[Federal Register Volume 85, Number 230 (Monday, November 30, 2020)]
[Rules and Regulations]
[Pages 76666-76731]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-25841]



[[Page 76665]]

Vol. 85

Monday,

No. 230

November 30, 2020

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; Final Rule

  Federal Register / Vol. 85 , No. 230 / Monday, November 30, 2020 / 
Rules and Regulations  

[[Page 76666]]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Office of Inspector General

42 CFR Part 1001

RIN 0936-AA08


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

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

ACTION: Final rule.

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SUMMARY: Discounts for prescription pharmaceutical products are central 
to this final rule, in which the Department of Health and Human 
Services (Department or HHS) amends the safe harbor regulation 
concerning discounts. Amending this regulation changes the definition 
of certain conduct that is protected from liability under the Federal 
anti-kickback statute of the Social Security Act (the Act). New 
regulatory text in the amendment revises the discount safe harbor. By 
excluding 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 or pharmacy benefit managers (PBMs) under 
contract with them, the Department modifies the existing discount safe 
harbor in particular contexts. Existing safe harbors otherwise remain 
unchanged. Safe harbors are also created for two additional types of 
arrangements. The first protects certain point-of-sale reductions in 
price on prescription pharmaceutical products, and the second protects 
certain PBM service fees.

DATES: This final rule is effective on January 29, 2021, except for the 
amendments to 42 CFR 1001.952(h)(5), which are effective on January 1, 
2022.

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

SUPPLEMENTARY INFORMATION: 

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       Social Security Act  citation        United States Code  citation
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1128B.....................................  42 U.S.C. 1320a-7b
1128D.....................................  42 U.S.C. 1320a-7d
1102......................................  42 U.S.C. 1302
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Table of Contents

I. Executive Summary
    A. Purpose and Need for Regulatory Action as Determined by the 
Secretary
    B. Summary of the Major Provisions
    i. Discount Safe Harbor
    ii. Point-of-Sale Reductions in Price for Prescription 
Pharmaceutical Products Safe Harbor
    iii. PBM Service Fees Safe Harbor
II. Background
    A. The Anti-Kickback Statute and Safe Harbors
    B. Summary of the Notice of Proposed Rulemaking
III. Summary of Public Comments and Responses
    A. General
    i. Antitrust
    ii. Transparency
    iii. Relationship to Part D
    (a) Non-Interference
    (b) Impact on Part D Program
    iv. Medicaid
    v. Commercial Market
    vi. Value-Based Arrangements
    vii. Enforcement Issues
    viii. State Law Issues
    ix. Other Legal Issues
    x. Formularies
    (a) Formulary Placement
    (b) Impact on Formulary
    xi. Impact on List Price
    xii. Definitions
    xiii. Comments Outside the Scope of Rulemaking
    B. Discount Safe Harbor Amendment
    i. Statutory Exception
    ii. Effective Dates
    iii. Expand to other Federal Health Care Programs
    iv. Scope of Amendment
    v. Impact on Volume or Prompt Pay Discounts
    vi. Impact on Beneficiary Access
    vii. Additional Safeguards
    viii. Alternative Recommendations
    C. Safe Harbor for Certain Price Reductions on Prescription 
Pharmaceutical Products
    i. Point-of-Sale Chargebacks
    ii. Reverse Engineering
    iii. Common Ownership
    iv. Incentives for Point-of-Sale Reduction in Price
    v. During 100 Percent Cost Sharing
    vi. Additional Safeguards
    D. Safe Harbor for Certain PBM Service Fees
    i. Scope of Protected Fees
    ii. Fair Market Value
    iii. Take Into Account Volume or Value
    iv. Fixed Fees
    v. Disclosure Requirement
    vi. Scope of Agreement
    vii. Statutory Exception and Safe Harbor for Group Purchasing 
Organizations
    viii. Additional Recommendations
    E. Technical Comments
IV. Provisions of the Final Regulation
    A. Revision to the Discount Safe Harbor
    B. New Safe Harbors
    C. Technical Corrections
V. Regulatory Impact Statement
    A. Need for Regulation
    B. Background on Costs, Benefits, and Transfers
    C. Affected Entities
    D. Costs
    E. Benefits
    F. Transfers
    G. Accounting Statement
    H. Regulatory Alternatives
    I. Regulatory Flexibilities Analysis
VI. Paperwork Reduction Act

I. Executive Summary

A. Purpose and Need for Regulatory Action as Determined by the 
Secretary

    On February 6, 2019, the Department published a Notice of Proposed 
Rulemaking in the Federal Register (84 FR 2340) (Proposed Rule). In 
that Proposed Rule, the Secretary set forth his concerns with the 
modern prescription drug distribution model and, in particular, how the 
current rebate-based system may be increasing financial burdens for 
beneficiaries. We refer readers to and incorporate by reference Section 
I of the Proposed Rule, which sets forth in detail the Secretary's 
determination of the purpose and need for this rulemaking.
    The Trump Administration's American Patients First blueprint 
described a new, more transparent drug pricing system that would lower 
high prescription drug prices and bring down out-of-pocket costs.\1\ 
The blueprint described four strategies: Boosting competition, 
enhancing negotiation, creating incentives for lower list prices, and 
reducing out-of-pocket spending.
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    \1\ American Patients First: The Trump Administration Blueprint 
to Lower Drug Prices and Reduce Out-of-Pocket Costs, Dep't Health & 
Human Servs. (May 2018), available at https://www.hhs.gov/sites/default/files/AmericanPatientsFirst.pdf.
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    On July 24, 2020 the President signed an Executive Order \2\ 
directing the Secretary of Health and Human Services to complete the 
rulemaking process that was commenced with the Proposed Rule. Section 4 
of this Executive Order directs the Secretary of the Department of 
Health and Human Services to confirm--and make public such 
confirmation--that the action is not projected to increase Federal 
spending, Medicare beneficiary premiums, or patients' total out-of-
pocket costs. The Secretary's confirmation is available at: https://www.hhs.gov/about/leadership/secretary/priorities/drug-prices/index.html.
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    \2\ Executive Order on Lowering Prices for Patients by 
Eliminating Kickbacks to Middlemen, Whitehouse.gov (July 24, 2020), 
available at https://www.whitehouse.gov/presidential-actions/executive-order-lowering-prices-patients-eliminating-kickbacks-middlemen/. See 85 FR 45759 (July 29, 2020).
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    This final rule is an important element to achieving the goals of 
the blueprint and the Executive Order and

