Medicare Part D and 
Medicaid MCOs have limited information about the percentage of rebates 
passed on to them and the percentage retained by their PBMs. The terms 
of rebate agreements manufacturers negotiate with PBMs may be treated 
as highly proprietary and, in many instances, may be unavailable to the 
plans. For example, in a 2011 evaluation, OIG learned that some Part D 
plan sponsors had limited information about rebate contracts and 
rebated amounts negotiated by their PBMs.\35\ To the extent still true, 
this lack of transparency could potentially impede the ability of 
parties to disclose, report, and otherwise account accurately for 
rebates where required by program rules (and potentially, under the 
discount safe harbor). This, in turn, creates a potential program 
integrity vulnerability because compliance with program rules may be 
more difficult to verify. We are interested in stakeholder feedback on 
the issue of transparency and compliance with program rules, 
particularly as it relates to bundled rebates, price protection or 
rebate guarantees, and other information not readily apparent when 
rebates are reported.
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    \35\ OIG, Concerns with Rebates in the Medicare Part D Program, 
supra note 32, at 17.
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4. Changing the Rebate Framework
    Based on the problems described above, the Secretary is concerned 
that rebate arrangements are neither beneficial to health care programs 
and beneficiaries, nor are they innocuous. In the Secretary's view, 
moreover, the statutory exemption for discounts (42 U.S.C. 1320a-
7b(b)(3)(A)) does not apply to most rebates paid by drug manufacturers 
to part D plans or to Medicaid managed care plans. To the extent those 
rebates are paid to or through PBMs to buy formulary position, such 
payments would not be protected by the discount statutory exemption. In 
accordance with the authority described above, this rule proposes to 
update the regulatory discount safe harbor at 42 CFR 1001.952(h) to 
exclude from the discount safe harbor certain types of remuneration 
offered by drug manufacturers to Part D plan sponsors and Medicaid MCOs 
that may pose a risk to certain Federal health care programs and 
beneficiaries.\36\ At the same time, this rule proposes a new safe 
harbor that would protect discount arrangements that the Department has 
determined would be beneficial and present a low risk of fraud and 
abuse if structured in accordance with the safe harbor's conditions. 
This new safe harbor (which is one of two new safe harbors proposed in 
this rule) would protect certain price reductions offered by 
manufacturers to Part D plans and Medicaid managed care organizations 
that are reflected at the point of sale to the beneficiary.
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    \36\ We recognize that the payments manufacturers 
retrospectively make to PBMs under rebate agreements would not 
constitute discounts or other reductions in price to the extent such 
payments are retained by the PBM and not passed through to any 
buyer, We do not intend to imply through the issuance of this 
proposed rule that such payments qualify for safe harbor protection 
under 42 CFR 1001.952(h). Notwithstanding, out of an abundance of 
caution and desire to offer bright line guidance regarding the 
treatment of retrospective payments to PBMs that they retain, we are 
proposing to specify that such payments (including payments that may 
be labeled as ``rebates'') are not protected by the discount safe 
harbor.
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    By excluding rebates paid by manufacturers to plan sponsors under 
Medicare Part D and Medicaid MCOs from the discount safe harbor and 
creating a new safe harbor for point of sale price reductions, the 
Department believes that there may be an improved

[[Page 2344]]

alignment of incentives among these parties that may curb list price 
increases, reduce financial burdens on beneficiaries, lower or increase 
Federal expenditures, improve transparency, and reduce the likelihood 
that rebates would serve to inappropriately induce business payable by 
Medicare Part D and Medicaid MCOs. The Department is soliciting comment 
on whether this action would advance those goals. Specifically, the 
Department is interested in comments on the effect that the proposed 
revision to the discount safe harbor and the proposed establishment of 
a new safe harbor that would protect only point-of-sale reductions in 
price may have on (i) beneficiary out-of-pocket spending for existing 
prescription pharmaceutical products, (ii) manufacturers' setting of 
list prices for newly launched products, (iii) the Federal Government, 
and (iv) commercial markets.
    Additionally, the current rebate framework may deter plans or their 
PBMs from placing lower cost, therapeutically equivalent drugs on their 
formularies or may incentivize these entities to give preferred 
formulary placement to a higher-cost drug that carries a higher 
associated rebate.\37\ Therefore, the Department is soliciting comments 
on (i) the extent to which rebates deter plans or their PBMs from 
placing lower cost, therapeutically equivalent drugs on their 
formularies or incentivizes plans or their PBMs to give preferred 
formulary placement to a higher-cost drug that carries a higher 
associated rebate, and (ii) how these practices might change if the 
Department were to eliminate safe harbor protection for rebates and 
protect only point-of-sale discounts for prescription pharmaceutical 
products.
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    \37\ ``Meet the Rebate, the New Villain of High Drug Prices.'' 
New York Times. July 27, 2018. ``The size of the rebate depends on a 
range of factors, including how many drugs are used by the insurers' 
members, and how generously the product will be covered on a 
formulary, or list of covered medicines. Companies that offer bigger 
rebates are often rewarded with better access like smaller co-
payments.''
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    The goal is to better align protected discount arrangements with 
evolving understandings of beneficial industry practices. However, we 
understand that PBMs still would be in competition with other PBMs; 
likewise, manufacturers still would be in competition with other 
manufacturers. We seek comments on possible negative or positive 
effects on pricing or competition that could result from an increase in 
transparency under the proposed point-of-sale discount safe harbor.
    The Department recognizes that modifications to the discount safe 
harbor will affect beneficiary and government spending on Part D plan 
premiums and cost sharing. However, it is difficult to predict 
manufacturer and Part D plan behavior in response to this regulation. 
Because their responses to the regulation will directly affect benefit 
design, plan bids and, ultimately, beneficiary and government spending 
on Part D plan premiums and cost sharing, the Department engaged CMS's 
Office of the Actuary (OACT) and two independent actuarial firms with 
experience working with Part D plan bid preparation to assess the 
potential effects on both premiums and out-of-pocket expenses under 
various assumptions.\38\ These analyses are discussed in greater detail 
in the Regulatory Impact Analysis, and we seek feedback on the various 
approaches to estimating the potential costs and benefits of this 
regulation.
---------------------------------------------------------------------------

    \38\ These analyses were conducted by Milliman and Wakely 
Consulting Group. We will refer to them by firm name in later 
sections for clarity.
---------------------------------------------------------------------------

B. Payments to PBMs

    When PBMs contract to administer the pharmacy benefit for health 
plans, the PBMs are the health plans' agents. However, the contracting 
health plans may not always know the services their PBMs are providing 
to pharmaceutical manufacturers. Manufacturers often pay PBMs fees for 
certain services (e.g., utilization management, medical education, 
medication monitoring, data management, etc.), and these fees may be 
calculated as a percentage of the list price of a particular drug 
product. If service fees paid by manufacturers are tied to the list 
price of the prescription pharmaceutical product, based on sales 
volume, or far exceed the fair market value of the services performed, 
these fees could function as a disguised kickback. This proposed rule 
would create a new safe harbor that would provide a pathway, specific 
to PBMs, to protect remuneration in the form of flat fee service fees 
that would be protected if they meet specified criteria.
    The Department believes the terms of the PBMs' agreements with the 
pharmaceutical manufacturers should be transparent to the health plans. 
Health plans may be better able to identify and protect themselves from 
conflicts of interest if they know with some specificity the fees 
manufacturers are paying PBMs and the services PBMs are rendering to 
the manufacturers. We solicit comments on any anticompetitive or other 
issues that may arise from providing health plans with transparency 
into interactions between pharmaceutical manufacturers and PBMs.

II. Summary of the Major Provisions

    This proposed rule would amend the discount safe harbor at 42 CFR 
1001.952(h) by adding an explicit exception to the definition of 
``discount'' such that certain price reductions on prescription 
pharmaceutical products from manufacturers to plan sponsors under 
Medicare Part D, and Medicaid MCOs would not be protected under the 
safe harbor. In addition, the proposed rule would add one new safe 
harbor to protect discounts between those same entities if such 
discounts are given at the point of sale and meet certain other 
criteria. Finally, this proposed rule would add a second new safe 
harbor specifically designed to protect certain fees pharmaceutical 
manufacturers pay to PBMs for services rendered to the manufacturers 
that relate to PBMs' arrangements to provide pharmacy benefit 
management services to health plans.
    The proposed rule would not alter obligations under the statutory 
provisions for Medicaid prescription drug rebates under Section 1927 of 
the Social Security Act, including without limitation the provisions 
related to best price, the additional rebate amounts for certain drugs 
if the rate of increase in AMP and the increase in the consumer price 
index for all urban consumers (CPI-U), or provisions regarding 
supplemental rebates negotiated between states and manufacturers. Nor 
would this proposed rule alter the regulations and guidance to 
implement Section 1927 provisions, although the Department may issue 
separate guidance if this proposal is finalized to clarify the 
treatment of pharmacy chargebacks in calculation of AMP and Best Price. 
This proposed rule recognizes that rebates paid by manufacturers to 
Medicaid MCOs should be treated differently than supplemental rebates 
paid by manufacturers to states because of the differing risk posed 
under the Federal anti-kickback statute.

III. Background

A. Anti-Kickback Statute and Safe Harbors

    Section 1128B(b) of the Act, the anti-kickback statute, provides 
for criminal penalties for whoever knowingly and willfully offers, 
pays, solicits, or receives remuneration to induce or reward the 
referral of business reimbursable under any of the Federal

[[Page 2345]]

health care programs, as defined in section 1128B(f) of the Act. The 
offense is classified as a felony and is punishable by fines of up to 
$100,000 and imprisonment for up to 10 years. Violations of the anti-
kickback statute may also result in the imposition of civil monetary 
penalties (CMPs) under section 1128A(a)(7) of the Act (42 U.S.C. 1320a-
7a(a)(7)), program exclusion under section 1128(b)(7) of the Act (42 
U.S.C. 1320a-7(b)(7)), and liability under the False Claims Act (31 
U.S.C. 3729-33).
    Congress's intent in placing the term ``remuneration'' in the 
statute in 1977 was to cover the transfer of anything of value in any 
form or manner whatsoever. The statute's language makes clear that 
illegal payments are prohibited beyond merely ``bribes,'' 
``kickbacks,'' and ``rebates,'' which were the three terms used in the 
original 1972 statute. The illegal payments are covered by the statute 
regardless of whether they are made directly or indirectly, overtly or 
covertly, in cash or in kind. In addition, prohibited conduct includes 
not only the payment of remuneration intended to induce or reward 
referrals of patients but also the payment of remuneration intended to 
induce or reward the purchasing, leasing, or ordering of, or arranging 
for or recommending the purchasing, leasing, or ordering of, any good, 
facility, service, or item reimbursable by any Federal health care 
program.
    Because of the broad reach of the statute, concern was expressed 
that some relatively innocuous commercial arrangements were covered by 
the statute and, therefore, potentially subject to criminal 
prosecution.\39\ In response, Congress enacted section 14 of the 
Medicare and Medicaid Patient and Program Protection Act of 1987, 
Public Law 100-93, which specifically requires the development and 
promulgation of regulations, the so-called safe harbor provisions, that 
would specify various payment and business practices that would not be 
subject to sanctions under the anti-kickback statute, even though they 
may potentially be capable of inducing referrals of business for which 
payment may be made under a Federal health care program.
---------------------------------------------------------------------------

    \39\ See, e.g., Medicare and State Health Care Programs: Fraud 
and Abuse; OIG Anti-Kickback Provisions, 56 FR 35952 (July 29, 
1991).
---------------------------------------------------------------------------

    Section 205 of the Health Insurance Portability and Accountability 
Act of 1996, Public Law 104-191, established section 1128D of the Act, 
which includes criteria for modifying and establishing safe harbors. 
Specifically, section 1128D(a)(2) of the Act provides that, in 
modifying and establishing safe harbors, the Secretary may consider 
whether a specified payment practice may result in:
    [square] An increase or decrease in access to health care services;
    [square] an increase or decrease in the quality of health care 
services;
    [square] an increase or decrease in patient freedom of choice among 
health care providers;
    [square] an increase or decrease in competition among health care 
providers;
    [square] an increase or decrease in the ability of health care 
facilities to provide services in medically underserved areas or to 
medically underserved populations;
    [square] an increase or decrease in the cost to Federal health care 
programs;
    [square] an increase or decrease in the potential overutilization 
of health care services;
    [square] the existence or nonexistence of any potential financial 
benefit to a health care professional or provider, which benefit may 
vary depending on whether the health care professional or provider 
decides to order a health care item or service or arrange for a 
referral of health care items or services to a particular practitioner 
or provider; or
     any other factors the Secretary deems appropriate in the 
interest of preventing fraud and abuse in Federal health care 
programs.\40\
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    \40\ See also section 1102 of the Act (vesting the Secretary 
with the authority to make and publish rules and regulations, not 
inconsistent with the Act, as may be necessary to the efficient 
administration of his functions under the Act).
---------------------------------------------------------------------------

    Since July 29, 1991, there have been a series of final regulations 
published in the Federal Register establishing safe harbors in various 
areas.\41\ These safe harbor provisions have been developed ``to limit 
the reach of the statute somewhat by permitting certain non-abusive 
arrangements, while encouraging beneficial or innocuous 
arrangements.''\42\
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    \41\ Medicare and State Health Care Programs: Fraud and Abuse; 
OIG Anti-Kickback Provisions, 56 FR 35952 (July 29, 1991); Medicare 
and State Health Care Programs: Fraud and Abuse; Safe Harbors for 
Protecting Health Plans, 61 FR 2122 (Jan. 25, 1996); Federal Health 
Care Programs: Fraud and Abuse; Statutory Exception to the Anti-
Kickback Statute for Shared Risk Arrangements, 64 FR 63504 (Nov. 19, 
1999); Medicare and State Health Care Programs: Fraud and Abuse; 
Clarification of the Initial OIG Safe Harbor Provisions and 
Establishment of Additional Safe Harbor Provisions Under the Anti-
Kickback Statute, 64 FR 63518 (Nov. 19, 1999); 64 FR 63504 (Nov. 19, 
1999); Medicare and State Health Care Programs: Fraud and Abuse; 
Ambulance Replenishing Safe Harbor Under the Anti-Kickback Statute, 
66 FR 62979 (Dec. 4, 2001); Medicare and State Health Care Programs: 
Fraud and Abuse; Safe Harbors for Certain Electronic Prescribing and 
Electronic Health Records Arrangements Under the Anti-Kickback 
Statute, 71 FR 45109 (Aug. 8, 2006); Medicare and State Health Care 
Programs: Fraud and Abuse; Safe Harbor for Federally Qualified 
Health Centers Arrangements Under the Anti-Kickback Statute, 72 FR 
56632 (Oct. 4, 2007); Medicare and State Health Care Programs: Fraud 
and Abuse; Electronic Health Records Safe Harbor Under the Anti-
Kickback Statute, 78 FR 79202 (Dec. 27, 2013); and Medicare and 
State Health Care Programs: Fraud and Abuse; Revisions to the Safe 
Harbors Under the Anti-Kickback Statute and Civil Monetary Penalty 
Rules Regarding Beneficiary Inducements, 81 FR 88368 (Dec. 7, 2016).
    \42\ Medicare and State Health Care Programs: Fraud and Abuse; 
OIG Anti-Kickback Provisions, 56 FR at 35958.
---------------------------------------------------------------------------

    Health care providers and others may voluntarily seek to comply 
with safe harbors so that they have the assurance that their business 
practices will not be subject to any anti-kickback enforcement action. 
In giving the Department the authority to protect certain arrangements 
and payment practices under the anti-kickback statute, Congress 
intended the safe harbor regulations to be updated periodically to 
reflect changing business practices and technologies in the health care 
industry.

