Federal Register, Volume 84 Issue 25 (Wednesday, February 6, 2019)

[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

[[Page 2340]]

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Office of Inspector General

42 CFR Part 1001

RIN 0936-AA08

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:

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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.
---------------------------------------------------------------------------

\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\
---------------------------------------------------------------------------

\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\
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\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