[[Page 76667]]

also works in concert with other regulatory provisions finalized by the 
Department. For example, this final rule creates new safe harbor 
protection for point-of-sale reductions in price, which will directly 
reduce beneficiary out-of-pocket spending at the pharmacy counter. It 
also increases price transparency, which will enable Medicare 
beneficiaries to better choose a plan that best meets their needs. This 
final rule addresses a practice that has increased patient costs at the 
pharmacy counter and will create incentives for drug companies to lower 
the list prices of their drugs.
    This final rule is also important to beneficiary and government 
spending in Medicare Part D. Part D rebates and other price concessions 
grew more than three times faster than gross drug expenditures from 
2014-2016. Price concessions, including rebates, have the potential to 
reduce Part D costs for the Federal government, because Part D plan 
sponsors subtract their estimated rebates from their plan bids. Lower 
plan bids contribute to lower premiums, and lower premiums contribute 
to lower government spending on premium subsidies. However, the 
Proposed Rule described how rebates also may create a perverse 
incentive that rewards manufacturers for increasing their list price, 
while subjecting consumers to higher out-of-pocket costs. Since 
beneficiary out-of-pocket costs are often calculated based on the list 
price of the drug (i.e., before rebates are paid), beneficiaries pay 
higher cost-sharing than they would if discounts were reflected at the 
point of sale. Furthermore, high list prices may result in more 
beneficiaries more quickly reaching the catastrophic phase, where the 
Federal government bears 80 percent of the drug costs and the Part D 
plans only cover 15 percent of the drug costs.
    The Department is issuing this final rule to create incentives for 
manufacturers to lower their list prices; reduce the incentives for 
Part D plans to choose high-cost, highly rebated drugs over comparable 
drugs with lower prices; lower beneficiary out-of-pocket spending; and 
increase transparency to improve plan choice and program integrity.

B. Summary of the Major Provisions

i. Discount Safe Harbor
    In this final rule, we amend 42 CFR 1001.952(h) to remove safe 
harbor protection for reductions in price in connection with the sale 
or purchase of prescription pharmaceutical products from manufacturers 
to plan sponsors under Part D, either directly or through PBMs acting 
under contract with them, unless the reduction in price is required by 
law. We note that reductions in price negotiated between manufacturers 
and plan sponsors under Part D (or through PBMs under contract with the 
plan sponsors) in the form of upfront discounts, rather than after-sale 
rebates, are eligible for protection under the new safe harbor for 
point-of-sale reductions in price for prescription pharmaceutical 
products at Sec.  1001.952(cc).
ii. Point-of-Sale Reductions in Price for Prescription Pharmaceutical 
Products Safe Harbor
    We are finalizing a new safe harbor at Sec.  1001.952(cc) for 
certain point-of-sale reductions in price offered by manufacturers on 
prescription pharmaceutical products that are payable under Medicare 
Part D or by Medicaid managed care organizations (MCOs) that meet 
certain criteria.
iii. PBM Service Fees Safe Harbor
    In this final rule, we create a new safe harbor at Sec.  Sec.  
1001.952(dd) for fixed fees that manufacturers pay to PBMs for services 
rendered to the manufacturers that meet specified criteria.

II. Background

A. The 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 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, and regardless of the label that parties 
may affix to the payment. 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.\3\ 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 incenting referrals of business for which 
payment may be made under a Federal health care program.
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    \3\ See, e.g., Medicare and State Health Care Programs: Fraud 
and Abuse; OIG Anti-Kickback Provisions, 56 FR 35952 (July 29, 
1991).
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    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:
     An increase or decrease in access to health care services;
     an increase or decrease in the quality of health care 
services;
     an increase or decrease in patient freedom of choice among 
health care providers;
     an increase or decrease in competition among health care 
providers;
     an increase or decrease in the ability of health care 
facilities to provide services in medically underserved areas or to 
medically underserved populations;
     an increase or decrease in the cost to Federal health care 
programs;
     an increase or decrease in the potential overutilization 
of health care services;

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     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.\4\
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    \4\ 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).
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    Since July 29, 1991, there have been a series of final regulations 
published in the Federal Register establishing safe harbors in various 
areas.\5\ 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.'' 
\6\
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    \5\ 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); 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).
    \6\ Medicare and State Health Care Programs: Fraud and Abuse; 
OIG Anti-Kickback Provisions, 56 FR at 35958.
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    Healthcare 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 healthcare 
industry.

B. Summary of the Notice of Proposed Rulemaking

    On February 6, 2019, we published the Proposed Rule setting forth 
certain proposed amendments to the safe harbors under the anti-kickback 
statute. The Proposed Rule also provided substantial background 
information to explain why the Department believes these amendments are 
necessary.
    With respect to the proposed amendment to the existing discount 
safe harbor, we explained that it was designed to address evolving 
business arrangements and align with the statutory exception's intent 
to encourage price competition that benefits the Medicare and Medicaid 
programs.\7\ We also emphasized our longstanding position that a 
discount must be in the form of a reduction in the price of a good or 
service based on an arms-length transaction. With respect to rebates, 
we explained the regulatory history regarding our treatment of 
``rebates'' under the discount safe harbor. Finally, we noted that the 
discount safe harbor was finalized in 1991 and has not been updated 
since 2002, and we highlighted that both the Medicare Part D program 
and comprehensive regulations governing Medicaid managed care delivery 
systems were enacted in the intervening years. For a more comprehensive 
discussion of why these amendments to the discount safe harbor are 
necessary, we incorporate by reference and refer readers to the 
discussion in the Proposed Rule.\8\
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    \7\ 54 FR 3092.
    \8\ 84 FR 2345-47.
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    The Proposed Rule also identified certain specific harms that may 
be caused by the current rebate framework. First, some beneficiaries 
experience increased financial burdens. For example, if a beneficiary 
is paying coinsurance on a drug subject to a rebate, the beneficiary 
pays a percentage of a price that more closely resembles the list price 
than the net price. Second, the Proposed Rule explained that 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 formulas used to 
determine pharmacy reimbursement or Medicaid rebates.\9\ Finally, the 
Proposed Rule expressed concerns about a lack of transparency in the 
current system. With respect to rebates, we explained that OIG work 
showed that some Part D plan sponsors had limited information about 
rebate contracts and rebate amounts that their PBMs negotiated. A lack 
of transparency could create a potential program integrity 
vulnerability because compliance with program rules may be more 
difficult to verify. We also sought to address a lack of transparency 
to health plans when the health plans' PBMs are being paid by 
manufacturers for services that the PBMs render to manufacturers 
related to pharmacy benefit management services that the PBM furnishes 
to the health plans.\10\
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    \9\ 84 FR 2343.
    \10\ 84 FR 2349-50.
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    To address the Department's concerns with the current rebate 
system, the Department proposed and solicited comments on three 
revisions to the safe harbors. First, the Department proposed to amend 
the discount safe harbor at 42 CFR 1001.952(h) to exclude from the 
definition of ``discount'' at Sec.  1001.952(h)(5) 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 Proposed Rule also proposed definitions at Sec.  
1001.952(h)(6)-(10) of the terms ``manufacturer,'' ``wholesaler,'' 
``pharmacy benefit manager,'' ``prescription pharmaceutical product,'' 
and ``Medicaid Managed Care Organization.''
    Second, the Proposed Rule proposed to add a new safe harbor at 
Sec.  1001.952(cc) to protect reductions in price between the entities 
that would be removed from the discount safe harbor at Sec.  
1001.952(h) if such reductions in price are given at the point of sale 
and meet certain other criteria. As proposed, this safe harbor would 
protect reductions in price on prescription pharmaceutical products 
offered to plan sponsors under Medicare Part D, Medicaid MCOs, or 
through a PBM acting under contract with either if: (1) The reduction 
in price is set in advance; (2) the reduction in price does not involve 
a rebate, unless the full value of the price reduction is accomplished 
through chargebacks or is a rebate required by law; and (3) the 
reduction in price is completely reflected in the price the pharmacy 
charges to the beneficiary at the point of sale.
    Finally, the Proposed Rule proposed to add a second new safe harbor 
at Sec.  1001.952(dd) specifically designed to protect certain fees a 
pharmaceutical