B. The Discount Safe Harbor

1. Discount Safe Harbor
    The discount safe harbor was created to align with the statutory 
exception's intent to encourage price competition that benefits the 
Medicare and Medicaid programs.\43\
---------------------------------------------------------------------------

    \43\ Medicare and Medicaid Programs; Fraud and Abuse OIG Anti-
Kickback Provisions, 54 FR at 3092.
---------------------------------------------------------------------------

    Section 1128B(b)(3)(E) of the Act protects from the anti-kickback 
statute ``any payment practice specified by the Secretary in 
regulations promulgated pursuant to section 14 of the Medicare and 
Medicaid Patient and Program Protection Act of 1987.'' Using the 
authority granted under section 14 of the Medicare and Medicaid Patient 
and Program Protection Act of 1987, in the January 23, 1989, Federal 
Register, OIG published a notice of proposed rulemaking that proposed 
various safe harbors, including a safe harbor for discounts that would 
apply ``to individuals and entities, including providers, who solicit 
or receive price reductions, and to individuals and entities who offer 
or pay them.'' \44\ Subject to certain modifications, OIG finalized the 
discount safe harbor, among others, in a final rule published on July 
29, 1991.\45\ This regulatory discount safe harbor was designed to

[[Page 2346]]

protect all discounts or reductions in price protected by Congress in 
the statutory exception, as well as additional discounting practices 
not included in the statutory exception that are not abusive.\46\
---------------------------------------------------------------------------

    \44\ Medicare and Medicaid Programs; Fraud and Abuse OIG Anti-
Kickback Provisions, 54 FR 3088 (Jan. 23, 1989).
    \45\ Medicare and State Health Care Programs: Fraud and Abuse; 
OIG Anti-Kickback Provisions, 56 FR 35952 (July 29, 1991).
    \46\ 64 FR 63518, 63528 (Nov. 19, 1999).
---------------------------------------------------------------------------

    In response to requests from stakeholders, in the July 21, 1994, 
Federal Register, OIG proposed a number of clarifications to the 
discount safe harbor. For instance, OIG proposed to divide the relevant 
parties into three groups (buyers, sellers, and offerors) in order to 
delineate the different obligations individuals or entities must meet 
to receive protection under the discount safe harbor.\47\
---------------------------------------------------------------------------

    \47\ Medicare and State Health Care Programs: Fraud and Abuse; 
Clarification of the OIG Safe Harbor Anti-Kickback Provisions, 59 FR 
37202 (July 21, 1994).
---------------------------------------------------------------------------

    OIG modified the proposed regulations in response to comments 
received and finalized the clarifications to the discount safe harbor, 
among others, in the final rule published in the November 19, 1999, 
Federal Register.\48\ Specifically, OIG defined ``rebate'' to include 
``any discount the terms of which are fixed at the time of the sale of 
the good or service and disclosed to the buyer, but which is not 
received at the time of the sale of the good or service.'' OIG 
recognized that a manufacturer may offer a discount in the form of a 
rebate to a buyer. In addition, OIG stated that the regulatory safe 
harbor both incorporates and enlarges upon the statutory exception.\49\
---------------------------------------------------------------------------

    \48\ Medicare and State Health Care Programs: Fraud and Abuse; 
Clarification of the Initial OIG Safe Harbor Provisions and 
Establishment of Additional Safe Harbor Provisions Under the Anti-
Kickback Statute, 64 FR 63518 (Nov. 19, 1999). That final rule also 
confirmed that ``the regulatory safe harbor expands upon the 
statutory [exception] by defining additional discounting practices 
not included in the statutory exception that are not abusive . . . 
.'' Id. at 63528.
    \49\ 64 FR 63518, 63528 (Nov. 19, 1999).
---------------------------------------------------------------------------

    Finally, in the October 20, 2000, Federal Register, OIG proposed 
several technical revisions to the discount safe harbor, including a 
revision that would expand the safe harbor to cover discounts for items 
or services for which payment may be made, in whole or in part, under 
Medicare, Medicaid, or other Federal health care programs.\50\ OIG 
finalized this expanded scope of the discount safe harbor in the 
Federal Register published on March 18, 2002.\51\
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    \50\ Medicare and State Health Care Programs: Fraud and Abuse; 
Revisions and Technical Corrections, 65 FR 63035, 63041 (Oct. 20, 
2000).
    \51\ Medicare and Federal Health Care Programs: Fraud and Abuse; 
Revisions and Technical Corrections, 67 FR 11928, 11934 (Mar. 18, 
2002).
---------------------------------------------------------------------------

    Subsequent OIG guidance has emphasized that, ``to qualify for the 
discount exception, the discount must be in the form of a reduction in 
the price of the good or service based on an arms-length transaction.'' 
\52\
---------------------------------------------------------------------------

    \52\ 2003 Compliance Program Guidance for Pharmaceutical 
Manufacturers, 68 FR 23731, 23735 (May 5, 2003) (emphasis in the 
original).
---------------------------------------------------------------------------

2. Treatment of ``Rebates'' Under the Discount Safe Harbor
    Section 1128B of the statute explicitly identifies rebates, along 
with kickbacks and bribes, as remuneration. When OIG first proposed a 
regulation implementing the discount exemption, it closely followed the 
statutory language, limiting its application to reductions in the 
amount a seller charges in a specific transaction for a good or service 
to a buyer.\53\ It specifically did not apply to remuneration in the 
form of things of value, such as rebates of cash, other free goods or 
services, redeemable coupons, or credit towards the future purchases of 
other goods or services.\54\ At the time, OIG recognized that these 
forms of remuneration may not be legitimate ``discounts'' and could be 
subject to abuse.\55\ In the July 29, 1991 final rule, OIG recognized 
that rebates can function like legitimate reductions in price, and 
defined discount to include protection for rebate checks, subject to 
the limitation that they only be applied to the same good or service 
that was purchased or provided, and must be fully and accurately 
reported.\56\ In the July 21, 1994, Federal Register, OIG proposed to 
clarify the definition of the term ``rebate'' for purposes of the safe 
harbor.\57\ OIG modified the proposed regulations in response to 
comments received and finalized the clarifications to the discount safe 
harbor, among others, in the final rule published in the November 19, 
1999, Federal Register.\58\ Specifically, OIG defined ``rebate'' to 
include ``any discount the terms of which are fixed at the time of the 
sale of the good or service and disclosed to the buyer, but which is 
not received at the time of the sale of the good or service.'' \59\ OIG 
recognized that a manufacturer may offer a discount in the form of a 
rebate to a buyer.\60\
---------------------------------------------------------------------------

    \53\ Medicare and Medicaid Programs; Fraud and Abuse OIG Anti-
Kickback Provisions, 54 FR at 3092.
    \54\ Id.
    \55\ Id.
    \56\ Medicare and State Health Care Programs: Fraud and Abuse; 
OIG Anti-Kickback Provisions, 56 FR at 35978-35979.
    \57\ Medicare and State Health Care Programs: Fraud and Abuse; 
Clarification of the OIG Safe Harbor Anti-Kickback Provisions, 59 FR 
37202 (July 21, 1994).
    \58\ Medicare and State Health Care Programs: Fraud and Abuse; 
Clarification of the Initial OIG Safe Harbor Provisions and 
Establishment of Additional Safe Harbor Provisions Under the Anti-
Kickback Statute, 64 FR 63518 (Nov. 19, 1999). That final rule also 
confirmed that ``the regulatory safe harbor expands upon the 
statutory [exception] by defining additional discounting practices 
not included in the statutory exception that are not abusive . . . 
.'' Id. at 63528.
    \59\ Id. at 63527.
    \60\ Id. at 63528.
---------------------------------------------------------------------------

3. Further Developments: Establishment of the Medicare Prescription 
Drug Benefit and Drug Rebates to Medicaid Managed Care Organizations
    Long after Congress passed the legislation creating the modern 
anti-kickback statute and discount exception, and OIG issued the 
discount safe harbor regulation, Congress passed the Medicare 
Prescription Drug, Improvement, and Modernization Act of 2003, Public 
Law 108-173, establishing a prescription drug benefit for Medicare 
Beneficiaries (Medicare Part D).
    The standard Part D benefit structure established by the Medicare 
Modernization Act required beneficiaries to pay a monthly premium, 
annual deductible, and copayments or coinsurance for drugs purchased at 
pharmacies. The standard benefit also included a coverage gap (also 
known as the doughnut hole) during which beneficiaries were required to 
pay 100 percent of their drug costs until their out-of-pocket spending 
reached the catastrophic threshold. The Part D benefit has been 
modified by a number of statutory changes, including the Patient 
Protection and Affordable Care Act of 2010 and the Bipartisan Budget 
Act of 2018.
    In 2019, applicable beneficiaries enrolled in standard coverage 
would pay a $415 deductible, 25 percent of their gross drug costs up to 
the initial coverage limit of $3,820 (an additional $851.25), and 25 
percent of their brand drug costs and 37 percent of generic drug costs 
until reaching the out-of-pocket threshold of $5,100 (an estimated 
$8,139.54 of total covered Part D spending). These thresholds, and the 
actuarial equivalence of alternative benefits designs, are determined 
annually based on gross Part D drug costs.
    Applicable beneficiaries, defined as those enrollees of 
prescription drug plans who do not receive the Low-Income Subsidy, pay 
5 percent of their gross drug costs after reaching the out-of-pocket 
limit and entering catastrophic coverage. Part D plan sponsors are 
responsible for 75 percent of the gross covered drug costs between the 
deductible and the initial coverage limit, 5 percent and 63 percent of 
gross brand and generic drug costs,

[[Page 2347]]

respectively, in the coverage gap, and 15 percent of the gross drug 
costs in the catastrophic phase of the benefit. The Federal Government 
pays 74.5 percent of the plan benefit costs,\61\ and 80 percent of the 
gross drug costs during catastrophic coverage. The government also 
provides premium subsidies and cost-sharing subsidies for low-income 
beneficiaries.
---------------------------------------------------------------------------

    \61\ On average, beneficiary premiums are 25.5 percent of the 
benefit costs, or the cost of a standard Part D plan, as determined 
by annual bids submitted by Part D plan sponsors.
---------------------------------------------------------------------------

    Part D plan sponsors are permitted to offer plans with alternative 
benefit designs that are actuarially equivalent to standard Part D 
coverage, but have different deductibles and cost-sharing requirements. 
In 2019, many Part D plan sponsors will offer an alternative benefit 
design. The weighted average total premium for all Part D plans is 
$43.50 per month. Part D beneficiaries enrolled in the 10 largest Part 
D plans will have formularies with 5 tiers of cost-sharing, and pay 
between $0 to $5 copayments for preferred generic drugs, $1 to $13 
copayments for generic drugs, $25 to $47 copayments for preferred 
brands, 32 percent to 50 percent coinsurance for non-preferred drugs, 
and 25 percent to 33 percent coinsurance for specialty drugs.
    Like the statutory exception, the discount safe harbor and all 
revisions to such safe harbor were promulgated prior to the enactment 
of the Medicare prescription drug benefit and prior to the promulgation 
of comprehensive regulations governing Medicaid managed care delivery 
systems. Moreover, after the current version of the discount safe 
harbor was finalized, there were two statutory changes involving the 
intersection of drug pricing under the Medicaid Drug Rebate Program and 
Medicaid MCOs (including the availability of mandatory Medicaid rebates 
for drugs dispensed to individuals enrolled with a Medicaid MCO if the 
MCO is responsible for covering those drugs),\62\ and the Department 
recently finalized regulations to modernize the Medicaid managed care 
regulatory structure.\63\
---------------------------------------------------------------------------

    \62\ Medicare Prescription Drug, Improvement, and Modernization 
Act of 2003, Public Law 108-173, sec. 1002; Patient Protection and 
Affordable Care Act, Public Law 111-148, as amended by the Health 
Care and Education Reconciliation Act of 2010, Public Law 111-152, 
sec. 2501(c).
    \63\ Medicaid and Children's Health Insurance Program (CHIP) 
Programs; Medicaid Managed Care, CHIP Delivered in Managed Care, and 
Revisions to Third Party Liability, 81 FR 27498 (May 6, 2016).
---------------------------------------------------------------------------

III. Provisions of the Proposed Rule

    To address the Department's concerns with the current rebate 
system, the Department proposes to eliminate safe harbor protection for 
manufacturer reductions in price on prescription pharmaceutical 
products to Medicare Part D plans operating under section 1860D-1 et 
seq. of the Act, and Medicaid MCOs, as defined under section 1903(m) of 
the Act. In conjunction with this amendment, the Department is 
proposing a new safe harbor that would protect manufacturer point-of-
sale reductions in price on prescription pharmaceutical products to a 
plan sponsor under Medicare Part D, a Medicaid MCO, or a PBM acting 
under contract with either, that would be applied at the point of sale 
to benefit the beneficiary, the plan, and, by extension, the 
Government. Finally, the Department is proposing a new safe harbor to 
protect certain fixed service fees that pharmaceutical manufacturers 
pay to PBMs. We are interested in and solicit comments on how these 
proposals, individually and/or collectively, would align or conflict 
with program requirements and any legal requirements (e.g., antitrust 
laws) that may apply to affected parties.

A. Amendment to the Discount Safe Harbor

    The Department proposes to amend the existing discount safe harbor 
so that it would no longer protect price reductions from manufacturers 
to plan sponsors under Medicare Part D or Medicaid MCOs, either 
directly or through PBMs acting under contract with plan sponsors under 
Medicare Part D or Medicaid MCOs, in connection with the sale or 
purchase of prescription pharmaceutical products, unless the reduction 
in price is required by law. Given that the discount safe harbor 
applies to items payable under Medicare, Medicaid, or other Federal 
health care programs, we solicit comments on whether this amendment 
should be limited to prescription pharmaceutical products payable by 
Medicare Part D and Medicaid MCOs, or whether the amendment also should 
apply to prescription pharmaceutical products payable under other HHS 
programs (e.g., Medicare Part B fee-for-service, a Medicaid managed 
care program operated using waiver authority under section 1915(b) of 
the Act).
    For purposes of this amendment as well as the proposed new safe 
harbor, we propose to interpret the term ``plan sponsor under Medicare 
Part D'' to include the sponsor of a prescription drug plan (PDP) as 
well as a Medicare Advantage organization offering a Medicare Advantage 
prescription drug plan. These two categories of plans are the 
predominant types of plans through which beneficiaries receive 
prescription drug coverage under Part D. We solicit comments on this 
definition and also whether we should adopt a broader definition that 
would include all entities considered to be ``Part D plan sponsors'' 
under 42 CFR 423.4 (i.e., expand to also include PACE organizations 
offering a PACE plan including qualified prescription drug coverage and 
cost plans offering qualified prescription drug coverage).
    We also note that nothing in this proposed rule changes the 
discount safe harbor's provision that excludes from protection price 
reductions offered to one payor but not to Medicare or Medicaid, 
particularly when such discounts serve as inducements for the purchase 
of federally reimbursable products. OIG has a long-standing concern 
about arrangements under which parties ``carve out'' referrals of 
Federal health care program beneficiaries or business generated by 
Federal health care programs from otherwise questionable financial 
arrangements. Such arrangements implicate, and may violate, the anti-
kickback statute by disguising remuneration for Federal health care 
program business through the payment of amounts purportedly related to 
non-Federal health care program business. This concern would extend to 
certain pharmaceutical rebate arrangements. For example, if a 
manufacturer offered a rebate on a product to an insurer for its 
private pay plans conditioned (explicitly or implicitly) on the 
product's favorable formulary placement across all plans (including 
Part D plans), such a rebate could be remuneration that would implicate 
the anti-kickback statute and would not be protected by the current 
discount safe harbor or by the provisions of this proposed rulemaking.
    While this amendment would exclude from protection all price 
reductions from manufacturers on prescription pharmaceutical products 
in connection with their sale to or purchase by plan sponsors under 
Medicare Part D, Medicaid MCOs, or PBMs acting under contract with plan 
sponsors under Medicare Part D or Medicaid MCOs, unless the reduction 
in price is required by law (e.g., rebates under the Medicaid Drug 
Rebate Program), the Department is proposing a new safe harbor, with 
different criteria, that would protect certain point-of-sale discounts 
that the proposed amendment would carve out from the current discount 
safe harbor. For the policy and program integrity reasons articulated 
above, the changes reflected in this proposed rulemaking

[[Page 2348]]

are intended to exclude from discount safe harbor protection rebates 
from manufacturers to plan sponsors under Medicare Part D and Medicaid 
MCOs, whether negotiated by the plan or by a PBM or paid through a PBM 
to the plan or Medicaid MCO.
    The Department intends for the discount safe harbor to continue to 
protect discounts on prescription pharmaceutical products offered to 
other entities, including, but not limited to, wholesalers, hospitals, 
physicians, pharmacies, and third-party payors in other Federal health 
care programs. We solicit comments regarding whether the proposed 
regulatory text amending the discount safe harbor (when read in 
conjunction with the proposed new safe harbor at 42 CFR 1001.952(cc)) 
excludes reductions in price not contemplated by the proposed 
amendment. In addition, we solicit comments on any additional or 
different regulatory text necessary to clarify that other types of 
discounts (e.g., volume or prompt payment discounts to wholesalers) 
that currently are protected by the discount safe harbor would remain 
protected if all safe harbor conditions are met. We also solicit 
comments regarding whether declining to protect rebates to plan 
sponsors under Medicare Part D and Medicaid MCOs under a safe harbor 
might affect beneficiary access to prescription pharmaceutical products 
either due to cost or formulary placement.
    While the Department intends for the discount safe harbor to 
continue to protect discounts on prescription pharmaceutical products 
offered to entities other than plan sponsors under Medicare Part D, and 
Medicaid MCOs, the Department is concerned about the potential for 
unintended loopholes. For example, we are concerned that in some 
circumstances, such price reductions could be used to funnel 
remuneration to parties that otherwise would have been in the form of 
rebates where such rebates, under this proposed rule, would no longer 
qualify for safe harbor protection.
    We also are aware that many states have negotiated supplemental 
rebate agreements with drug manufacturers, which the Department does 
not presently believe should be affected by this proposal. We are 
considering and solicit comments on the extent, if any, to which these 
supplemental rebates would be affected by this proposal. In addition, 
we solicit comments on other types of entities who receive price 
reductions from manufacturers for the same types of prescription 
pharmaceutical products that are also sold to or purchased by plan 
sponsors under Medicare Part D, Medicaid MCOs, or pharmacy benefit 
managers acting under contract with either and whether price reduction 
arrangements with those entities may pose similar risks. We are 
considering and seek comments on safeguards that already may be in 
place or could be included in the discount safe harbor to protect 
beneficial price reductions (i.e., that benefit programs or 
beneficiaries) while at the same time preventing the potential abuses 
described above.
    As part of this proposal, the Department is soliciting comments on 
a definition for ``in connection with'' in the discount safe harbor; 
such a definition would clarify the scope of those price reductions 
that would no longer be protected under the discount safe harbor 
because they relate to the purchase of pharmaceutical products 
ultimately sold to or purchased by a plan sponsor under Medicare Part 
D, a Medicaid MCO, or a pharmacy benefit manager acting under contract 
with either. As stated above, we are considering and also soliciting 
comments on whether additional or different regulatory text would be 
necessary to clarify that other types of discounts (e.g., volume or 
prompt payment discounts to wholesalers) that currently are protected 
by the discount safe harbor would remain protected if all safe harbor 
conditions are met.
    The Department is exploring value-based arrangements and their use 
in the sale of prescription pharmaceutical products. The Department 
does not intend for this proposal to have any effect on existing 
protections for value-based arrangements between manufacturers and plan 
sponsors under Medicare Part D and Medicaid MCOs. We are interested in 
hearing from stakeholders about, and are soliciting comments on, the 
extent to which the proposed amendment and accompanying proposed safe 
harbor may affect any existing or future value-based arrangements. We 
request that any such comments specify how any currently protected 
arrangements or arrangements that might be protected under the proposed 
safe harbor are ``value based.''
    We are proposing that this amendment, if finalized, be effective on 
January 1, 2020. We are mindful that many entities may be using the 
current discount safe harbor to protect financial arrangements that no 
longer would meet the definition of ``discount'' under this proposed 
change. We are soliciting comments on whether the proposed effective 
date gives affected entities a sufficient transition period to 
restructure any arrangements that could implicate the anti-kickback 
statute and no longer would be protected by a safe harbor.
    Finally, we solicit comments on proposed definitions for the terms 
``manufacturer,'' ``wholesaler,'' ``distributor,'' ``pharmacy benefit 
manager'' or ``PBM,'' and ``prescription pharmaceutical product'' for 
purposes of 42 CFR 1001.952(h). We solicit comments on the sufficiency 
of the proposed definitions to accurately describe these terms for use 
in this proposed rule.

B. New Safe Harbor for Certain Price Reductions on Prescription 
Pharmaceutical Products

    The Department is proposing a new safe harbor (Point-of-Sale 
Reductions in Price for Prescription Pharmaceutical Products) that 
would protect point-of-sale price reductions offered by manufacturers 
on certain prescription pharmaceutical products that are payable under 
Medicare Part D or by Medicaid MCOs that meet certain criteria. The 
proposed effective date for the new safe harbor would be 60 days after 
publication of the final rule. The Department intends for this new safe 
harbor to protect reductions in price for prescription pharmaceutical 
products without regard to what phase of the benefit the beneficiary is 
in. We solicit comment on potential revisions to clarify how the safe 
harbor would apply during periods of 100 percent beneficiary cost 
sharing.
    As we describe throughout this preamble, point-of-sale reductions 
in price pose less risk to Medicare Part D, Medicaid MCOs, and 
beneficiaries than the current rebate system for prescription 
pharmaceutical products. In that regard, we are soliciting comments on 
the extent to which the safe harbor, if finalized, would incentivize 
manufacturers to provide point-of-sale discounts. We are considering 
whether and, if so, how the proposed safe harbor conditions should be 
modified to encourage these point-of-sale price reductions without 
posing any undue risk to programs or patients. We will consider 
alternative suggestions as well.
    We continue to believe that ``discounts are distinct from across-
the-board price reductions offered to all buyers where the inducement 
that is made is so diffuse that it does not appear intended to 
encourage a particular buyer to purchase or order a particular good or 
service payable under

[[Page 2349]]

Medicare or Medicaid.'' \64\ For example, if a manufacturer were to 
implement an across-the-board reduction in price for a prescription 
pharmaceutical product (e.g., a reduction in WAC), such a reduction in 
price would not need the protection of the discount safe harbor or the 
safe harbor proposed in this rulemaking.
---------------------------------------------------------------------------

    \64\ Medicare and State Health Care Programs: Fraud and Abuse; 
OIG Anti-Kickback Provisions, 56 FR 35952, 35977 (July 29, 1991).
---------------------------------------------------------------------------

    Under the proposed new safe harbor, a manufacturer could offer a 
reduction in price on a particular prescription pharmaceutical product 
to a plan sponsor under Medicare Part D, to a Medicaid MCO, or through 
a PBM acting under contract with either if certain conditions are met. 
First, the reduction in price would have to be set in advance with the 
plan sponsor under Medicare Part D, a Medicaid MCO, or a PBM. We 
propose that ``set in advance'' would mean that the terms of the 
reduction in price would be fixed and disclosed in writing to the plan 
sponsor under Medicare Part D or the Medicaid MCO by the time of the 
initial purchase. We propose to interpret ``the initial purchase'' to 
mean the first purchase of the product at that reduced price by the 
plan sponsor or Medicaid MCO on behalf of an enrollee. Like the current 
discount safe harbor, we propose that this new safe harbor would 
exclude from protection price reductions offered to one payor but not 
to Medicare or Medicaid and solicit comments on whether the regulation 
captures this intent.
    Second, the reduction in price could not involve a rebate, as 
defined in 42 CFR 1001.952(h), unless the full value of the reduction 
in price is provided to the dispensing pharmacy through a chargeback or 
a series of chargebacks, or the rebate is required by law. We propose 
to define a ``chargeback'' as a payment made directly or indirectly by 
a manufacturer to a dispensing pharmacy so that the total payment to 
the pharmacy for the prescription pharmaceutical product is at least 
equal to the price agreed upon in writing between the Plan Sponsor 
under Part D, the Medicaid MCO, or a PBM acting under contract with 
either, and the manufacturer of the prescription pharmaceutical 
product. For example, when a pharmacy dispenses a drug to a beneficiary 
that is reimbursed by a particular Part D plan or Medicaid MCO, the 
total payment to the pharmacy (i.e., cost-sharing from the beneficiary, 
payment from the Part D plan or Medicaid MCO, and any chargeback) will 
be at least equal to the price agreed upon between the manufacturer of 
that drug and the Part D Plan or Medicaid MCO, or a PBM acting under 
contract with either. We solicit comments on this definition. Notably, 
the current rebate frameworks under which a manufacturer pays the plan 
sponsor under Medicare Part D or Medicaid MCO directly or through a PBM 
would not meet this criterion absent those chargebacks resulting in the 
dispensing pharmacy receiving the full value of the reduction in price.
    Third, the reduction in price must be completely reflected in the 
price the pharmacy charges to the beneficiary at the point of sale. For 
example, if the discounted rate is set in advance, at the time of 
dispensing the pharmacy would have the necessary information to 
appropriately charge a beneficiary who owes coinsurance, even if the 
manufacturer ultimately tenders the dispensing pharmacy a payment 
through a chargeback to reflect this negotiated price with the payor.
    The proposed safe harbor's requirements are intended to exclude 
from its protection conduct that mimics rebates but are referenced in 
other ways in the contracts between a manufacturer and a PBM, a plan 
sponsor under Medicare Part D, or a Medicaid MCO. For example, fees 
that are based on a percentage of a prescription pharmaceutical 
product's list price could be a disguised kickback and would not be 
protected by this proposed safe harbor unless the requirements created 
by this rule are met. We are soliciting comments on this approach and 
whether, and if so, how the regulatory text should be modified to best 
reflect this intent.
    We recognize that some pharmacies and PBMs are related through 
ownership, and we solicit comments on any potential issues such 
ownership interests might create under this proposed safe harbor and 
how best to address them. We also recognize that some PBMs may argue 
that allowing the reduction in price to be processed at the point of 
sale may provide pharmacies sufficient data to reverse engineer the 
manufacturer's or the PBM's discount structure. We solicit comments on 
whether this is likely, and if so, how it might transpire, what impact 
it might have on competition, and how, if at all, this should be 
addressed in the proposed safe harbor.
    For purposes of proposed 42 CFR 1001.952(cc) we propose to 
incorporate the definitions of the terms ``manufacturer,'' ``pharmacy 
benefit manager'' or ``PBM,'' ``prescription pharmaceutical product,'' 
``rebate,'' and ``Medicaid managed care organization'' or ``Medicaid 
MCO'' as they would be set forth in the proposed amendment to 42 CFR 
1001.952(h). We also propose a definition of ``chargeback.'' We solicit 
comments on the sufficiency of the proposed definitions to accurately 
describe these terms for use in this proposed rule.

C. New Safe Harbor for Certain PBM Service Fees

    The Department is proposing a new safe harbor (PBM Service Fees) 
that would protect fixed fees that manufacturers pay to PBMs for 
services rendered to the manufacturers that meet specified criteria. In 
some circumstances, services that PBMs provide to health plans and 
pharmaceutical manufacturers put PBMs in a position to recommend or 
arrange for the purchase of pharmaceutical manufacturers' products. The 
Department recognizes the possibility that certain types of 
remuneration that manufacturers might pay to PBMs either would not 
implicate the anti-kickback statute or could be protected under another 
existing safe harbor. However, this proposed new safe harbor would 
provide a pathway, specific to PBMs, to protect remuneration in the 
form of flat fee service fees that would be low risk if they meet 
specified criteria.
    This proposed safe harbor would protect payments pharmaceutical 
manufacturers make to PBMs for services the PBMs provide to the 
pharmaceutical manufacturers, for the manufacturers' benefit, when 
those services relate in some way to the PBMs' arrangements to provide 
pharmacy benefit management services to health plans. This safe harbor 
would protect only a pharmaceutical manufacturer's payment for those 
services that a PBM furnishes to the pharmaceutical manufacturer, and 
not for any services that the PBM may be providing to a health plan. 
With respect to services that relate in some way to the PBM's 
arrangements with health plans, we have in mind, by way of example, 
services rendered to manufacturers that depend on or use data gathered 
by PBMs from their health plan customers (whether claims or other types 
of data). For example, PBMs might provide services for pharmaceutical 
manufacturers to prevent duplicate discounts on 340B claims.\65\ Such a 
service is for the benefit of the manufacturer but relies on certain

[[Page 2350]]

information the PBM would have from its contracted health plans. We 
note, however, that nothing in this proposed safe harbor would preempt 
any contractual terms that a PBM has with a health plan that limits or 
delineates the PBM's use of the health plan's data.
---------------------------------------------------------------------------

    \65\ Section 256b(a)(5)(A)(i) of Title 42 provides that 
manufacturers are not required to provide a discounted 340B price 
and a Medicaid drug rebate for the same drug.
---------------------------------------------------------------------------

    We consider ``pharmacy benefit management services'' to be services 
such as contracting with a network of pharmacies; establishing payment 
levels for network pharmacies; negotiating rebate arrangements; 
developing and managing formularies, preferred drug lists, and prior 
authorization programs; performing drug utilization review; and 
operating disease management programs. We do not propose to create a 
definition for ``pharmacy benefit management services'' as these 
services could evolve over time. We solicit comments on this approach 
and whether other services should be considered ``pharmacy benefit 
management services'' for purposes of this safe harbor. We also solicit 
comments on our proposal to limit this safe harbor to the fees that 
pharmaceutical manufacturers pay to PBMs that relate to the PBM's 
arrangements to provide pharmacy benefit management services to health 
plans.
    The first proposed condition of the safe harbor would require the 
PBM and the pharmaceutical manufacturer to have a written agreement 
that: (i) Covers all of the services the PBM provides to the 
manufacturer in connection with the PBM's arrangements with health 
plans for the term of the agreement, and (ii) specifies each of the 
services to be provided by the PBM and the compensation for such 
services. Compliance with this first condition is necessary to 
demonstrate compliance with the second proposed condition. We solicit 
comments regarding whether the safe harbor should specify the format of 
any such agreement (e.g., whether it would be sufficient for a PBM to 
have one agreement with a manufacturer that covers all of the services 
the PBM provides to that manufacturer, or whether separate agreements 
for services that relate to each health plan would be necessary).
    The second proposed condition would specify that compensation paid 
to the PBM must: (i) Be consistent with fair market value in an arm's-
length transaction; (ii) be a fixed payment, not based on a percentage 
of sales; and (iii) not be determined in a manner that takes into 
account the volume or value of any referrals or business otherwise 
generated between the parties, or between the manufacturer and the 
PBM's health plans, for which payment may be made in whole or in part 
under Medicare, Medicaid, or other Federal health care programs. The 
first sub-condition requires that the remuneration be consistent with 
fair market value in an arm's length transaction and we welcome 
comments on the requirement, including comments on avoiding any risks 
of gaming with respect to valuation or other conditions in this 
proposed safe harbor. The second sub-condition would permit flat fees, 
but not percentage-based fees, including fees based on a percentage of 
sales. Flat fees pose lower risk of abuse and conflicts of interest. 
For example, if a pharmaceutical manufacturer were to offer 
compensation to a PBM for its services based on a percentage of the 
price of the manufacturer's product, the PBM could be influenced to 
include higher-priced alternatives in favorable tiers on its formulary, 
which would increase the PBM's own profits but be less beneficial for 
the health plans for which the PBM is supposed to be acting as an 
agent. (We note that the current rebate framework, where we understand 
that PBMs generally seek payments (which the parties refer to as 
``rebates'') from manufacturers in exchange for a favorable formulary 
placement, may be instructive with respect to the relative risks of 
payments based on sales versus fixed fees.) Therefore, we are proposing 
that the protected payments must be fixed fees, rather than fees that 
are based on a percentage of sales or other variable. We solicit 
comments on this approach and these concerns.
    The third sub-condition would require that the fees not be 
determined in a manner that takes into account the volume or value of 
any referrals or other business generated. We solicit comments 
regarding this volume or value criterion. In particular, we solicit 
comments on any services arrangements between pharmaceutical 
manufacturers and PBMs that take into account the volume or value of 
referrals or business otherwise generated between the parties, or the 
manufacturer and the PBM's health plans, but otherwise would be low 
risk or appropriate. We are considering whether, and if so how, we 
could include criteria that would allow us to deem certain arrangements 
not to take into account the volume or value of any referrals or 
business otherwise generated between the parties so that they may be 
protected under this safe harbor if all other criteria are met.
    Finally, the Department proposes that the PBM disclose in writing 
to each health plan with which it contracts at least annually, and to 
the Secretary upon request, the services it rendered to each 
pharmaceutical manufacturer that are related to the PBM's arrangements 
with that health plan and the associated costs for such services. We 
are also considering, and solicit comments on, whether, and if so under 
what conditions, PBMs should also be required as an additional 
condition of safe harbor compliance to disclose the fee arrangements to 
the health plans. We propose that the PBMs be required to disclose the 
fee arrangements to the Secretary upon request. To promote transparency 
and minimize risks of fraud or abuse, we are also considering, and 
solicit comments on, requiring PBMs to disclose, in order to use the 
safe harbor, additional information about the fee arrangements to the 
Secretary upon request, including information about some or all of the 
following: Information about valuation and valuation methodology; 
information demonstrating that fee arrangements are not duplicative of 
other arrangements for which the PBM might receive duplicative payments 
(``double-dipping''); and information demonstrating that fee 
arrangements meet the ``volume or value'' criterion. The Department 
believes that PBMs are agents of the health plans with which they 
contract and that this transparency requirement is important to ensure 
that the PBM's arrangements with pharmaceutical manufacturers are not 
in tension with the services that the PBM provides to the health plans 
for which it is acting as an agent. We solicit comments on this 
transparency requirement. For example, we solicit comments on whether 
arrangements that PBMs have, or would seek to have, with pharmaceutical 
manufacturers could be attributed to services provided to particular 
health plans. We are also soliciting comments on any competitive 
concerns this transparency condition would raise and how we might 
address them in this rulemaking. Nothing in this proposal would affect 
the ability of the health plan and PBMs to negotiate different 
disclosure provisions in their contracts; however, safe harbor 
protection would only apply if the conditions of the safe harbor are 
fully met.