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manufacturer pays to a PBM for services rendered to the manufacturer 
that relate to the PBM's arrangements to provide pharmacy benefit 
management services to health plans. As proposed, the safe harbor would 
protect a payment a pharmaceutical manufacturer makes to a PBM for 
services the PBM provides to the manufacturer, for the manufacturer's 
benefit, when those services relate to the PBM's arrangements to 
provide pharmacy benefit management services to health plans. To 
receive protection, the proposed safe harbor would require that: (1) 
The services and compensation be set out in a written agreement; (2) 
the compensation be consistent with fair market value in an arm's-
length transaction; be a fixed payment, not based on a percentage of 
sales; and 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; and (3) the 
PBM makes annual written disclosures to each health plan with which it 
contracts regarding the services rendered to each pharmaceutical 
manufacturer related to the PBM's arrangements to furnish pharmacy 
benefit management services to the health plan, and make such 
disclosures to the Secretary upon request.
    The Department solicited comments on a range of topics in the 
course of describing the new proposed safe harbors. For instance, for 
the proposed safe harbor for point-of-sale reductions in price, the 
Proposed Rule solicited comments on the sufficiency of the proposed 
definitions as well as any effects of the proposed safe harbor on 
competition to the extent pharmacies have sufficient data to reverse 
engineer the manufacturer's or the PBM's discount structure. For the 
proposed safe harbor for certain PBM service fees, the Proposed Rule 
solicited comments on the interpretation of pharmacy benefit management 
services and the transparency-related requirements that would be a 
condition of the safe harbor.

III. Summary of Public Comments and Responses

    We received responsive comments from approximately 26,000 distinct 
commenters, including, but not limited to, individuals, pharmaceutical 
manufacturers, pharmacies, PBMs, wholesalers, plan sponsors under Part 
D, Medicaid MCOs, and trade associations representing various 
individuals and entities. Many of these individuals and entities 
provided comments on multiple topics. Commenters generally agreed with 
the Department on the need to lower out-of-pocket costs for consumers 
on prescription drugs, but they diverged in terms of whether they 
supported or opposed the Proposed Rule. Comments from both those who 
opposed the rule and those who supported the rule recommended certain 
changes or requested certain clarifications. We appreciate the robust 
feedback from the commenters. We have divided the public comment 
summaries and our responses into discrete sections: The first section 
covers general comments and responses that may apply to more than one 
of our proposals, and the following sections summarize and respond to 
the comments specific to our proposed amendments to the discount safe 
harbor and our two new proposed safe harbors.

A. General

i. Antitrust
    Comment: Several commenters were supportive of the Proposed Rule 
and contended that antitrust laws do not affect the Proposed Rule or 
that the Proposed Rule will not lead to anti-competitive discriminatory 
pricing. A commenter explained that antitrust laws related to 
differential pricing apply equally to upfront discounts as they do to 
retrospective rebates. Another commenter explained that the Proposed 
Rule will result in lower cost-sharing amounts for beneficiaries at the 
point of sale and will allow for the reestablishment of the nexus 
between price concessions on a product and the actual price paid by 
consumers for that product.
    Response: We appreciate the commenters' support for the Proposed 
Rule.
    Comment: Several commenters addressed whether and how the policies 
underlying the Proposed Rule intersect with the Robinson-Patman Act. 
Some commenters that opposed the proposal suggested that the risk of 
liability under the Robinson-Patman Act will hinder manufacturers' 
ability to negotiate up-front discounts. Several of these commenters 
claimed that the current rebate system resulted from a settlement in 
the In re Brand Name Prescription Drugs litigation, in which pharmacies 
sued brand-name prescription drug manufacturers and wholesalers for 
discriminatory pricing practices that favored large, institutional 
purchasers. These commenters pointed out that under the terms of the 
1996 settlement, manufacturers agreed to give pharmacies the same 
opportunity to earn the favorable discounts given to institutional 
purchasers, provided that the pharmacies can demonstrate an ability to 
affect market share in the same or similar manner as the institutional 
purchasers. The commenters argued that the Department failed to 
consider this settlement, and stated that absent Congressional action 
to amend or repeal the Robinson-Patman Act, manufacturers will move to 
offering lower, unvaried discounts.
    Other commenters, however, contended that the antitrust laws do not 
pose an obstacle to or hinder implementation of the Proposed Rule and 
that the Proposed Rule would, in fact, further the ultimate goal of 
antitrust law, which is to promote competition. For instance, one 
commenter pointed out that the antitrust laws apply equally to up front 
discounts and retrospective rebates, and the In re Brand Name 
Prescription Drugs litigation did not result in any change in the 
ability of a prescription drug manufacturer to offer an upfront 
discount, or create any precedent suggesting that upfront discounts are 
illegal and retrospective rebates are legal. Another comment similarly 
questioned the conclusion that moving from a world of PBM rebates to 
point-of-sale chargebacks would result in anti-competitive 
discriminatory pricing and pointed out that the Proposed Rule would 
result in individuals paying less at the pharmacy counter. Yet another 
commenter contended that transitioning away from rebates to upfront 
discounts achieves the intended goals of the 1996 settlement.
    Response: The Department is not persuaded that the threat of 
Robinson-Patman Act litigation will dissuade manufacturers from 
offering pro-competitive price concessions in the form of upfront 
discounts. In fact, comments submitted by the major association 
representing pharmaceutical manufacturers rejected the notion that the 
Robinson-Patman Act prevents prescription pharmaceutical manufacturers 
from offering upfront discounts and pointed out that rebates do not 
occupy a unique position insulated from antitrust scrutiny. The 
Department agrees that neither the 1996 settlement nor the subsequent 
court rulings made any distinction between retrospective rebates and 
upfront discounts and did not result in any decision suggesting that 
the former are less problematic than the latter. Both retrospective 
rebates and upfront discounts, to the extent that they are true price 
concessions, could theoretically be applied in a