IV. Regulatory Impact Statement

    Executive Orders 12866 and 13563 direct agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). A 
regulatory impact analysis

[[Page 2351]]

(RIA) must be prepared for major rules with economically significant 
effects of $100 million or more in any one year.
    Executive Order 13771 (January 30, 2017) requires that the costs 
associated with significant new regulations ``to the extent permitted 
by law, be offset by the elimination of existing costs associated with 
at least two prior regulations.'' The Department believes that this 
proposed rule is a significant regulatory action as defined by 
Executive Order 12866 that imposes costs, and therefore is considered a 
regulatory action under Executive Order 13771. The Department estimates 
that this rule generates $56.2 million in annualized costs at a 7% 
discount rate, discounted relative to 2016, over a perpetual time 
horizon.
    The Regulatory Flexibility Act and the Small Business Regulatory 
Enforcement and Fairness Act of 1996, which amended the RFA, require 
agencies to analyze options for regulatory relief of small businesses. 
For purposes of the RFA, small entities include small businesses, non-
profit organizations, and government agencies. Based on subsequent 
analysis, the Secretary does not believe that this rule will have 
significant impact on a substantial number of small entities.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a rule may have a significant impact on 
the operations of a substantial number of small rural hospitals. This 
analysis must conform to section 603 of the RFA. For purposes of 
section 1102(b) of the Act, we define a small rural hospital as a 
hospital that is located outside a Metropolitan Statistical Area for 
Medicare payment regulations and has fewer than 100 beds. The Secretary 
has determined that this proposed rule would not have a significant 
impact on the operations of a substantial number of small rural 
hospitals.
    Section 202 of the Unfunded Mandates Reform Act of 1995 also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule whose mandates require spending in any one year of 
$100 million in 1995 dollars, updated annually for inflation. In 2018, 
that threshold is approximately $150 million. The proposed rule may 
have effects on states through its effects on the Medicaid Drug Rebate 
Program, under which rebates are shared between the Federal Government 
and the states based on the Federal Medical Assistance Percentage 
(FMAP) for each state, and through its effects on Medicaid managed 
care. We invite comments on these or other potential impacts.
    The rule does not alter the statutory provisions for Medicaid 
prescription drug rebates under Section 1927 of the Social Security Act 
that are calculated as percentages of AMP plus the difference between 
the rate of increase in AMP and the increase in the consumer price 
index for all urban consumers (CPI-U). It also does not alter Section 
1927's provisions for Medicaid rebates based on the Best Price 
available to other payers for innovator drugs or for supplemental 
rebates negotiated between states and manufacturers. Nor does the rule 
alter the regulations and guidance to implement Section 1927 
provisions.
    To the extent that the rule reduces Average Manufacturer Price 
(AMP), however, it will also reduce Medicaid prescription drug rebates 
calculated as percentages of AMP plus the difference between the rate 
of increase in AMP and the increase in the CPI-U. The Milliman analysis 
includes an extended example demonstrating that the loss of revenue 
from these rebates can exceed the savings from lower list prices.\66\
---------------------------------------------------------------------------

    \66\ Milliman. ``Impact of Potential Changes to the Treatment of 
Manufacturer and Pharmacy Rebates.'' September 2018. The Milliman 
analysis is posted as supplementary material in the docket for this 
rule at regulations.gov.
---------------------------------------------------------------------------

    The proposed rule would also change the safe harbor provision that 
currently protects rebates that PBMs negotiate on behalf of Medicaid 
MCOs while establishing a new safe harbor that allows point-of-sale 
price reductions under certain conditions. Finally, we seek comment 
regarding how these changes would influence bids submitted by Medicaid 
MCOs, including whether or not reducing rebate revenue for Medicaid 
managed care plans could result in states receiving bids with increased 
costs for Medicaid MCO contracts.
    The Office of the Actuary estimates that the rule will result in 
estimated aggregate savings of $4.0 billion for states over ten years, 
as follows.\67\ The impact of the rule on Medicaid prescription drug 
rebates, MCO premiums, and prescription drug prices could result in net 
Federal Medicaid costs of $1.7 billion between 2020 and 2029, and net 
state Medicaid costs of $0.2 billion over the same period.\68\ The 
Office of the Actuary also estimates that state governments will save 
$4.3 billion between 2020 and 2029 through lower prescription drug 
prices for state employees.\69\ These estimates are at the national 
level; Medicaid costs, state employee savings, and the net of the two 
may vary among states.
---------------------------------------------------------------------------

    \67\ CMS Office of the Actuary. ``Proposed Safe Harbor 
Regulation.'' August 2018. The OACT analysis is posted as 
supplementary material in the docket for this rule at 
regulations.gov.
    \68\ CMS Office of the Actuary. ``Proposed Safe Harbor 
Regulation.'' August 2018. The OACT analysis is posted as 
supplementary material in the docket for this rule at 
regulations.gov.
    \69\ CMS Office of the Actuary. ``Proposed Safe Harbor 
Regulation.'' August 2018. The OACT analysis is posted as 
supplementary material in the docket for this rule at 
regulations.gov.
---------------------------------------------------------------------------

    We further note that the Veterans Health Administration, the Indian 
Health Service, tribes administering health programs under tribal self-
governance, and other entities are eligible to purchase prescription 
drugs under the Federal Supply Schedule (FSS). FSS pricing is 
negotiated based on a unique commercial sales practices format, using 
commercial list pricing and most favored customer pricing as a base for 
negotiating, in most cases, up front discounts. In addition, the 
Veterans Health Administration, Department of Defense, Coast Guard, and 
the Public Health Service (including the Indian Health Service) are 
eligible to purchase drugs under the Federal Ceiling Price (FCP) 
Program. The Federal Ceiling Price is calculated as a percentage of 
non-Federal average manufacturer pricing (non-FAMP). Eligible programs 
can purchase drugs using the lesser of the FSS Price and FCP. Although 
it is difficult to determine the operation of the proposed rule on FSS 
users or entities entitled to FCPs, if the overall effect of lowering 
list pricing is achieved and that results in lower prices to commercial 
customers (and wholesalers) or pricing components of non-FAMP, it is 
possible VA may realize some additional savings. We solicit comment on 
effects on these stakeholders.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule (and subsequent 
final rule) that imposes substantial direct requirement costs on State 
and local governments, preempts State law, or otherwise has federalism 
implications. Since this regulation does not impose any direct costs on 
State or local governments, preempt State law, or otherwise have 
federalism implications, the requirements of Executive Order 13132 are 
not applicable.

A. Need for Regulation

    As described above, manufacturers paying rebates to PBMs may be a 
factor in list prices rising faster than inflation. This phenomenon may 
also be causing PBMs to favor higher-cost drugs with higher rebates 
over drugs with lower costs, and discouraging the adoption of lower-
cost brand drugs and biosimilars. As a result, rebates may increase 
costs

[[Page 2352]]

for consumers, because their out-of-pocket costs during the deductible, 
coinsurance, and coverage gap phases of their benefits are based on the 
list price. Rebates may also increase costs for the government, which 
pays a portion of the premium, cost-sharing, and reinsurance payments 
associated with the use of highly-rebated drugs instead of less-costly 
alternatives).
    Prescription drug spending can be measured based on WAC price (also 
referred to as list price or invoice price) and the so-called ``net 
price'' (which accounts for all price concessions).\70\ According to 
the IQVIA Institute for Human Data Science (a private research 
organization affiliated with the human data science and consulting firm 
IQVIA that uses proprietary data from IQVIA), the difference between 
total US invoice spending (the amount paid by distributors) and net 
spending (which accounts for all price concessions) across all 
distribution channels has increased from approximately $74 billion in 
2013 to $130 billion 2017 for retail drugs. The IQVIA Institute found a 
similar growth in the difference between invoice and net spending for 
the total US retail market.\71\
---------------------------------------------------------------------------

    \70\ ``Net price'' is industry jargon. Each PBM or plan sponsor 
may treat payments and price concessions differently. Thus the ``net 
price'' of a drug is more difficult to define than the Wholesale 
Acquisition Cost set by the manufacturer.
---------------------------------------------------------------------------

    Department analysis shows that within Medicare there has been a 
similar trend of growing differences between list and net prices. 
Manufacturer rebates grew from about 10 percent of gross prescription 
drug costs in 2008 to about 20 percent in 2016, and are projected to 
reach 28 percent in 2027 under current policy (Figure 1). Reinsurance 
spending and gross drug costs, after rising in tandem with premiums in 
the early years of the Part D benefit, are now growing much faster than 
premiums.
[GRAPHIC] [TIFF OMITTED] TP06FE19.000

B. Background on Costs, Benefits, and Transfers

    This proposed rule seeks to eliminate rebates so that manufacturers 
will have an incentive to lower list prices and PBMs will have more 
incentive to negotiate greater discounts from manufacturers. The goal 
of this policy is to lower out-of-pocket costs for consumers and reduce 
government drug spending in Federal health care programs.
    The full magnitude of these savings is difficult to quantify, and 
the Office of Management and Budget has specific definitions of costs, 
benefits, and transfers. As such, a brief summary of potential effects 
of this rule is provided here. More information about these effects may 
be found in the respective costs, benefits, and transfers sections.
    Notably, the Department intends for this proposal to result in 
manufacturers lowering their list prices, and replacing rebates with 
discounts. One way to quantify this impact is to simply replace all 
manufacturer rebates paid to PBMs with discounts paid to consumers, and 
estimate the effect of this transfer on stakeholders. However, this 
approach does not consider the range of strategic behavior changes 
stakeholders may make in response to this rule, including the extent to 
which manufacturers lower list prices or retain a portion of current 
rebate spending, PBMs change benefit designs or obtain additional price 
concessions, and the impact on consumer utilization of lower-cost 
drugs. The section below describes the current system and the potential 
system that could result from finalizing this rule, based on current 
Medicare Part D spending and a range of potential behavioral changes, 
including the manufacturer pricing changes and PBM negotiation 
practices described above.
    Today, prescription drug manufacturers prospectively set the 
Wholesale Acquisition Cost, or list price, of the drugs they sell to 
wholesalers and other large purchasers. Manufacturers also 
retrospectively make payments to pharmacy benefit managers (PBMs) or 
other customers who meet certain volume-based or market-share criteria. 
The difference between the list price of a drug and the rebate amount 
is referred to in industry parlance as the ``net price.'' Since the 
passage of the Anti-Kickback Statute and the establishment of the 
various safe harbors, the list prices of branded prescription drugs, 
and the rebates paid by manufacturers to pharmacy benefit managers, 
have grown substantially. The phenomenon of list prices rising faster 
than ``net prices'' is referred to as the ``gross to net bubble.''
    Research suggests that the approval of a new drug can lead to 
higher list prices for existing drugs in the therapeutic class. PBMs 
may favor drugs with higher rebates over drugs with lower costs, or 
otherwise discourage the

[[Page 2353]]

adoption of lower-cost brand or generic drugs and biosimilars. As a 
result, rebates may increase costs for consumers (who experience out-
of-pocket costs more closely related to the list price than the rebated 
amount during the deductible, coinsurance, and coverage gap phases of 
their benefits) and the government (who pays a portion of the premium, 
cost-sharing, and reinsurance payments associated with the use of 
higher-rebated drugs instead of less-costly alternatives). This rule 
seeks to correct the incentives that have created the widening gaps 
between gross and net prescription drug costs and between gross 
prescription drug costs and Part D premiums.
    This proposed rule would remove safe harbor protection for rebates 
received by PBMs from manufacturers in connection with Medicare Part D 
and Medicaid MCOs, and create two new safe harbors protecting certain 
discounts by manufacturers and protecting certain flat fees paid by 
manufacturers to a PBM for services the PBM renders to the 
manufacturer. To the extent that this rule would result in 
manufacturers reducing the list price of drugs, this rule would impact 
all cash flows throughout the system.
    The intent of this rule is to eliminate rebates from manufacturers 
to PBMs, and replace them with discounts provided to beneficiaries at 
the point of sale. This change would also impact the price that many 
patients pay for prescription drugs. As part of their health insurance 
coverage, many consumers pay some cost sharing for the use of health 
care services. For many plans, consumers first pay a deductible. This 
typically means that the consumer pays the full cost of services until 
the deductible is met. After the consumer has met the deductible, cost 
sharing often takes the form of coinsurance, in which consumers pay a 
percentage of the cost of the covered health care service or product, 
or copayments, in which consumers pay a fixed amount for a covered 
health care service or product. A recent IQVIA report found that in 
2017 more than 55 percent of commercially-insured consumer spending on 
branded medicines was filled under coinsurance or before the deductible 
is met.\72\ For most health care services, consumer deductibles and 
coinsurance are based on the prices health insurers negotiate with 
their network providers. However, for prescription drugs, often the 
price the plan ultimately pays is based on rebates that are paid after 
the point of sale to the consumer, whereas the consumers' deductible 
and coinsurance payments are based on the list price.
---------------------------------------------------------------------------

    \72\ Consumer Affordability Part One: The Implication of 
Changing Benefit-Designs and High Cost sharing.
---------------------------------------------------------------------------

    With a reduced price charged by the pharmacy, patients with 
coinsurance or deductible plans will likely experience reductions in 
cost-sharing for rebated brand-name at the point of sale. Patients with 
fixed co-payments may not see changes in their cost-sharing at the 
point of sale outside of the deductible, coverage gap, or catastrophic 
phases of their benefits. These effects will accrue to some 
beneficiaries through lower out-of-pocket costs and to all 
beneficiaries through more transparent pricing. If this rule closes the 
gap between list and net prices and leads to additional price 
concessions, the benefit of lower premiums and out-of-pocket costs 
could accrue to all beneficiaries with individual out-of-pocket savings 
varying by beneficiary prescription drug utilization. If this rule 
closes the gap between list and net prices but leads to fewer price 
concessions, all beneficiaries could experience higher premiums with 
only some experiencing lower out-of-pocket costs. The potential impact 
of these distributional changes is described in the transfers section 
of this regulatory impact analysis.
    Consumers also select health insurance plans based on their 
understanding of relevant plan characteristics, including premiums, 
cost sharing, coverage, and in-network providers. Research shows that 
consumers often do not understand their health insurance plans and 
would better understand a simpler plan.\73\ Research specific to 
Medicare Part D suggests beneficiaries place a greater weight on 
premium than out-of-pocket cost, are most likely to choose the plan 
with the lowest premium.\74\ Oftentimes they select the plan with the 
lowest premiums when plans with higher premiums and more comprehensive 
coverage were actuarially favorable.\75\ However, consumers in poorer 
health or with higher drug costs are more likely to anticipate their 
future drug spending and choose a plan that places them at less 
financial risk. Also, as stated earlier, a beneficiary paying 20% 
coinsurance on a drug with a $100 WAC and 30% rebate effectively pays 
28% of the plan's cost after accounting for payments made by the 
manufacturer to the PBM. Thus, the publication of premiums and cost-
sharing amounts that more accurately reflect the discounted price of a 
prescription drug could help align consumer understanding of health 
insurance benefits with reality and help consumers to choose the health 
insurance plans that best meet their needs. These effects are described 
in the benefits section.
---------------------------------------------------------------------------

    \73\ Loewenstein G et al. Consumers misunderstanding of health 
insurance. Journal of Health Economics. 32(2013) 850-862.
    \74\ Abaluck and Gruber. Evolving Choice Inconsistencies in 
Choice of Prescription Drug Insurance. Am Econ Rev. 2016 Aug; 
106(8): 2145-2184.
    \75\ Heiss, Leive, McFadden and Winter. Plan Selection in 
Medicare Part D: Evidence From Administrative Data. J Health Econ. 
2013 Dec; 32(6): 1325-1344.
---------------------------------------------------------------------------

    The Federal Government pays a significant portion of the premium 
for every Medicare Part D beneficiary, and subsidizes the cost sharing 
of beneficiaries eligible for the Part D low-income subsidy. If this 
rule increases premiums, Federal spending on premium subsidies will 
also increase, potentially outweighing estimated Federal savings 
associated with this proposal. These potential effects are described in 
the transfers section of this regulatory impact analysis.
    Lastly, stakeholders involved in the manufacture, sale, 
distribution, and dispensing of prescription drugs, as well as those 
who provide prescription drug coverage, will need to review this policy 
and determine how it affects them. They may also need to make changes 
to existing business practices, update systems, or implement new 
documentation and recordkeeping requirements. These effects are 
described in the costs section of this regulatory impact analysis. We 
seek comment on the impacts identified and any other impacts.

C. Affected Entities

    This proposed rule would affect the operations of entities that are 
involved in the distribution and reimbursement of prescription drugs to 
Medicaid beneficiaries and Medicare Part D prescription drug benefit 
enrollees. According to the US Census \76\ and other sources, \77\ 
there were 67,753 community pharmacies (including 19,500 pharmacy and 
drug store firms and 21,909 small business community pharmacies), 1,775 
pharmaceutical and medicine manufacturing firms, and 880 direct health 
and medical insurance carrier firms operating in the US in 2015. In 
2018, there are 44 Pharmacy Benefit Managers (PBMs) listed in the 
Pharmacy Benefit Management

[[Page 2354]]

Institute \78\ directory. Organizations are required to pay a fee if 
they choose to register, and therefore we estimate that participation 
in the directory is incomplete and that the total number of PBMs 
operating in the U.S. is approximately 60.
---------------------------------------------------------------------------

    \76\ https://www.census.gov/data/tables/2015/econ/susb/2015-susb-annual.html.
    \77\ Qato, Zenk, Wilder, et al. PLoS One. 2017 Aug 16;12(8).
    \78\ https://www.pbmi.com/PBMI/Directory/Pharmacy_Benefit_Manager_Directory.aspx, accessed 7/13/2018.
---------------------------------------------------------------------------

    This rule also affects the operation of 56 Medicaid agencies, 
including all states, the District of Columbia, American Samoa, the 
Commonwealth of the Northern Mariana Islands, Guam, Puerto Rico, and 
the US Virgin Islands.
    Finally, the proposed rule if finalized would affect Medicare 
prescription drug enrollees. CMS reports there were 44,491,003 Medicare 
prescription drug enrollees in December 2018.\79\ CMS reports there 
were 80,184,501 beneficiaries in Medicaid in 2016, 65,005,748 of which 
were enrolled in any type of managed care plan. However, these 
beneficiaries are less likely to be significantly affected, given 
Medicaid's low beneficiary cost-sharing requirements. Throughout, we 
use these numbers as estimates of affected entities in relevant 
categories, and we request comments on these assumptions.
---------------------------------------------------------------------------

    \79\ https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/Dashboard/Medicare-Enrollment/Enrollment%20Dashboard.html.
---------------------------------------------------------------------------

    The Department estimates the hourly wages of individuals affected 
by this proposed rule using the May 2016 National Occupational 
Employment and Wage Estimates provided by the US Bureau of Labor 
Statistics.\80\ We note that, throughout, estimates are presented in 
2016 dollars. We use the wages of Medical and Health Services Managers 
as a proxy for management staff, the wages of Lawyers as a proxy for 
legal staff, and the wages of Network and Computer Systems 
Administrators as a proxy for information technology (IT) staff 
throughout this analysis. To value the time of Medicare prescription 
drug benefit enrollees, we take the average wage across all occupations 
in the US. We assume that the total dollar value of labor, which 
includes wages, benefits, and overhead, is equal to 200 percent of the 
wage rate. Estimated hourly rates for all relevant categories are 
included below. We seek public comment on these assumptions.
---------------------------------------------------------------------------

    \80\ https://www.bls.gov/oes/2016/may/oes_nat.htm.

                       Table 1--Hourly Wages \81\
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Medical and Health Services Managers...........................   $52.58
Lawyers........................................................    67.25
Network and Computer Systems Administrators....................    40.63
Medicare Prescription Drug Benefit Enrollees...................    23.86
------------------------------------------------------------------------

D. Costs
---------------------------------------------------------------------------

    \81\ https://www.bls.gov/oes/2016/may/oes_nat.htm.
---------------------------------------------------------------------------

    In order to comply with the regulatory changes proposed in this 
proposed rule, affected businesses and Medicaid agencies would first 
need to review the rule. The Department estimates that this would 
require an average of 2 hours for affected businesses to review, 
divided evenly between managers and lawyers, in the first year 
following publication of the final rule. As a result, using wage 
information provided in Table 1, this implies costs of $5.3 million in 
the first year following publication of a final rule after adjusting 
for overhead and benefits. We seek public comment on these assumptions.
    After reviewing the rule, businesses and Medicaid agencies would 
need to review their policies in the context of these new requirements, 
and determine how to respond. For some affected businesses, this may 
mean substantially changing their pricing models, and engaging in 
lengthy negotiations with other businesses. For others, much more 
modest changes are likely needed. The Department estimates that this 
would result in affected businesses spending an average of 20 hours 
reviewing their policies and determining how to respond, divided evenly 
between lawyers and managers, in the first year following publication 
of the final rule. In subsequent years, the Department estimates this 
would result in affected businesses spending an average of 10 hours 
implementing policy changes, with 20% of time spent by lawyers and 80% 
of time spent by managers. As a result, using wage information provided 
in Table 1, the Department estimates costs of $53.5 million in the 
first year and $24.8 million in years two through five following 
publication of the final rule after adjusting for overhead and 
benefits. We seek public comment on these assumptions.
    The Department is proposing that this amendment, if finalized, be 
effective on January 1, 2020, and is soliciting comments on whether the 
proposed effective date gives affected entities a sufficient transition 
period for any necessary restructuring of arrangements. Plan sponsor 
and manufacturer negotiations for the 2020 benefit year could be 
influenced by the release of this proposal, and bids could be submitted 
without knowledge of whether or not the proposal will be finalized with 
a January 1, 2020 effective date. Parties who wish to enjoy protection 
under a new safe harbor may need to restructure their contractual 
arrangements, and the change in law itself would trigger contractual 
obligations to terminate or amend existing contracts. These changes 
could affect the assumptions underlying plan sponsors' bids. As a 
result, we estimate the cost of 218 Part D parent organizations of Part 
D plan sponsors updating their bids with new information to be $5.45 
million in the first year this rule is finalized.
    This rule imposes documentation and reporting requirements on PBMs. 
In particular, PBMs and pharmaceutical manufacturer must have a written 
agreement that specifies their contractual arrangements and 
interactions with health plans, and PBMs must disclose their services 
rendered and compensation associated with transactions with 
pharmaceutical manufacturers related to interactions between the PBM 
and the health plan. In addition, PBMs may be required to disclose this 
information to the Secretary upon request. We believe that these 
written agreements already exist as a matter of standard business 
practice, as they need to be in place in order to enforce contractual 
arrangements between these entities. As a result, we believe that the 
documentation requirement merely codifies standard practice, and 
therefore imposes no marginal costs on affected entities. We believe 
that the disclosure requirements will not require PBMs to generate new 
information or retain additional records related to their interactions 
with pharmaceutical manufacturers or health plans. However, we believe 
that the disclosure requirements will result in additional disclosure 
to health plans and potentially the Secretary. We estimate that each 
PBM will provide this information an additional 50 times each year. We 
estimate that these disclosures will require an average of 4 hours, 
with 50% of time spent by managers, 25% of time spent by attorneys, and 
25% of time spent by IT staff. As a result, using wage information 
provided in Table 1, the Department estimates costs of $1.28 million in 
each year following publication of the final rule after adjusting for 
overhead and benefits. We request comments on these assumptions.
    We expect that this rule will also lead PBMs, pharmacies, and 
health insurance providers to update their IT

[[Page 2355]]

systems for processing claims and payments. For these entities, the 
Department estimates that this will require an average of five hours 
per year over the first five years following publication of the final 
rule to make these changes. Using wage information provided in Table 1, 
we estimate this will cost $10.8 million in each of the first five 
years following publication of a final rule after adjusting for 
overhead and benefits. We seek public comment on these assumptions.
    Medicare prescription drug benefit enrollees will also spend time 
responding to the rule. In particular, the Department believes that 
this rule will result in changes to the characteristics of Medicare 
prescription drug plans. Once enrollees become aware that changes have 
been made, we believe they will review available plans to determine the 
plan which best suits their needs. The Department expects that Medicare 
enrollees will become aware of these changes gradually over time. In 
particular, the Department expects that 20% of enrollees will become 
aware of these changes in each of the five years following publication 
of the final rule, and that responding to these changes will require an 
average of thirty minutes per enrollee. As a result, using wage 
information provided in Table 1, we estimate costs of $209 million in 
each of the first five years following publication of a final rule 
after adjusting for overhead and benefits. We seek public comment on 
these assumptions.
    This rule may lead to shifts in the composition of affected 
industries by affecting the extent to which entities vertically 
integrate, and the rate at which entities of various sizes 
(particularly small entities) enter and exit the market. Vertical 
integration is a strategy where a firm acquires business operations in 
a different sector of the supply chain and reimbursement system. 
Entities are affected by this rule to the extent that their business 
models depend on using rebates, and rebates are streamlined regardless 
of where they are paid if a company is vertically integrated. As a 
result, this rule may affect incentives for vertical integration for 
affected entities. For example, PBMs, plan sponsors, and pharmacies may 
want to vertically integrate as a result of this rule. At the same 
time, the potential loss of retained rebate revenue by PBMs may cause 
existing vertically-integrated businesses to consider new 
organizational structures. These changes, in turn, may generate costs 
and benefits.

E. Benefits

    It is difficult to accurately quantify the benefits of this 
proposed rule due to the complexity and uncertainty of stakeholder 
response. As such, the Department has qualitatively described two 
potential benefits of the proposed rule, and we request comment on the 
methodology and data sources that could be used to quantify these 
benefits.
    First, if this rule is finalized, the Department anticipates the 
enhanced transparency of premiums, out-of-pocket costs and improved 
formulary designs will help beneficiaries make more actuarially 
favorable decisions, because the new discounts negotiated by PBMs would 
be passed on to beneficiaries at the point of sale for those enrolled 
in health plans electing to use the proposed new safe harbor protecting 
certain point-of-sale reductions in price on prescription 
pharmaceutical products.
    Second, with reduced out-of-pocket payments, patient adherence and 
persistence with prescription drug regimens may improve. Patients 
abandoned 21 percent of all prescriptions for branded drugs processed 
by pharmacies in the United States in the fourth quarter of 2017,\82\ 
and copayment or coinsurance amounts can be a predictor of abandonment 
\83\ While there may be a variety of reasons patients may not pick up a 
medication, one factor that may impact patient decision-making is the 
out-of-pocket cost of a prescription. One study suggested that for 
chronic myeloid leukemia, patients using tyrosine kinase inhibitors 
were 42% more likely to be non-adherent (which may include delaying the 
purchase of, never purchasing, or switching their prescription to a 
less optimal choice) if they were in the higher copayment group 
compared to the lower copayment group.\84\ The intent of this proposal 
is to lower the out-of-pocket costs for prescription drugs for some 
Medicare prescription drug enrollees. The pricing decisions of drug 
companies, and negotiations between manufacturers and PBMs, will 
determine how plan sponsors make formulary decisions that determine 
whether or not beneficiaries pay more or less in out-of-pocket costs.
---------------------------------------------------------------------------

    \82\ IQVIA Institute for Human Data Science, Medicine Use and 
Spending in the U.S.: A Review of 2017 and Outlook to 2022, April 
2018, p. 31.
    \83\ William H. Shrank et al., The Epidemiology of Prescriptions 
Abandoned at the Pharmacy 153 Annals Internal Med. 633 (2010).
    \84\ Stacie B. Dusetzina et al. ``Cost Sharing and Adherence to 
Tyrosine Kinase Inhibitors for Patients With Chronic Myeloid 
Leukemia.'' 32:4 Journal of Clinical Oncology. February 2014.
---------------------------------------------------------------------------

    Furthermore, lower out-of-pocket costs may lead to fewer enrollees 
abandoning prescription drugs. This could result in beneficiaries 
filling more prescriptions, and thus increasing spending, as 
prescriptions that were once unaffordable are now attainable. It could 
also lead to lower total costs-of-care, if increased adherence led to 
improved health outcomes. The Department is unable to estimate the 
extent to which this proposal would reduce abandonment across all drug 
markets or the resulting health benefits of higher adherence of 
prescription drugs. We request comment on the methodology and data 
sources that could be used to estimate such impacts.
    In addition, the reduction in abandonment could benefit pharmacies 
by reducing costs related to storage and tracking of abandoned 
prescriptions. We request comment on the methodology or data sources 
that could be used to estimate such impacts. Further, we request 
comment on any other benefits of this rule and the data sources that 
could be used to estimate such benefits.