[[Page 76670]]

discriminatory fashion. The Department does not administer antitrust 
law. However, as the Department understands its application, whether 
the price discrimination is achieved by something labeled a ``rebate'' 
versus something labeled a ``discount'' would not be relevant for 
purposes of Robinson-Patman Act liability.
    Comment: A commenter requested, and believed it would be helpful 
for, the Antitrust Division at the Federal Trade Commission (FTC) or 
Department of Justice (DOJ) to analyze the Proposed Rule and provide a 
Competition Advisory Opinion upon which stakeholders could rely.
    Response: Parties that want greater certainty may request an 
advisory opinion from the FTC.
ii. Transparency
    Comment: Numerous commenters reiterated the need for greater 
transparency in our current rebate system, with various commenters 
asserting that the proposed point-of-sale reduction in price safe 
harbor would increase transparency and ensure that patients benefit 
from price reductions. A commenter stated that greater transparency 
would enable independent pharmacies to negotiate more favorable terms 
with PBMs and health plan sponsors and inform patients about their drug 
coverage options, while another commenter stated that greater 
transparency may put plan sponsors in a better position to exert more 
influence to lower net drug spending and PBM administrative fees. 
Another commenter asserted that transparency surrounding discounts 
would be likely to lower list prices and reduce misaligned incentives. 
This commenter also stated that patients who know the amount of a 
plan's discount for a product would be in a better position to select 
the right plan. Another commenter asserted that this increased 
transparency surrounding the rebates provided to PBMs and plans would 
place significant pressure on pharmaceutical manufacturers to lower 
list prices, stating that manufactures would no longer be able to point 
to rebates as the reason for high drug prices.
    Conversely, other commenters stated that the changes reflected in 
the Proposed Rule would not increase transparency. Specifically, some 
commenters asserted that pharmaceutical manufacturers establish drug 
prices, and that if the rule aims to create transparency, then it 
should apply to all parties, including pharmaceutical manufacturers, 
instead of only PBMs and health plans. Another commenter asserted that 
health plans already provide meaningful transparency surrounding 
rebates through mechanisms like direct and indirect remuneration (DIR) 
reporting to CMS, while pharmaceutical manufacturers do not 
systematically disclose their rebates. Another commenter opposed the 
proposed point-of-sale reductions in price safe harbor and stated that 
as long as rebates are a part of our drug pricing system, there will 
still be confusion among patients and plan sponsors surrounding drug 
prices.
    Response: We appreciate support from commenters who agree that 
applying manufacturer reductions in price to drug prices at the point 
of sale would increase transparency. Additionally, we concur that 
greater transparency surrounding price reductions can enable 
stakeholders in the drug supply chain to support patients in selecting 
drugs and plans that minimize their out-of-pocket costs and can lead to 
lower drug prices.
    Many publications document that many Medicare beneficiaries do not 
make what might appear to be the best decisions when choosing a Part D 
plan. If the plan premium is the monthly cost of having access to drugs 
that best meet a beneficiary's needs, then the beneficiary should have 
visibility into what kind of discounts are being negotiated on their 
behalf.
    While we understand that plan sponsors under Part D already have 
DIR reporting requirements, we believe that by excluding certain 
rebates paid by manufacturers from the discount safe harbor and 
creating a new safe harbor for point-of-sale reductions in price, there 
will be enhanced transparency regarding reductions in price that 
pharmaceutical manufacturers negotiate with plan sponsors under 
Medicare Part D and PBMs under contract with these plans, especially 
for the consumer, and create new incentives for manufacturers to lower 
drug prices.
    Comment: Other commenters asserted that blaming PBMs for the lack 
of transparency in the rebate system is misdirected. A PBM commenter 
stated that its plan sponsors see their respective drug costs at a unit 
cost level, as well as the savings the PBM generates for plan sponsors, 
including rebates, and that its plan sponsors have full audit rights to 
ensure complete transparency. Another commenter noted that PBMs already 
offer transparent contracts that allow many large employers to pull 
through some of the value of negotiated rebates to reduce enrollees' 
drug-related costs, while another commenter noted that the Proposed 
Rule did not account for these innovative and transparent models that 
are taking place within the PBM industry.
    Conversely, other commenters claimed that the PBM market lacks 
transparency. Some commenters indicated that rather than excluding 
certain rebates from the discount safe harbor, OIG should focus on 
ensuring that PBMs are completely transparent with health plans 
regarding rebate payments and pass through 100 percent of all rebate 
payments to Part D plan sponsors, with a commenter noting that 
increased transparency with respect to PBM rebates may enable plan 
sponsors to retain some of these rebates that can be used to benefit 
plan participants and beneficiaries.
    Other commenters discussed the impact of increased transparency on 
the PBM industry generally. Specifically, a commenter advised OIG to 
ensure the proposed transparency requirements on top of the other 
regulations that apply to Medicare and Medicaid will not 
unintentionally stifle new entrants in the PBM market, noting that more 
choice in PBMs would benefit patients and the government. Conversely, 
another commenter asserted that greater transparency will invite 
competition from new PBM entrants, such as nonprofit PBMs and employer 
self-administered PBMs.
    Response: We understand that some programmatic mechanisms are 
already in place to foster transparency of rebates and drug prices 
between PBMs and plan sponsors and to CMS. PBMs will need to consider 
the new requirements in this final rule and may need to adjust their 
operations in order to comply with the terms of the applicable safe 
harbor. However, we are persuaded by the comments suggesting that the 
additional transparency provided by this final rule would be useful. 
Further, as stated in the Proposed Rule, a 2011 evaluation indicated 
that certain Part D plan sponsors had limited information regarding 
rebate contracts and rebate amounts negotiated by their PBMs.\11\ A 
lack of transparency could contribute to program integrity 
vulnerabilities by making compliance with program rules harder to 
verify and by allowing hidden incentives that result in higher list 
prices. We believe that excluding certain rebates paid by manufacturers 
from the discount safe harbor and creating a new safe harbor for point-
of-sale reductions in price will increase transparency, including 
transparency to plans and beneficiaries, and improve alignment of 
incentives among parties

[[Page 76671]]

that could result in lower list prices and out-of-pocket costs.
---------------------------------------------------------------------------

    \11\ 84 FR 2343.
---------------------------------------------------------------------------

    Comment: A commenter recommended restricting or banning PBM spread 
pricing because spread pricing detracts from the goals of transparency 
and fair pricing by enabling PBMs to profit by charging plans a higher 
cost for drugs than they reimburse to pharmacies and retaining the 
difference. To this end, the commenter recommended that OIG or the 
Department implement penalties for PBMs to discourage this practice and 
ensure that the full value of price reductions is passed on to plans.
    Response: The scope of the changes that we proposed to the discount 
safe harbor was limited to remuneration from pharmaceutical 
manufacturers to plan sponsors under Part D, Medicaid MCOs, and PBMs 
operating on their behalf. Comments about profits that PBMs may retain 
by negotiating a difference between what they charge plans and what 
they reimburse pharmacies are beyond the scope of this rulemaking.
    Comment: A commenter suggested that the healthcare system explore 
other policy actions focused on high list prices, such as prohibiting 
brand pharmaceutical companies from effectively preventing low-cost 
generic medications from coming to market. Other commenters noted that 
our current drug pricing system can only be transparent if 
beneficiaries are able to predict their out-of-pocket costs and 
recommended locking in the price of prescription drugs that require 
coinsurance or requiring at least one drug in each class to be subject 
to a flat copayment in order to create more stability.
    Response: While we appreciate commenters' suggestions for other 
actions to address high list prices and encourage stability in 
beneficiaries' out-of-pocket costs, such policy initiatives are outside 
the scope of this rulemaking.
    Comment: Several commenters recommended various additional measures 
to help promote transparency in the prescription drug supply chain. 
Specifically, a commenter's recommendations included: Standardized 
contract terms relating to PBM services and compensation; requiring 
additional regular disclosures by PBMs to health plans with which they 
contract regarding their business arrangements with drug manufacturers; 
disclosure by PBMs to public programs and private plans of discount 
amounts and other revenue paid to the PBM or related third parties 
based on the plan sponsor's drug utilization; and an auditable 
structure that allows plan sponsors to have a complete picture and 
conduct more fulsome analyses of their drug-related costs and 
contractual relationships. Another commenter emphasized the need for 
stakeholders in the prescription drug supply chain to disclose rebate 
and discount information, financial incentive information, and pharmacy 
and therapeutics committee information, which the commenter asserted 
would further improve transparency in this area. Another commenter 
stated that to further transparency, CMS and OIG should identify, 
collect, and disseminate data and information that would enable the 
evaluation of the impact of changes under this rule on beneficiaries.
    Other commenters recommended requiring prescription drug 
manufacturers to be more transparent by making list prices public, with 
a commenter asserting that patient-level information related to drug 
pricing must be transparent, democratized, and open source.
    Another commenter noted that under the current framework, Medicaid 
MCOs may negotiate supplemental rebates directly with pharmaceutical 
manufacturers to minimize costs based on the net cost to the MCO, but 
the lowest net cost product for the MCO may not always align with the 
lowest net cost product for the Medicaid program. This commenter 
recommended mandating transparency of the unit rebate amount (URA) and 
unit rebate offset amount (UROA) to Medicaid MCOs to help Medicaid MCOs 
drive toward the lowest net costs to the system.
    Response: We appreciate these commenters' feedback. We note that 
the new safe harbor for PBM service fees requires PBMs to disclose in 
writing to each health plan with which it contracts at least annually 
the services rendered to each manufacturer related to the PBM's 
arrangements to furnish pharmacy benefit management services to the 
plan. We are not adopting the commenter's recommendation to require 
additional regular disclosures by PBMs to health plans regarding 
business arrangements with drug manufacturers. We believe the 
requirements under the PBM service fees safe harbor allow for 
appropriate transparency between the parties in order for the 
remuneration protected under the safe harbor to be sufficiently low 
risk. We also are not adopting any of the commenters' other 
recommendations to increase transparency because they are beyond the 
scope of the Proposed Rule and, in some cases, outside the authorities 
under the anti-kickback statute. We are mindful of the importance of 
monitoring the impact of the final rule on beneficiaries.
iii. Relationship to Part D
a. Non-Interference
    Comment: A number of commenters contended that the Proposed Rule 
was an impermissible exercise of the Secretary's authority because it 
violates the Medicare Part D noninterference provision, section 1860D-
11(i) of the Act. These commenters asserted the Proposed Rule seeks to 
interfere with how manufacturers and Part D plan sponsors negotiate and 
pay for prescription drugs through the elimination of rebates and the 
prohibition on using formulary placement as leverage to reduce prices, 
which are well-established negotiating tools. Commenters also asserted 
that, by requiring that reductions in price be applied at the point of 
sale and not applied to premiums, the Proposed Rule violates the 
prohibition on instituting a price structure for the reimbursement of 
covered Part D Drugs. A commenter asserted that the proposal, if 
finalized, also would interfere in Part D plan sponsors' negotiations 
with pharmacies by mandating that Part D sponsors ensure that pharmacy 
reimbursement is reduced by the amount of any discounts received by the 
pharmacy from the manufacturer. In addition, multiple commenters cited 
CMS rulemakings, which they concluded previously interpreted the non-
interference clause as prohibiting the agency from adopting the 
policies proposed by this rule and asserted that the changed statutory 
interpretation would require notice and comment.
    Response: This rule does not interfere in any negotiations between 
Part D sponsors, manufacturers, and pharmacies. This final rule changes 
the circumstances under which certain agreements that implicate the 
anti-kickback statute fall within the protection of a safe harbor. The 
parameters of the safe harbor do not institute a price structure, nor 
do they interfere with negotiations between plans and pharmacies, 
because they do not have any bearing on the ultimate prices negotiated 
among the parties. CMS's longstanding position about the non-
interference provision is that all aspects of the non-interference 
provision must be considered in light of other statutory requirements 
to implement and oversee the Part D program.\12\ It has always been the

[[Page 76672]]

Department's view that the non-interference provision does not exist in 
a vacuum and must be read in concert with Part D statutory obligations 
in connection with, for example, pharmacy network adequacy, consistency 
in treatment of drug costs, and the provision of adequate formularies. 
It is no different when one views the non-interference provision in the 
broader context of the Secretary's other statutory obligations under 
the Act, including the mandate to establish and modify safe harbors. 
This rule, as it is being finalized, does not change the Department's 
interpretation of the Part D non-interference provision.
---------------------------------------------------------------------------

    \12\ See, e.g., 79 FR 29844, 29874-75 (May 23, 2014).
---------------------------------------------------------------------------

b. Impact on Part D Program
    Comment: Some commenters made a variety of recommendations to 
address pharmacy DIR fees. Other commenters recommended that OIG not 
finalize the Proposed Rule because it would eliminate DIR.
    Response: The administration of pharmacy DIR fees is outside the 
scope of this rulemaking. Nothing in this final rule changes CMS's 
rules with respect to DIR.
    Comment: Several commenters recommended that HHS, CMS, and Congress 
reform the Part D program by, for example: Implementing a rebate pass-
through requirement as part of the Part D program in lieu of the 
Proposed Rule; allowing for greater flexibility in calculating 
deductibles; redefining Average Manufacturer Price (AMP) or clarifying 
how point-of-sale price concessions or chargebacks might apply to AMP; 
making adjustments to certain cost-sharing requirements for partial 
point-of-sale rebate and formulary design options; and permitting 
manufacturers to offer copayment and coinsurance assistance for single-
source drugs.
    Response: Comments that request Congressional action, pertain to 
changes to the administration of the Part D program, or ask for 
guidance with respect to Medicaid pricing rules are outside the scope 
of this rulemaking. Manufacturer-sponsored copayment assistance 
programs are also outside the scope of this rulemaking.
    Comment: A commenter recommended that OIG work with the Department 
to develop guidance and procedures for how to identify and avoid 340B 
and point-of-sale duplicate discounts in Part D and Medicaid managed 
care prior to implementation of the proposed safe harbor. For example, 
the commenter recommended similar requirements that the Department of 
Defense has implemented, such as (1) requiring the use of a National 
Council for Prescription Drug Programs (NCPDP) modifier to identify 
340B transactions within the new system, or (2) requiring, in the safe 
harbor text or otherwise, that the PBM or other chargeback 
administrator must exchange information and cooperate as necessary to 
enable manufacturers to determine whether any 340B discounts are also 
implicated in the transaction. Another commenter requested confirmation 
that manufacturers may continue traditional duplicate discount 
avoidance arrangements and that doing so will not put the safe-harbored 
status of a point-of-sale reduction in price arrangement at risk. The 
commenter noted that the new point-of-sale reductions in price safe 
harbor should not require that manufacturers pay chargebacks for Part D 
point-of-sale reductions in price when doing so would generate 340B 
duplicate discounts.
    Response: We appreciate commenters' feedback on 340B and the 
potential for point-of-sale duplicate discounts in Part D. 
Establishment of mechanisms for avoiding duplicate discounts or 
resolving disputes or errors regarding rebates is outside the scope of 
this rule, as is compliance with CMS requirements relating to 
Prescription Drug Event (PDE) reporting for when a claim is re-
processed as a result of such mechanisms. The point-of-sale reduction 
in price safe harbor requires, as a condition of qualifying for the 
safe harbor, that the reduction in price be completely reflected at the 
time the pharmacy dispenses the prescription pharmaceutical product to 
the beneficiary; it does not specifically require chargebacks. In 
addition, we note that a violation of the anti-kickback statute must be 
knowing and willful. Good faith efforts to avoid duplication of 
discounts or resolve disputes or errors, where such practices are not 
intending to offer or pay remuneration to induce or reward purchases of 
federally payable goods or services, likely would not constitute 
violations.
    Comment: Some commenters recommended that OIG review whether and 
explain how the changes proposed in its Proposed Rule are consistent 
with a rule that CMS previously proposed, ``Modernizing Part D and 
Medicare Advantage to Lower Drug Prices and Reduce Out-of-Pocket 
Expenses.'' \13\
---------------------------------------------------------------------------