F. Transfers

    The provisions of this proposed rule are specifically aimed at 
incentives related to pharmaceutical list prices as set by 
manufacturers, increases in these prices by manufacturers, rebates paid 
by manufacturers to PBMs acting on behalf of Part D plan sponsors and 
Medicaid MCOs, and the misalignment of incentives caused by 
concurrently increasing list prices and rebates. A significant, though 
difficult to quantify, potential transfer resulting from this rule if 
finalized would be the reduction of list prices and/or a reduction in 
the annualized increases thereof. Retrospective rebate-based 
contractual arrangements between manufacturers and PBMs and health 
insurers may be renegotiated to match these regulations' new 
conditions. Manufacturers may reset their pricing strategies to better 
match net pricing trends and strategies. Changes in list prices could 
flow throughout the entire pharmaceutical supply chain and 
reimbursement system.
    If manufacturers reduced their current list prices to an amount 
equal or similar to their current net prices, there would be less 
impact on premiums. If manufacturers did not reduce their list price, 
or adopted pricing processes that led to higher net prices, beneficiary 
and Federal spending on premiums and cost sharing could increase beyond 
the increase attributable to simply eliminating rebates. We seek 
feedback from stakeholders about the impact of

[[Page 2356]]

this regulation on list and net prices, and the magnitude of these 
changes.
    If Part D plans changed their benefit structures (e.g., increased 
formulary controls, greater use of generic drugs), and sought to 
prevent or ameliorate premium increases, they may able to obtain 
additional price concessions from manufacturers. If list price 
reductions and increased price concessions led to lower net prices and 
gross drug costs in Part D plans, beneficiary and Federal spending on 
premiums and cost sharing could decrease. If Part D plans were unable 
to achieve additional price concessions, and net prices increased, 
beneficiary and Federal spending on premiums and cost sharing could 
increase. We seek feedback from Part D plans and others about the 
impact of this regulation on list and net prices, and the magnitude of 
these changes.
    Under the Part D program, plan sponsors pay network pharmacies a 
negotiated price for a covered Part D drug that is intended to cover a 
pharmacy's acquisition cost (termed the negotiated price at section 
1860D-2(d) of the Act), plus a dispensing fee. Currently, pharmacies 
are not a part of the financial flow related to rebates that are paid 
after the point of sale, nor do beneficiaries receive any out-of-pocket 
benefit from these rebates. This means that beneficiaries, whose cost 
sharing for Part D covered drugs is calculated as coinsurance, or a 
percentage of the price of the drug dispensed, are charged a percentage 
of the price paid to pharmacies (or the full price prior to meeting 
their deductible), which does not include the rebates plans receive 
through PBMs from manufacturers. Removing the existing safe harbor 
protection for retrospectively-paid rebates that are not reflected in 
the prices paid at the point of sale may, if the proposal is finalized 
and if list prices decrease as a result, reduce beneficiary out-of-
pocket spending for Part D covered drugs. If the proposal is finalized 
but list prices do not decrease, beneficiaries could see an increase in 
premiums without the benefit of decreased cost-sharing.
    Below, this section discusses the potential specific effects within 
Part D on premiums, benefit design thresholds, and Federal outlays for 
the portions of the benefit subsidized by the Medicare Part D program.
    The Department's Medicare Part D analysis is based on the CMS 
Office of the Actuary's work commissioned specifically for this 
rulemaking \85\ and two commissioned actuarial analyses independent of 
the CMS Office of the Actuary.\86\ The Office of the Actuary `directs 
the actuarial program for CMS and directs the development of and 
methodologies for macroeconomic analysis of health care financing 
issues.' The two external actuarial firms were chosen based on their 
commercial experience assisting plan sponsors with their plan bids.
---------------------------------------------------------------------------

    \85\ CMS Office of the Actuary. ``Proposed Safe Harbor 
Regulation.'' August 2018. The OACT analysis is posted as 
supplementary material in the docket for this rule at 
regulations.gov.
    \86\ Wakely Consulting Group. ``Estimate of the Impact of 
Eliminating Rebates for Reduced List Prices at Point-of Sale on 
Beneficiaries.'' August 2018. The Wakely analysis is posted as 
supplementary material in the docket for this rule at 
regulations.gov.
     Available at XXX. And Milliman. ``Impact of Potential Changes 
to the Treatment of Manufacturer and Pharmacy Rebates.'' September 
2018. The Milliman analysis is posted as supplementary material in 
the docket for this rule at regulations.gov.
---------------------------------------------------------------------------

    There are significant differences in the assumptions the respective 
actuaries used to estimate stakeholder behavior. The Office of the 
Actuary predicts that while some current rebates will be retained by 
manufacturers, future price increases will be smaller and fewer. Per 
the Office of the Actuary's assumption, rather than reducing list 
prices and offering discounts to achieve current net prices, the 
expected behavior is to reduce future price increases so that post-rule 
net prices converge over time to meet the trend on pre-rule net price 
forecasts. As such, the Office of the Actuary predicts that the Federal 
Government would increase spending on premium subsidies for Medicare 
beneficiaries, and that consumers and private businesses would 
experience decreased overall spending.
    Because drug manufacturers pay a portion of the drug costs incurred 
by beneficiaries in the Part D coverage gap, their expenses would be 
reduced in relation to the reduction of beneficiary spending in the 
coverage gap. The Milliman non-behavioral analysis estimates gross drug 
costs would decrease by $679.7 billion and coverage gap discount 
payments would decrease by $20.6 billion over the same period, 
representing a $659.1 billion decrease in gross manufacturer revenue. 
The same analysis also shows that drug spending net of all discounts 
and rebates would increase more than $20 billion over 10 years; Federal 
spending would increase by $34.8 billion, and beneficiary spending 
would decrease by $14.5 billion.\87\ We seek feedback on these 
estimates, and are interested in assessing the full economic effects of 
this proposed rulemaking. We invite comment on the structure of and 
sources for such an analysis.
---------------------------------------------------------------------------

    \87\ Milliman. ``Impact of Potential Changes to the Treatment of 
Manufacturer and Pharmacy Rebates.'' September 2018. The Milliman 
analysis is posted as supplementary material in the docket for this 
rule at regulations.gov. Appendix A1, Scenario 1A, page 1.
---------------------------------------------------------------------------

    In addition to the actuarial analysis described above, the economic 
analysis of this rule is also informed by stakeholder comments and 
meetings in response to the drug pricing Blueprint.\88\ We invite 
comment on additional sources the Department could consider related to 
the economic impacts on the Part D program, and stakeholders to 
specifically comment on the most likely strategic behavior changes in 
response to this rule.
---------------------------------------------------------------------------

    \88\ Comments are available for viewing at https://www.regulations.gov/document?D=CMS-2018-0075-0001.
---------------------------------------------------------------------------

    All three of these analyses contemplate and quantify the behavioral 
changes by plans in the form of changes to benefit offerings, or by 
manufacturers in the form of changes to pricing processes, but differed 
in their assumptions. All three assessed pharmaceutical manufacturers' 
unique opportunity to adjust their overall pricing and rebate strategy, 
but differed in the assumed amount of rebates that would be retained by 
manufacturers, if any, and the effect on list and net prices.
    The OACT analysis assumed manufacturers would retain 15 percent of 
the existing Medicare Part D rebates, that 75 percent of the remaining 
rebates would be applied as discounts to beneficiaries, and that 
manufacturers would apply the remaining 25 percent to lower list 
prices. OACT based this assumption on the belief that consumer 
discounts provide less return on investment to drug manufacturers than 
rebates and that resetting the rebate system would allow manufacturers 
to recapture forgone revenue streams such as those that occurred from 
the changes in the Coverage Gap Discount Program included in the 
Bipartisan Budget Act of 2018. OACT's assumption would lead to higher 
net prices in Medicare Part D at the beginning of time period analyzed, 
while the reduced price increase trend would lead to post-rule net 
prices eventually converging to pre-rule net price forecasts. Each of 
the analyses took varying approaches to the treatment of discounts and 
acknowledge uncertainty around this assumption. Wakely's analysis 
assumed that all existing manufacturer rebates would be passed along as 
either list price reductions or discounted prices at the point of sale. 
The Milliman baseline assumption was that manufacturers

[[Page 2357]]

would reduce list prices to their current net prices, which would lead 
to no changes in net prices.
    Milliman provided six additional scenarios based on a range of 
strategic behavior changes by stakeholders, including increased 
formulary controls, increased price concessions, reduced price 
concessions in Part D to offset list price decreases in other markets, 
decreased brand unit cost trend, and increased utilization and 
decreased brand unit cost trend. These scenarios are intended to 
bookend the baseline analysis by showing a range of possible scenarios, 
given the uncertainty inherent in such a policy change. Tables 2A, 2B, 
4A, and 4B later in this section present the main assumptions and 
findings of the analyses we discuss.
    Only one analysis contemplated, but did not seek to quantify, the 
behavioral change of beneficiaries choosing lower-cost plans, switching 
from PDPs to MA-PDs, or in the form of increased persistence and 
adherence caused by induced demand due to decreased out-of-pocket 
costs. We invite comment on sources the Department could consider to 
more fully illustrate the effects of reduced purchase prices for drugs.
    We note that all the actuaries who submitted analyses developed 
different results based on differing, yet plausible, assumptions. The 
sheer size of the Medicare Part D program makes these results sensitive 
to small differences in assumptions, particularly over a ten year 
period. As such, there are often good reasons for small differences in 
assumptions that are neither right nor wrong, but may be reasonable 
within a plausible range of outcomes. The different assumptions made 
include the initial values used for the direct subsidy and base 
beneficiary premium, the pattern of future costs, the granularity with 
which growth rates or future effects are applied uniformly or based on 
product type. The actuarial analyses used to prepare this impact 
analysis are posted as supplementary material in the docket for this 
proposal at regulations.gov.
    Given that all stakeholders involved in the manufacture, sale, 
dispensing and coverage of prescription drugs have their own actuarial 
models and financial estimates, we invite comment on additional sources 
the Department could consider related to the economic impacts on the 
Part D program, and encourage stakeholders to specifically comment on 
the most likely strategic behavior changes in response to this rule.
Effect on Beneficiary Spending
    This rule will likely impact beneficiary spending on Part D premium 
subsidies, low-income cost-sharing, and reinsurance. It is difficult to 
quantify the impact on beneficiary spending without knowing 
manufacturer and Part D plan behavior in response to this regulation. 
As noted above, the Department is presenting three actuarial analyses 
(six total scenarios) conducted under various behavioral assumptions.
    The projected decrease in beneficiary spending on premiums and 
cost-sharing in 2020 is $1.0 to 1.4 billion. The projected decrease in 
beneficiary spending on premiums and cost-sharing from 2020-2029 is 
$14.5 billion to $25.2 billion. Individuals who qualify for the Low 
Income Subsidy (LIS) pay low or no premiums to enroll in the Part D 
benefit and have their cost sharing obligations under each benefit 
phase reduced significantly (called the Low Income Cost Sharing Subsidy 
or LICS). We expect a smaller effect among these enrollees (about 30% 
of total Part D enrollees) than among those not receiving the LIS and 
LICS.
    All three actuarial reports support the conclusion that non-LIS 
Medicare beneficiaries enrolled in, and actively utilizing, plans with 
coinsurance-based cost-sharing structures for covered out-patient drugs 
for which their respective plan has negotiated a rebate, will likely 
see lower out-of-pocket cost sharing at the pharmacy counter as a 
result of this regulatory change.
    The Office of the Actuary, Wakely and five of the six Milliman 
scenarios considered by the Department suggest total beneficiary cost 
sharing would decrease and premiums would increase, and that the 
decrease in total beneficiary cost-sharing would offset the total 
increase in premiums across all beneficiaries, regardless of 
assumptions regarding whether or not manufacturers retained rebates or 
applied a percentage of them as list price reduction, or PBMs and plan 
sponsors changed formularies or obtained additional price concessions. 
However, more beneficiaries would pay more for premiums than they would 
save in cost sharing, suggesting that out-of-pocket impacts are likely 
to vary by individual and the greatest benefit of these transfers 
accrues to sicker beneficiaries (e.g., those with more drug spending 
and/or those using high-cost drugs).
    However, it is important to note that the effect of this rule on 
individual beneficiaries depends on whether they use medications, and 
whether the manufacturers of the drugs in their regimen are paying 
rebates.
    Analyses that contemplated increased price concessions or benefit 
design changes predicted beneficiaries having lower premiums and out of 
pocket costs overall. Tables 2A and 2B describe the net beneficiary 
impact predicted by each analysis and assumption. (Scenarios 5, 6, and 
7 in the Milliman analysis are available online rather than reproduced 
here, since they are not referenced further in our write-up.) We seek 
feedback on these estimates and the assumptions.

                            Table 2.A.--Beneficiary Impacts, per Member per Month, Non-Low Income Subsidy Enrollees, CY 2020
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                   Milliman, Scenario   Milliman, Scenario   Milliman, Scenario   Milliman, Scenario
                                     OACT                  1                    2                    3                    4                 Wakely
--------------------------------------------------------------------------------------------------------------------------------------------------------
Modeled Assumptions........   15% of       100% of      100% of      More than    20% of       100% of
                              current Part D       current Part D       current rebates      100% of rebates      current Part D       current
                              rebates retained     rebates are          are converted into   are converted into   rebates are          manufacturer
                              by manufacturer.     converted into       list price           list price           retained by          rebates are
                              75% of       list price           concessions.         concessions (same    manufacturers        converted into
                              remaining amount     concessions          Part D       agnosticism on how   (same agnosticism    reductions in
                              applied to per-      (agnostic on list    plans exert          applied).            on how applied).     drug costs at the
                              sponsor/PBM          price reductions     greater formulary    Part D       80% of       point of sale.
                              negotiated           versus up front      control..            plans exert          current Part D       No
                              discounts..          discounts).                               greater formulary    rebates are          beneficiary or
                                                                                             control..            converted to price   plan behavioral
                                                                                                                  concessions (list    changes are
                                                                                                                  price or             assumed.
                                                                                                                  discounts)..
                              25% of
                              remainder applied
                              as reduction to
                              list price.
                              No
                              beneficiary or
                              plan behavioral
                              changes are
                              assumed..

[[Page 2358]]

 
Impact on Beneficiary        +$5.64, (+19%) \89\  +$3.15, (+14%) \90\  +$2.70, (+12%).....  +$2.77, (+12%).....  +$5.11, (+22%).....  +$3.73, (+8%).\91\
 Premium.
Impact on Beneficiary Cost   -$8.01, (-14%).....  -$4.85, (-11%).....  -$5.44, (-13%).....  -$5.22, (-12%).....  -$3.86, (-9%)......  -$5.75, (-10%).
 sharing.
                            ----------------------------------------------------------------------------------------------------------------------------
    Total..................  -$2.37, (-3%)......  -$1.70, (-3%)......  -$2.74, (-4%)......  -$2.44, (-4%)......  +$1.25, (+2%)......  -$2.02, (-2%).
--------------------------------------------------------------------------------------------------------------------------------------------------------


                        Table 2.B.--Beneficiary Impacts, per Member per Month, Non-Low Income Subsidy Enrollees, CY 2020-CY 2029
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                   Milliman, Scenario   Milliman, Scenario   Milliman, Scenario   Milliman, Scenario
                                     OACT                  1                    2                    3                    4                 Wakely
--------------------------------------------------------------------------------------------------------------------------------------------------------
Premium \92\...............  +25%...............  +$4.03, +13%.......  +$1.27, +4%........  +$0.61, +2%........  +$6.84, +21%.......  N/A.
Cost sharing...............  -18%...............  -$6.23, -12%.......  -$9.85, -19%.......  -$9.68, -19%.......  -$4.97, -10%.......  N/A.
                            ----------------------------------------------------------------------------------------------------------------------------
    Total..................  -4%................  -3%................  -18%...............  -11%...............  +2%................  N/A.
--------------------------------------------------------------------------------------------------------------------------------------------------------

Premiums
    All analyses that assumed no behavioral changes that would reduce 
net prices below current net prices saw Part D premiums increase in 
2020 and beyond. The increase in 2020 Part D premiums ranged from $3.20 
per beneficiary per month to $5.64 per beneficiary per month (PBPM).
---------------------------------------------------------------------------

    \89\ Calculated against actual paid premium, not basic premium, 
calculated as $29.22 for non-LIS enrollees absent this proposal.
    \90\ For this and the next two columns, calculated against 
actual paid premium.
    \91\ Calculated against basic premium, calculated as $47.02 for 
2020 absent this proposal.
    \92\ See footnotes above regarding actual paid versus basic 
premium.
---------------------------------------------------------------------------

    The Milliman analyses that contemplated behavioral changes that 
increased price concessions beyond current levels and/or greater 
formulary controls predicted a significant decrease in premiums 
compared to the baseline scenarios presented in Table 3 of the Milliman 
analysis. (That is, premiums would increase 2 to 8% by 2029 rather than 
13 to 25% without such assumptions.) We seek feedback on these 
estimates and the assumptions.
Out of Pocket Spending
    Absent behavioral changes leading to lower list and net prices, two 
groups of beneficiaries would benefit most from this rule: (1) 
Beneficiaries that are prescribed and dispensed high cost drugs and (2) 
beneficiaries with total drug spending into the coverage gap. The range 
of total decreased beneficiary cost-sharing in 2020 was -$8.01 PBPM to 
-$4.85 PBPM.
    However, reductions in cost-sharing would only accrue to 
beneficiaries using drugs for which manufacturers are currently paying 
rebates. For example, a beneficiary taking a brand name drug in a 
competitive class may see his or her coinsurance-based cost sharing for 
the drug reduced significantly, if behavioral changes in response to 
this policy result in rebates largely being converted to point of sale 
discounts. By contrast, a beneficiary using high cost drugs in 
protected classes is less likely to benefit from a reduced pharmacy 
purchase price, because manufacturers generally offer low or no rebates 
to plans for these drugs, since drugs in protected classes must be 
included on Part D plan formularies.
    The analysis by the Office of the Actuary estimated the annual 
changes in benefit parameters as a result of this rule. See Table 3 
below.
---------------------------------------------------------------------------

    \93\ This limit varies by beneficiary, according to the mix of 
brand and generic drugs taken. As presented here, this figure is 
calculated assuming that only brand name drugs are dispensed, which 
represents the lowest possible estimate for this threshold.