    \13\ See 83 FR 62152 (Nov. 30, 2018).
---------------------------------------------------------------------------

    Response: We thank commenters for their recommendation and note 
that the rule we are finalizing here makes certain changes to the 
regulatory safe harbors to the anti-kickback statute, which may impact 
business arrangements of parties participating in the Part D program 
but do not amend any program requirements.
    Comment: A commenter urged CMS and OIG to advance, in both the 
final rule and corresponding CMS-issued guidance, plan designs or 
financing pathways for Medicare Advantage plans that allow for the 
continuation of Medicare Advantage supplemental benefit programs by 
offsetting the reduction in rebates that the commenter predicted would 
result from this rule.
    Response: This final rule amends the discount safe harbor and adds 
two new safe harbors to specify types of arrangements that would be 
protected from liability under the anti-kickback statute. Additional 
guidance on plan design or financing pathways for Medicare Advantage 
plans are outside the scope of this rule.
    Comment: A number of commenters identified issues related to 
beneficiary rights that they asserted will require rulemaking or 
guidance in order to implement the Proposed Rule. These issues include, 
but are not limited to: How CMS would expect plans to apply formulary 
and tiering exceptions policies; how CMS will handle beneficiary 
complaints, appeal rights, and transition fills; application of 
percentage price concessions to the higher-tier drug; how CMS would 
expect plans to apply formulary exceptions when approving a no price 
concession drug; what changes will be reported in the language of the 
Evidence of Coverage and model marketing materials; whether enrollees 
will be told the price concession amount at the point of sale, and how 
it will be accounted for in the cost component of Medication Therapy 
Management (MTM) (e.g., might previously qualified enrollees no longer 
qualify as they no longer meet the cost threshold?); whether a plan's 
Advance Notice of Changes will have to be revised to reflect changes in 
rebate status.
    Response: To the extent parties elect to structure arrangements to 
fit into the new point-of-sale reduction in price safe harbor, 
questions may arise about implementation. Questions related to CMS's 
administration of the Part D program, however, are outside the scope of 
OIG's authority and this rulemaking. We have coordinated with CMS in 
the promulgation of this rule and are informed that their formulary 
review processes will continue to protect beneficiary access and 
choice. CMS provides Part D plan sponsors with guidance related to 
bidding, formulary submission, and Medicare Plan Finder instructions, 
and will continue to work

[[Page 76673]]