                              Table 3--Part D Standard Benefit Design Parameters With and Without This Proposed Rulemaking
--------------------------------------------------------------------------------------------------------------------------------------------------------
                              Year                                    2020            2021            2022            2023        . . .        2029
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline:
    Deductible.................................................            $435            $460            $490            $520  .......            $725
    Initial Coverage Limit.....................................           4,010           4,250           4,520           4,800  .......           6,690
    Catastrophic Limit.........................................           6,350           6,750           7,150           7,600  .......          10,600
                                                                ----------------------------------------------------------------------------------------
        Total Drug Costs at TrOOP Limit \93\...................           9,296           9,874          10,470          11,126  .......          15,515
Under Proposed Rule:
    Deductible.................................................             435             405             395             420  .......             580
    Initial Coverage Limit.....................................           4,010           3,740           3,630           3,840  .......           5,310
    Catastrophic Limit.........................................           6,350           5,950           5,750           6,100  .......           8,400
                                                                ----------------------------------------------------------------------------------------
        Total Drug Costs at TrOOP Limit........................           9,296           8,699           8,416           8,919  .......          12,297
Difference (Percent):
    Deductible.................................................              0%          -12.0%          -19.4%          -19.2%  .......          -20.0%
    Initial Coverage Limit.....................................              0%          -12.0%          -19.7%          -20.0%  .......          -20.6%
    Catastrophic Limit.........................................              0%          -11.9%          -19.6%          -19.7%  .......          -20.8%
                                                                ----------------------------------------------------------------------------------------
        Total Drug Costs at TrOOP Limit........................              0%          -11.9%          -19.6%          -19.8%  .......          -20.7%
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 2359]]

    Under the CMS Actuary's analysis, the majority of beneficiaries 
would see an increase in their total out-of-pocket payments and premium 
costs; reductions in total cost sharing will exceed total premium 
increases. The minority of beneficiaries who utilized drugs with 
significant manufacturer rebates would experience a substantial 
decrease in costs, causing average beneficiary cost across the program 
to decline.
    Medicare beneficiaries with lower levels of drug spending are 
expected to benefit by way of a lowered deductible. Following the first 
year of this new environment, and into the second year as well, the 
Part D benefit design thresholds are projected to change to the benefit 
of lower-cost beneficiaries, providing lower out-of-pocket payments for 
these beneficiaries. Because the Part D benefit design's parameters are 
calculated annually to account for aggregate growth in Part D spending, 
and because the estimated potential effects of this regulation would be 
to reduce aggregate spend levels to more closely match net spending 
level trends, the applicable deductible would decrease for plan year 
2021. Beneficiaries whose spending is above the current deductible 
amount but lower than the coverage gap would benefit from a reduced 
deductible.
    The CMS Actuary also finds that while the deductible and initial 
coverage limit would decrease, the patient out-of-pocket spending 
threshold to enter catastrophic coverage would increase significantly 
in year 2 as the full effects of reduced purchase prices are 
incorporated. The out-of-pocket threshold is set in statute and updated 
annually by aggregate Part D program growth. Because overall 
beneficiary spending levels would now match the net price of drugs 
rather than their list prices, progress toward the out-of-pocket limit 
would be slowed, though total dollars paid by beneficiaries would not 
change aside from statutory and annual updates.
    Milliman's analysis did not incorporate changes to the Part D 
benefit thresholds, and these actuaries based their break-even analyses 
on the 2019 threshold amounts. Their analysis projects that the 
distribution of changes is far from uniform, and that the impact of the 
change is concentrated around the non-LIS beneficiaries who account for 
about 70% of the benefit. The break-even point would be $3.20 per-
member per month in cost-sharing reductions. Beneficiaries with cost-
sharing reductions above that point would save money, and those with 
cost-sharing reductions below that figure would spend more on premiums 
than they saved in cost-sharing. Their analysis also projects about 7% 
of non-LIS beneficiaries do not use any medication, and therefore would 
see premium costs exceeding reductions in cost sharing ($0 reductions 
in cost-sharing). Up to 30% of non-LIS beneficiaries have drug costs 
such that they could directly benefit from the changes in the point-of-
sale costs by enough to make up for the average increase in premium. 
The remaining 63% of beneficiaries may or may not have their out-of-
pocket costs reduced enough to offset any potential premium increase, 
depending on the mix of brand and generic drugs used. All else 
constant, these members generally do not have enough cost sharing 
savings to fully offset the increase in premium. However, they may 
benefit from changes to copayments made by plan sponsors to maintain 
the minimum required actuarial value of 25%.
    Taken together, the actuarial analyses project reductions in total 
cost sharing will exceed total premium increases; however, impact on 
beneficiaries will vary greatly with some beneficiaries seeing savings 
while others experience increases in out-of-pocket spending. We invite 
comment on the impact of the changes in premiums and cost sharing on 
beneficiaries with different levels of drug spending.
Effect on Federal Government Spending
    This rule will impact Federal spending on Part D direct premium 
subsidies, reinsurance, low-income cost-sharing subsidies, and low-
income premium subsidies.
    If there were no behavioral changes by manufacturers and Part D 
plans (e.g., drug prices and benefit designs were held constant), all 
three actuarial analyses previously described predicted increased 
Federal spending. The projected increase in 2020 Federal spending 
ranged from $2.8 billion to $13.5 billion. The projected increase in 
Federal spending from 2020-2029 ranged from $34.8 billion to $196.1 
billion.
    The Milliman analyses that contemplated behavior changes that would 
lower net prices from current levels predicted Federal spending from 
2020-2029 could decrease by $78.9 billion if Part D plan sponsors 
increased formulary controls, decrease by $99.6 billion if Part D plan 
sponsors increased formulary controls and obtained additional price 
concessions, but increase by $139.9 billion if manufacturers reduced 
price concessions in Part D to offset list price decreases in other 
markets.
    Tables 4A and 4B describe the impact on Federal spending predicted 
by each analysis and assumption. We seek feedback on these estimates 
and the assumptions.

                                                    Table 4.A.--Government Spending Impacts, CY 2020
                                                                       [$billions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                   Milliman, Scenario   Milliman, Scenario   Milliman, Scenario   Milliman, Scenario
                                     OACT                  1                    2                    3                    4                 Wakely
--------------------------------------------------------------------------------------------------------------------------------------------------------
Modeled Assumptions........   15% of       100% of      100% of      More than    20% of       100% of
                              current Part D       current Part D       current rebates      100% of rebates      current Part D       current Part D
                              rebates retained     rebates are          are converted into   are converted into   rebates are          rebates converted
                              by manufacturer.     converted into       list price           list price           retained by          to up front
                              75% of       list price           concessions.         concessions (same    manufacturers        discounts
                              remaining amount     concessions          Part D       agnosticism on how   (same agnosticism    No
                              applied to per-      (agnostic on list    plans exert          applied).            on how applied).     beneficiary or
                              sponsor/PBM          price reductions     greater formulary    Part D       80% of       plan behavioral
                              negotiated           versus up front      control..            plans exert          current Part D       changes are
                              discounts..          discounts).                               greater formulary    rebates are          assumed.
                                                                                             control..            converted to price
                                                                                                                  concessions (list
                                                                                                                  price or
                                                                                                                  discounts)..
                              25% of
                              remainder applied
                              as reduction to
                              list price.
                              No
                              beneficiary or
                              plan behavioral
                              changes are
                              assumed..

[[Page 2360]]

 
Direct subsidy.............  +$20.1, (+128%)....  +$15.1, (+149%)....  +$14.5, (+144%)....  +$14.8, (+146%)....  +$15.6, (+154%)....  Not avail., (+146%
                                                                                                                                       \94\).
Low income premium subsidy.  +$0.9, (+20%)......  +$0.8, (+14%)......  +$0.7, (+12%)......  +$0.7, (12%).......  +$1.4, (+22%)......  Not avail., (+8%).
Low income cost sharing      -$1.8, (-6%).......  -$5.8, (-18%)......  -$6.2, (-20%)......  -$6.1, (-20%)......  -$4.4, (-14%)......  Not avail., (-
 subsidy.                                                                                                                              12%).
Reinsurance................  -$5.9, (-12%)......  -$7.3, (-16%)......  -$7.9, (-17%)......  -$8.0, (-17%)......  -$3.0, (-6%).......  Not avail., (-
                                                                                                                                       14%).
                            ----------------------------------------------------------------------------------------------------------------------------
    Total..................  +$13.4, (+14%).....  +$2.8, (+3%).......  +$1.1, (+1%).......  +$1.5, (+1%).......  +$9.5, (+10%)......  Not avail., +3%.
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                              Table 4.B.--Government Spending Impacts, CY 2020 Through 2029
                                                                       [$billions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                   Milliman, Scenario   Milliman, Scenario   Milliman, Scenario   Milliman, Scenario
                                     OACT                  1                    2                    3                    4                 Wakely
--------------------------------------------------------------------------------------------------------------------------------------------------------
Direct subsidy.............  +$258.7, (+119%)...  +$215.4, (+193%)...  +$174.7, (+157%)...  +$180.3, (+162%)...  +$221.1, (+199%)...  Not avail.
Low income premium subsidy.  +$15.4, (+24%).....  +$12.0, (+13%).....  +$3.8, (+4%).......  +$1.9, (+2%).......  +$20.5, (+21%).....  ..................
Low income cost sharing      -$57.7, (-15%).....  -$89.5, (-20%).....  -$118.3, (-26%)....  -$118.5, (-26%)....  -$71.4, (-16%).....  ..................
 subsidy.
Reinsurance................  -$20.3, (-3%)......  -$103.1, (-13%)....  -$139.1, (-18%)....  -$163.2, (-18%)....  -$30.2, (-4%)......  ..................
                            ----------------------------------------------------------------------------------------------------------------------------
    Total..................  +$196.1, (+14%)....  +$34.8, (+2%)......  -78.8, (-5%).......  -$99.6, (-7%)......  +$139.9, (+10%)....  N/A.
--------------------------------------------------------------------------------------------------------------------------------------------------------

Direct Premium Subsidy Spending
    The Medicare program provides a direct subsidy to Part D plans of 
74.5% of expected costs. Medicare program payments for direct subsidies 
will increase by an estimated $14.1 to $20.1 billion (128% to 154%) in 
2020 and $174.7 to $258.7 billion (119% to 199%) from 2020-2029. The 
proposed change would require plans to smooth the effects of negotiated 
discounts across the entire benefit, rather than concentrate them on 
the initial coverage limit as is current practice. As noted above, 
premiums paid by beneficiaries are predicted to increase overall in 
analyses without behavioral changes that would reduce net prices below 
current levels.
---------------------------------------------------------------------------

    \94\ Calculated as percent change in per member per month 
payments for each category.
---------------------------------------------------------------------------

    In the Milliman analysis, the two scenarios that contemplated 
behavior changes that would reduce net prices compared to current 
levels predicted that Federal spending on direct premium subsidies from 
2020-2029 could increase less compared to a scenario with no behavior 
change. In these scenarios, Part D plan sponsors increased formulary 
controls and/or obtained additional price concessions. Payments for 
direct premium subsidies would be higher than under the scenario with 
no behavior change, if manufacturers reduced price concessions in Part 
D to offset list price decreases in other markets (as described in the 
OACT analysis and Milliman scenario 4). See Table 4B for magnitude and 
percent changes.
Reinsurance Spending
    Transforming rebates into upfront discounts may result in fewer 
beneficiaries reaching catastrophic coverage. This benefits the 
government because the government bears the majority of the cost (80%) 
for beneficiaries who reach catastrophic levels of drug spending. As 
such, all analyses suggest Medicare payments for reinsurance will 
decrease by an estimated $3.0 to $7.9 billion (6 to 17%) in 2020 and 3 
to 18% from 2020-2029. In the catastrophic coverage phase, Medicare 
makes reconciliation payments to Part D plans for 80% of gross drug 
costs incurred once the beneficiary reaches the out-of-pocket 
threshold. As discussed above, the effect of this proposed rule would 
be to reduce the effective purchase price of drugs, which in turn would 
require more prescriptions before a beneficiary would enter the 
catastrophic phase. If fewer beneficiaries enter this benefit phase, 
and the prices of the drugs they receive in this benefit phase are 
reduced, the Medicare Program would experience lower reinsurance 
payments to Part D plans.
    Milliman's scenarios that contemplated behavior changes predicted 
Federal spending on reinsurance from 2020-2029 could decrease by $139.1 
billion if Part D plan sponsors increased formulary controls, decrease 
by $163.2 billion if Part D plan sponsors increased formulary controls 
and obtained additional price concessions, and decrease by only $30.2 
billion if manufacturers reduced price concessions in Part D to offset 
list price decreases in other markets.
Low Income Subsidy Spending
    Medicare payments for Low Income Subsidy enrollees will on net 
decrease by an estimated $0.9 to $5.5 billion in 2020 and $42.3 to 
$114.5 billion from 2020-2029. Generally LIS enrollees will not see the 
same out-of-pocket savings that non-LIS enrollees will, because they 
are assessed cost sharing based almost exclusively on copayments. 
However, payments for the Low Income Cost Sharing Subsidy (LICS) will 
decrease for the same reasons that Medicare payments for reinsurance 
will decrease. Under the provisions of LICS, the Medicare program makes 
payments to plans to cover the difference between the LIS enrollee's 
copayment and the otherwise applicable coinsurance. As prices are 
reduced to account for discounts rather than applied to the plan 
liability exclusively, Medicare payments for these amounts will 
decrease. These savings are estimated to be $57.5 to $118.3 billion 
over ten years.
    Analyses that contemplated behavior changes predicted Federal 
spending on low-income cost sharing subsidies from 2020-2029 could 
decrease by $118 billion if Part D plan sponsors increased formulary 
controls, decrease by $119 billion if Part D plan sponsors increased 
formulary controls and obtained additional price concessions, and 
decrease by $71 billion if manufacturers reduced price concessions in 
Part D to offset list price decreases in other markets.