with plan sponsors to ensure a smooth transition and minimize 
disruption.
    Comment: Commenters expressed several concerns about formulary 
structure and benefit design, which the commenters asserted will 
require rulemaking or guidance from CMS in order to implement changes 
included in the Proposed Rule, if finalized. For example, a commenter 
identified various issues related to formulary structure, which the 
commenter asserted will require rulemaking or guidance by CMS in order 
to implement the new or amended safe harbors, if finalized. These 
included: Any potential changes to CMS's formulary review process; what 
the potential effects will be on formularies due to new arrangements; 
manufacturers using alternate National Drug Codes for existing drugs 
(e.g., to allow for price concessions or to reauthorize a branded drug 
as generic or biosimilar); what happens when an LIS enrollee is in 
different phases of benefit or tiers of a formulary; whether the de 
minimis premium policy for LIS will be increased. Commenters also 
suggested that CMS finalize its proposal in the 2020 Draft Call Letter 
to restrict brand and generic drugs to respective brand and generic 
tiers and more actively track formularies.
    Response: As discussed above, questions about CMS's administration 
of the Part D program (which includes oversight of policies regarding 
LIS beneficiaries) are outside the scope of OIG's authority.
    Comment: A commenter asked if new costs associated with the 
Proposed Rule (e.g., to update systems, contracts, and staff call 
centers) will be included in administrative costs for purposes of 
medical loss ratio compliance. The commenter stated that plans will 
need to collect higher premiums and make larger claims payments if 
there is no exception for new costs.
    Response: Whether administrative costs should be taken into account 
when calculating medical loss ratios are outside the scope of this 
rulemaking.
    Comment: Other commenters predicted that the proposal may result in 
higher premiums for individuals in self-insured plans. In particular, a 
commenter asserted that self-funded employer group waiver plans (EGWPs) 
that enroll Medicare Advantage beneficiaries use rebate dollars to 
reduce premiums and that with fewer rebate dollars, self-funded EGWPs 
would have to increase premiums substantially for all enrollees by the 
amount received in rebates.
    Response: The intent of the rule includes the elimination of the 
distortions in the market that drive up pharmaceutical list prices for 
EGWPs as well as other MA and Part D plans. As discussed elsewhere in 
this rule, list prices have been rising to increase the rebates. This 
change will bring transparency to the plan design and allow 
beneficiaries and employers funding EGWPs to better understand and 
negotiate, prior to the effective date of this rule, the benefits they 
are paying for.
    Comment: A commenter stated that MA and Part D plan sponsors should 
have additional flexibility regarding what drugs to exclude from 
coverage formularies, what criteria and guidance to follow for coverage 
decisions, and what restrictions they should be subject to. Because 
plan sponsors must certify the accuracy, completeness, and truthfulness 
of all data, another commenter stated that CMS should provide plan 
sponsors with an alternative good faith compliance approach.
    Response: Comments requesting that plan sponsors have increased 
flexibility in the MA and Part D programs are outside the scope of this 
rulemaking.
    Comment: Commenters suggested that the catastrophic phase of the 
Part D benefit should be reformed or that a cap should be placed on 
out-of-pocket costs to beneficiaries.
    Response: Comments recommending policy changes to the Part D 
program or amendments to the governing law are outside the scope of 
this rulemaking.
    Comment: A number of commenters expressed concern about the impact 
of the Proposed Rule on the Part D bid process and stated that 
rulemaking or guidance by CMS will be necessary to implement the 
Proposed Rule, including: How would CMS require plan sponsor negotiated 
price concessions to be allocated in the bid and when would the Bid 
Pricing Tool be updated for such price concessions; how would CMS 
revise the out-of-pocket cost values and Total Beneficiary Cost 
metrics; how will changes in Part D bid amounts be incorporated into 
MA-PD submission; will CMS adjust the bidding schedule and beneficiary 
enrollment period to allow entities to bring their arrangements into 
compliance; and would CMS require other plan types (e.g., EGWPs) to 
follow its lead on the bid process? A commenter also recommended 
certain protections for the 2020 bid submission to limit program 
disruption and instability such as: Adjust the de minimis threshold, 
rebate reallocation process, supporting documentation requirements for 
bids, and risk corridor protections; waive the Total Beneficiary Cost 
and Medicare Part D out-of-pocket cost rules; allow more flexibility in 
aggregate and product margin tests as well as the desk review and bid 
audits; and give consideration to the impact of change on EGWP plans.
    Response: Comments related to CMS's administration of the Part D 
program are outside the scope of this rulemaking. We consulted with CMS 
in the promulgation of this final rule and anticipate that by 
finalizing this rule with a January 1, 2022 implementation date for the 
amendments to the discount safe harbor at Sec.  1001.952(h)(5), we have 
addressed concerns related to the 2020 bid submission.
    Comment: A commenter stated that CMS should oversee plan actuarial 
equivalence determinations to ensure that beneficiaries with copayments 
receive the intended benefits of the rule through reduced cost sharing. 
The commenter further stated that CMS should ensure that plan sponsors 
and PBMs ``reduce copayments for the tier on which the prescribed 
medicine is placed that maintains actuarial equivalence with the 
standard benefit design.''
    Response: Comments related to CMS's administration of the Part D 
program are outside the scope of this rulemaking. However, we are aware 
that actuarial equivalence requirements in the Part D program may 
require that plans adjust copayment amounts to reflect discounts that 
are protected under the point-of-sale safe harbor. Specifically, if the 
negotiated prices change, the benefit (i.e., cost-sharing structure) 
must be adjusted to meet actuarial equivalence. Under the defined 
standard benefit design, lower negotiated prices would result in 
beneficiaries paying less cost sharing, in absolute terms, in each 
benefit phase. Under a tiered benefit design, the copayment or 
coinsurance amounts for the different tiers in each phase could be 
changed in various ways, as long as the overall cost-sharing structure 
results in beneficiaries being projected to pay no more in each phase 
than the beneficiaries' share required under the defined standard for 
that phase.
    Comment: Commenters raised concerns about the impact that changes 
included in the Proposed Rule could have on data reporting. 
Specifically, the commenter identified the following issues that the 
commenter asserted will require rulemaking or guidance by CMS in order 
to implement the Proposed Rule, citing Medicare Part D reporting 
requirements: Whether there would be changes to the PDE report, and how 
claims would be reported where a rebate was provided; what the Proposed 
Rule's

[[Page 76674]]

effect is on PDE data reporting procedures; whether point-of-sale price 
concessions would be reported on the estimated rebate fields, how they 
would be used on market shares, or what process would be used to 
reconcile over- or under-payments of point-of-sale price concessions to 
enrollees; how PDEs would be reported when wholesalers are involved; 
how claims would be reported when a rebate was provided that was later 
determined to be ineligible (e.g., due to 340B, denial, patient 
recoupment or duplicate claims); how point-of-sale price concessions or 
rebates would be reflected in DIR reports, and whether DIR reporting 
procedures would be revised, including to account for new requirements 
for PBM service fees; and would CMS need to create an agreement to 
allow for information to be shared by manufacturers to CMS since 
confidential data are being collected and reported.
    Response: Establishment of mechanisms for avoiding duplicate 
discounts or resolving disputes or errors regarding rebates is outside 
the scope of this rule. Comments about CMS's administration of the Part 
D program, including compliance with CMS requirements relating to PDE 
reporting for when a claim is re-processed as a result of such 
mechanisms, are outside the scope of this rulemaking.
    Comment: A commenter asked whether CMS will adopt the same 
definitions as OIG, including the definition of a rebated or discounted 
drug.
    Response: Comments about CMS's administration of the Part D program 
are outside the scope of this rulemaking. This question would be best 
addressed by CMS.
    Comment: Several commenters stated that D-SNP beneficiaries \14\ 
qualify for low income subsidies that reduce their cost-sharing 
responsibilities for brand and generic drugs to nominal amounts, so the 
Proposed Rule will most likely not result in a material change in their 
experience. These commenters are concerned that if premiums increase it 
could impact coverage affordability for D-SNP beneficiaries. Other 
commenters requested adopting a broad interpretation of the term ``plan 
sponsor under Medicare Part D.''
---------------------------------------------------------------------------

    \14\ Dual Eligible Special Needs Plans (D-SNPs) enroll 
beneficiaries who are entitled to both Medicare and Medicaid.
---------------------------------------------------------------------------

    Response: We are finalizing the revisions to the safe harbors as 
they apply to reductions in price or other remuneration in connection 
with the sale or purchase of a prescription pharmaceutical product from 
a manufacturer to a plan sponsor under Medicare Part D, without 
distinguishing among Part D plan types.
    Comment: Several commenters sought guidance on the interaction of 
the changes in the Proposed Rule with the Part D definition of 
``negotiated price.'' A commenter stated that CMS should update its 
cost-sharing rules to align with the proposed point-of-sale reductions 
in price safe harbor. The commenter urged CMS to finalize its 
definition of negotiated price in the MA and Part D proposed rule, 
``Modernizing Part D and Medicare Advantage to Lower Drug Prices and 
Reduce Out-of-Pocket Expenses,'' and to provide additional guidance. 
Some commenters stated that the definition of ``negotiated price'' at 
42 CFR 423.100 would need to be revised for several reasons, including: 
To incorporate price reductions processed via chargebacks itemized at 
the point of sale, because changes to the Proposed Rule would eliminate 
a portion of the DIR currently negotiated, or to ensure stakeholders 
can comply with not only the new safe harbors, if finalized, but also 
applicable Part D regulations.
    Another commenter stated that CMS should clarify the definition of 
negotiated price to clearly reflect the discounts protected by the new 
safe harbor. The commenter also stated that CMS should adjust the Part 
D benefit design to accommodate the reduced negotiated prices. The 
commenter further asserted that CMS should recalculate the portion of 
the overall program cost that beneficiaries are responsible for paying 
by using the reduced negotiated prices. This adjustment, the commenter 
stated, would lower the deductible, the initial coverage limit, and the 
catastrophic threshold to reflect the reduced cost of the standard 
benefit package. The commenter stated that this adjustment also would 
likely result in Part D plans lowering copayment amounts on specific 
formulary tiers, since those are also calculated based on the portion 
of the negotiated price for drugs placed on those tiers.
    Response: Comments related to CMS's administration of the Part D 
program, including the definition of negotiated price, are outside the 
scope of this rulemaking. However, we are aware that actuarial 
equivalence requirements in the Part D program may require that plans 
adjust copayment amounts to reflect discounts that are protected under 
the point-of-sale safe harbor. This rule does not change the definition 
of ``negotiated price'' at 42 CFR 423.100.
    Comment: A commenter requested guidance on the application of the 
provisions of the Proposed Rule to various kinds of pharmacies that the 
commenter indicated will have different applications and expectations, 
including LTC, mail-order, and specialty pharmacies.
    Response: As the commenter did not provide information on which 
provisions included in the Proposed Rule would affect categories of 
pharmacies differently, we are unable to respond more fully to this 
comment. We note that the amendment to the discount safe harbor does 
not affect discounts on prescription pharmaceutical products offered to 
entities such as pharmacies,\15\ as long as the arrangement meets all 
the existing requirements of the safe harbor; the amendment only 
impacts discounts from a manufacturer directly to a plan sponsor under 
Medicare Part D or indirectly to the plan sponsor, through a PBM acting 
under contract with it.
---------------------------------------------------------------------------