[[Page 2361]]

Other Stakeholder Impacts
    Based on the provisions of this proposed rulemaking, the actuarial 
estimates we received estimated that drug manufacturers will see 
revenues, as measured by changes in gross drug costs and Coverage Gap 
Discount Program payments, decrease beginning in CY2020 and each year 
thereafter. However, when drug costs net of all discounts and rebates 
are considered, the actuarial analyses results converged in finding net 
increases in total drug spending. In terms of dollar effects, 
Milliman's analysis identifies a reduction in gross revenues of $38 
billion in CY2020 and $588 billion through the ten year budget window. 
However, Milliman's analysis also estimated an increase in government 
costs of $34.8 billion over ten years, with beneficiary costs 
decreasing by $14.5 billion, resulting in an increase in Part D drug 
spending net of all discounts and rebates of more than $20 billion over 
10 years.\95\ These changes in revenue will predominantly affect brand 
name drugs more so than generic drugs. Since 2011, brand name drug 
manufacturers have been required to provide a discount applied at the 
point of sale to beneficiaries whose claims occur during the coverage 
gap. Since the intent of this proposed rulemaking is to reduce the 
negotiated prices paid by plans to pharmacies by incorporating up front 
discounts into them, both the frequency of beneficiaries entering the 
coverage gap, and the length of the coverage gap itself, are 
potentially reduced by the rule's effects. We seek feedback on this 
analysis and potential impacts.
---------------------------------------------------------------------------

    \95\ Milliman. ``Impact of Potential Changes to the Treatment of 
Manufacturer and Pharmacy Rebates.'' Appendix A1, Scenario 1A, page 
1. September 2018. The Milliman analysis is posted as supplementary 
material in the docket for this rule at regulations.gov.
---------------------------------------------------------------------------

    Likewise, this rule will affect the way pharmacies are reimbursed. 
If list prices come down, pharmacies will experience lower acquisition 
costs, and their combined reimbursement from plan sponsors and 
beneficiaries will be reduced by the amount of discount provided by 
manufacturers to beneficiaries of each particular plan sponsor. The use 
of chargebacks to make pharmacies whole for the difference between 
acquisition cost, plan payment, and beneficiary out-of-pocket payment 
is described earlier in this rule. The actuarial analyses we 
commissioned were not designed to evaluate the effects on the pharmacy 
supply chain by moving from a system where reimbursement rates were 
divorced from actual negotiated prices after accounting for rebates. We 
invite comments on how we might structure such an analysis, along with 
the effects on these and other stakeholders. We also seek comment on 
the ability of wholesalers to facilitate chargebacks to pharmacies in a 
timely fashion, replacing PBMs rebates with manufacturer discounts 
routed through wholesalers, and other concerns related to disrupting 
the relationship between pharmacies and PBMs.
Summary of Part D Impacts
    This proposed rule, if finalized, would significantly redirect the 
dollars flowing through the Part D program. Several of the positive and 
negative transfers are imperfect offsets of one another. For example, 
the analyses commissioned for this proposed rule estimated that the 
amount saved by reducing cost-sharing exceeds the cost of increasing 
premiums for beneficiaries overall. However, more beneficiaries would 
pay more for premiums than they would save in cost sharing, suggesting 
that out-of-pocket impacts are likely to vary by individual and the 
greatest benefit of these transfers accrues to sicker beneficiaries 
(e.g., those with more drug spending and/or those using high-cost 
drugs).
    It is difficult to predict the full extent of the transfers created 
by this proposed rule in the absence of information about strategic 
behavior changes by manufacturers and Part D plan sponsors in response 
to this rule. Without behavioral changes, enrolled beneficiaries may 
see premiums increase in 2020 by $3.15 PBPM to $3.73 PBPM (14 to 19%) 
but average cost-sharing under their benefits will decline by -$8.01 
PBPM to -$5.75 PBPM (11 to 14%).\96\ Premium and cost-sharing estimates 
were calculated on a different basis by each firm. The Office of the 
Actuary estimated actual beneficiary paid amounts for all enrollees on 
average. Milliman estimated beneficiary payments based upon the basic 
benchmark amounts. We present the range across these calculation types.
---------------------------------------------------------------------------

    \96\ Wakely Consulting Group. ``Estimate of the Impact of 
Eliminating Rebates for Reduced List Prices at Point-of Sale on 
Beneficiaries.'' August 2018. The Wakely analysis is posted as 
supplementary material in the docket for this rule at 
regulations.gov.
    And Milliman. ``Impact of Potential Changes to the Treatment of 
Manufacturer and Pharmacy Rebates.'' Scenario 1. September 2018. The 
Milliman analysis is posted as supplementary material in the docket 
for this rule at regulations.gov.
---------------------------------------------------------------------------

    In the absence of the stakeholder behavior changes described often 
in this section, government payments to plans for direct subsidies, 
subsidies for low income enrollees' premiums and cost sharing will 
likely increase and be partially offset by reduced payments to plans 
for reinsurance, increasing overall by 2 to 14% in the absence of 
behavior change.
    If manufacturer and plan behavior caused net prices to decrease in 
response to this rule, enrolled beneficiaries may see premiums increase 
12% ($3.15 PBPM) and average cost-sharing under their benefits may 
decline by 13% (-$4.85 PBPM) in 2020. Total government payments to 
plans would increase 1-3%, as the net result of increased payments for 
direct subsidies (144-149%) and low income premium subsidies (12-14%) 
and decreased payments for low income cost sharing (-18 to -20%) and 
reinsurance (-16 to -17%).
    If manufacturer and plan behavior caused Part D net prices to 
increase in response to this rule, enrolled beneficiaries will see 
published premiums increase 8 to 22% ($5.11 to $5.64) and average cost-
sharing under their benefits will decline by 9 to 14% (-$5.22 to -
$8.01). Government payments to plans for direct subsidies and subsidies 
for low income enrollees' premiums and cost sharing will increase and 
reinsurance payments will also decrease.
    The goal of this policy is to lower out-of-pocket costs for 
consumers and reduce government drug spending in Federal health care 
programs. We seek feedback from stakeholders about the impact of this 
regulation on list and net prices, the magnitude of these changes, and 
the ability of this regulation to meet these goals.

G. Accounting Statement

------------------------------------------------------------------------
                  Category                       Benefits ($Millions)
------------------------------------------------------------------------
Improved information for consumers           Not Quantified.
 regarding the characteristics of their
 health insurance plans supporting more
 actuarially favorable plan choices.
Lower prescription abandonment rates         Not Quantified.
 leading to better medication adherence.

[[Page 2362]]

 
Lower prescription abandonment rates         Not Quantified.
 leading to decreased storage and
 restocking costs for pharmacies.
------------------------------------------------------------------------


----------------------------------------------------------------------------------------------------------------
                  Category                             Costs ($Millions)                      Timeframe
----------------------------------------------------------------------------------------------------------------
Manufacturers, PBMs, and plan sponsors       5.3..................................  First year.
 reading and understanding the rule.
Changes to business practices for            53.5; 24.8...........................  First year; years two
 manufacturers, PBMs, and plan sponsors.                                             through five.
Cost of plan sponsors updating contracts     5.45.................................  First year.
 and bids.
Cost of annual disclosures from PBMs to      1.28.................................  Each year.
 health plans.
Costs to PBMs, pharmacies, and health        10.8.................................  In each of the first five
 insurance providers to update their IT                                              years.
 systems for claims processing and payments.
Beneficiaries comparing new Part D plan      209..................................  In each of the first five
 features and benefits.                                                              years.
----------------------------------------------------------------------------------------------------------------


------------------------------------------------------------------------
                                               Transfers ($Billions) CY
                  Category                            2020-2029
------------------------------------------------------------------------
Decreased Medicare beneficiary spending....  -25.2 to -59.5.
Decreased employee premium and OOP spending  -11.7.
Decreased beneficiary premium and cost-      -14.5 to -25.2.
 sharing spending.
Changes in Federal spending................  -99.6 to 196.1.
Decreased State spending (OACT only).......  -4.0.
Decreased manufacturer coverage gap          17 to 39.8.
 discount payments.
------------------------------------------------------------------------

H. Regulatory Alternatives

    The first option is no action. This means that there would be no 
change in the safe harbor regulations. None of the costs or benefits of 
the rule would be realized and Medicare drug plan enrollees will 
continue to pay deductibles and coinsurance based on the list prices 
for prescription drugs.
    As a second option, the compliance date could be delayed by one 
year from January 1, 2020 to January 1, 2021. This would lower 
transition costs by giving affected entities additional time to respond 
to the rule and institute necessary changes into contracts and claim 
software updates, and to integrate these changes into their scheduled 
updates. However, this also means that benefits and costs would be 
delayed by a year.
    A third option contemplated by the Department, unrelated to safe 
harbor rulemaking, would require sponsors to incorporate into the point 
of sale price for a covered drug a specified minimum percentage of the 
average rebates expected to be received for the therapeutic class of 
drugs to which that covered drug belongs. This option, described in an 
RFI contained in the 2019 Part C & D policy and technical NPRM, would 
require sponsors to report the point of sale price for a covered drug 
as the lowest possible reimbursement that a network pharmacy could 
receive for that drug, inclusive of all pharmacy price rebates and 
concessions.

I. Regulatory Flexibility Analysis

    As discussed above, the RFA requires agencies that issue a 
regulation to analyze options for regulatory relief of small entities 
if a proposed rule has a significant impact on a substantial number of 
small entities. HHS considers a rule to have a significant economic 
impact on a substantial number of small entities if at least 5 percent 
of small entities experience an impact of more than 3 percent of 
revenue. The Department calculates the costs of the proposed changes 
per affected business over 2020-2024. The estimated average costs of 
the rule per business peak in 2020 at approximately $3,200, and are 
approximately $1,600 in subsequent years. The Department notes that 
relatively large entities are likely to experience proportionally 
higher costs. The U.S. Small Business Administration establishes size 
standards that define a small entity. For entities with standards based 
on revenue, they range from $17.5 million to $38.5 million in 2017. 
Since the estimated average costs of the proposed rule are a small 
fraction of these thresholds, the Department anticipates that the 
proposed rule would not have a significant economic impact on a 
substantial number of small entities. We seek public comment on this 
determination, and the rule's impact on small entities.

V. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995, we are 
required to solicit public comments, and receive final OMB approval, on 
any information collection requirements set forth in rulemaking. This 
rule imposes documentation and disclosure requirements on PBMs. 
Specifically, for one of the new safe harbors, PBMs and pharmaceutical 
manufacturer must have a written agreement that specifies their 
contractual arrangements and interactions with health plans, and PBMs 
must disclose their services rendered and compensation associated with 
transactions with pharmaceutical manufacturers related to interactions 
between the PBM and the health plan. In addition, PBMs may be required 
to disclose this information to the Secretary upon request.
    We believe that the documentation requirements necessary to enjoy 
safe harbor protection do not qualify as an added paperwork burden, 
because the requirements deviate minimally, if at all, from the 
information PBMs and manufacturers would routinely collect in their 
normal course of business. We believe it is usual and customary for 
PBMs and manufacturers to memorialize contracts and other similar 
agreements in writing. Ensuring that such writings are comprehensive 
and that the actual business activities are accurately reflected by 
documentation are standard prudent business practices. However, we 
recognize that the disclosure of this information to plans, and 
potentially to the Secretary, is not a routine business practice. We 
have included estimates of disclosure related burden in the Regulatory 
Impact Statement and seek feedback on these

[[Page 2363]]

estimates. We request comments on this proposed collection of 
information in accordance with the Paperwork Reduction Act.

List of Subjects in 42 CFR Part 1001

    Administrative practice and procedure, Fraud, Grant programs--
health, Health facilities, Health professions, Maternal and child 
health, Medicaid, Medicare, Social Security.

    For the reasons set forth in the preamble, the Office of the 
Inspector General, Department of Health and Human Services proposes to 
amend 42 CFR part 1001 as set forth below:

PART 1001--[AMENDED]

0
1. The authority citation for part 1001 continues to read as follows:

    Authority:  42 U.S.C. 1302; 1320a-7; 1320a-7b; 1395u(j); 
1395u(k); 1395w-104(e)(6), 1395y(d); 1395y(e); 1395cc(b)(2)(D), (E), 
and (F); 1395hh; 1842(j)(1)(D)(iv), 1842(k)(1), and sec. 2455, Pub. 
L. 103-355, 108 Stat. 3327 (31 U.S.C. 6101 note).

0
2. Section 1001.952 is amended by revising paragraphs (h)(5)(vi) and 
(vii) and adding paragraphs (h)(5)(viii), (h)(6) through (10), (cc), 
and (dd) to read as follows:


Sec.  1001.952  Exceptions.

* * * * *
    (h) * * *
    (5) * * *
    (vi) Services provided in accordance with a personal or management 
services contract;
    (vii) Other remuneration, in cash or in kind, not explicitly 
described in this paragraph (h)(5); or
    (viii) A reduction in price or other remuneration from a 
manufacturer in connection with the sale or purchase of a prescription 
pharmaceutical product to a plan sponsor under Medicare Part D, a 
Medicaid Managed Care Organization as defined in section 1903(m) of the 
Act, or to a pharmacy benefit manager acting under contract with a plan 
sponsor under Medicare Part D, or Medicaid Managed Care Organization, 
unless it is a price reduction or rebate that is required by law.
    (6) For purposes of this paragraph (h), the term manufacturer 
carries the meaning ascribed to it in Social Security Act section 
1927(k)(5).
    (7) For purposes of this paragraph (h), the terms wholesaler and 
distributor are used interchangeably and carry the same meaning as the 
term ``wholesaler'' defined in Social Security Act section 1927(k)(11).
    (8) For purposes of this paragraph (h), the term pharmacy benefit 
manager or PBM means any entity that provides pharmacy benefits 
management on behalf of a health benefits plan that manages 
prescription drug coverage.
    (9) For purposes of this paragraph (h), a prescription 
pharmaceutical product is either a drug or a biological as those terms 
are defined in Social Security Act section 1927(k)(2)(A), (B), and (C).
    (10) For purposes of this paragraph (h), the term Medicaid Managed 
Care Organization or Medicaid MCO carries the meaning ascribed to it in 
section 1903(m) of the Social Security Act.
* * * * *
    (cc) Point-of-sale reductions in price for prescription 
pharmaceutical products. (1) As used in section 1128B of the Act, 
``remuneration'' does not include a reduction in the price charged by a 
manufacturer for a prescription pharmaceutical product that is payable, 
in whole or in part, by a plan sponsor under Medicare Part D or a 
Medicaid Managed Care Organization, provided the manufacturer meets the 
following conditions with regard to that reduction in price:
    (i) The reduced price must be set in advance with a plan sponsor 
under Medicare Part D, a Medicaid MCO, or the PBM acting under contract 
with either;
    (ii) The sale does not involve a rebate unless the full value of 
the reduction in price is provided to the dispensing pharmacy through a 
chargeback or series of chargebacks, or is required by law; and
    (iii) The reduction in price must be completely applied to the 
price of the prescription pharmaceutical product charged to the 
beneficiary at the point of sale.
    (2)(i) For purposes of this paragraph (cc), the terms manufacturer, 
pharmacy benefit manager or PBM, prescription pharmaceutical product, 
rebate, and Medicaid managed care organization or Medicaid MCO have the 
meanings ascribed to them in paragraph (h) of this section.
    (ii) For purposes of this paragraph (cc), a chargeback is a payment 
made directly or indirectly by a manufacturer to a dispensing pharmacy 
so that the total payment to the pharmacy for the prescription 
pharmaceutical product is at least equal to the price agreed upon in 
writing between the Plan Sponsor under Part D, the Medicaid MCO, or a 
PBM acting under contract with either, and the manufacturer of the 
prescription pharmaceutical product.
    (dd) PBM service fees. As used in section 1128B of the Act, 
``remuneration'' does not include any payment by a pharmaceutical 
manufacturer to a pharmacy benefit manager (PBM) for services the PBM 
provides to the pharmaceutical manufacturer related to the pharmacy 
benefit management services that the PBM furnishes to one or more 
health plans as long as the following conditions are met:
    (1) The PBM must have a written agreement with the pharmaceutical 
manufacturer that covers all of the services the PBM provides to the 
manufacturer in connection with the PBM's arrangements with health 
plans for the term of the agreement and specifies each of the services 
to be provided by the PBM and the compensation associated with such 
services.
    (2) The compensation paid to the PBM must:
    (i) Be consistent with fair market value in an arm's-length 
transaction;
    (ii) Be a fixed payment, not based on a percentage of sales; and
    (iii) Not be determined in a manner that takes into account the 
volume or value of any referrals or business otherwise generated 
between the parties, or between the manufacturer and the PBM's health 
plans, for which payment may be made in whole or in part under 
Medicare, Medicaid, or other Federal health care programs.
    (3) The PBM must disclose in writing to each health plan with which 
it contracts at least annually, and to the Secretary upon request, the 
services rendered to each pharmaceutical manufacturer related to the 
PBM's arrangements to furnish pharmacy benefit management services to 
the health plan.
    (4) For purposes of safe harbor in this paragraph (dd), the terms 
manufacturer, pharmacy benefit manager or PBM, and prescription 
pharmaceutical product have the meanings ascribed to them in paragraph 
(h) of this section, and health plan has the meaning ascribed to it in 
paragraph (l) of this section.

    Dated: January 25, 2019.
Alex M. Azar II,
Secretary.

    Dated: January 18, 2019.
Daniel R. Levinson,
Inspector General.
[FR Doc. 2019-01026 Filed 1-31-19; 4:45 pm]
 BILLING CODE 4152-01-P