    \15\ 84 FR 2348.
---------------------------------------------------------------------------

    Comment: A commenter recommended that independent community 
pharmacies should assume no liability for implementation of the changes 
included in the Proposed Rule. For example, if the system required 
fees, the commenter stated, the fees should not be paid by pharmacies. 
The commenter also suggested that independent community pharmacies' 
reimbursements should not be affected by price reductions that are 
agreed upon between the plan or PBM and the manufacturer.
    Response: The final rule does not require fees, but only provides a 
safe harbor from liability under the anti-kickback statute for certain 
fees or other remuneration, under certain conditions. Whether pharmacy 
reimbursements are affected by price reductions agreed to between 
manufacturers and PBMs or plans for purposes of compliance under this 
rule will depend on the particulars of private contracting between the 
parties.
    Comment: Commenters raised questions about implementing the new 
safe harbor for point-of-sale reductions in price in light of Part D 
requirements. A commenter stated that CMS should provide guidance on 
how point-of-sale discounts apply to Medicare Secondary Payer claims, 
how point-of-sale discounts will impact vaccine administration fees, 
and whether point-of-sale discounts would change enrollment eligibility 
for MTM programs based on exceeding a set annual out-of-pocket cost.
    Response: We have coordinated with CMS on the promulgation of the 
point-

[[Page 76675]]

of-sale safe harbor to ensure that this rule can operate effectively in 
conjunction with the Part D program rules. Requests for CMS to issue 
guidance regarding the Part D program matters raised by the commenters 
are outside the scope of this rule.
    Comment: A commenter recommended amending the proposed safe harbor 
for point-of-sale reductions in price to require plans' compliance with 
tiering and coverage requirements for generic and biosimilar products, 
including automatic coverage of generic and biosimilar medicines 
immediately after launch, placement of generic-only tiers, and a 
dedicated specialty tier for specialty generics and biologics.
    Response: We do not believe we can make the suggested changes to 
the proposed point-of-sale safe harbor because we did not propose them. 
Moreover, even had we proposed them, we do not believe it would be 
necessary to include compliance with Part D tiering and coverage 
requirements for generic and biosimilar products in the safe harbor. We 
believe the conditions in the final safe harbor are sufficient to 
address program integrity risk with respect to the specific 
remuneration being protected. Nothing in the final rule changes any 
requirement of the Part D program, and parties are required to comply 
with all applicable CMS rules.
iv. Medicaid
    Comment: The majority of commenters who addressed Medicaid in their 
comments strongly opposed including Medicaid MCOs in the scope of the 
proposed changes to the discount safe harbor, with commenters positing 
that the change could harm state Medicaid programs, could impose 
unnecessary costs on states, and could lead states to make significant 
cuts to other parts of their Medicaid programs. A commenter highlighted 
that the changes we proposed would introduce significant uncertainties 
to states without any clear benefit. Another commenter requested that 
the Department instead focus on reforming the Medicaid Drug Rebate 
Program (MDRP).
    Several commenters also objected to, or did not understand, the 
inclusion of Medicaid in the proposed revisions to the discount safe 
harbor because, according to the commenters, the changes would not 
achieve the Department's goal of lowering beneficiaries' out-of-pocket 
spending. Per the commenters, beneficiaries are charged only nominal 
copayments in Medicaid and, except for a few plans, do not have 
coinsurance obligations. According to various commenters, because of 
the limited role of rebates in Medicaid managed care, passing through 
reductions in price for Medicaid beneficiaries will benefit only a few 
enrollees by a marginal amount or will be irrelevant. These commenters 
further questioned whether there would be any incentive for 
manufacturers to provide point-of-sale price reductions in Medicaid at 
a level equal to or similar to the savings leveraged through the 
current framework.
    Response: Upon consideration of the comments received, we are 
persuaded that we should not move forward with our proposal to revise 
the discount safe harbor to exclude rebates offered to Medicaid MCOs. 
In the Proposed Rule, the Department articulated its concern that 
``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,'' which the Department hypothesized could 
be increasing financial burdens for beneficiaries.\16\ For these 
reasons, the Department proposed to eliminate protection for rebates 
provided to Medicaid MCOs and to offer protection for point-of-sale 
reductions in price for a prescription pharmaceutical product payable, 
in whole or in part, by a Medicaid MCO. As noted by commenters, 
however, Medicaid beneficiaries generally have nominal cost-sharing 
obligations for prescription pharmaceutical products. Additionally, 
although State Medicaid agencies have flexibility to design alternative 
cost-sharing arrangements for Medicaid beneficiaries, generally 
Medicaid MCO contracts must meet cost-sharing requirements for drugs in 
42 CFR 447.53. See 42 CFR 438.108. These requirements set maximum 
allowable cost-sharing amounts for preferred and non-preferred drugs. 
Given these circumstances and existing regulatory requirements, we 
believe that eliminating discount safe harbor protection for reductions 
in price offered to a Medicaid MCO would have minimal, if any, effect 
on the amount a Medicaid beneficiary pays when he or she purchases 
prescription pharmaceutical products at the pharmacy.
---------------------------------------------------------------------------

    \16\ 84 FR 2341-42.
---------------------------------------------------------------------------

    Under this final rule, Medicaid MCOs seeking safe harbor protection 
for discounts have the option to use either the discount safe harbor or 
the new safe harbor for point-of-sale reductions in price at Sec.  
1001.952(cc). As discussed in more detail below, however, we note that 
neither the discount safe harbor nor the new safe harbor protects 
rebates or other reductions in price from a manufacturer that are 
retained by a PBM, even if that PBM is operating on behalf of a 
Medicaid MCO.
    Comment: Some commenters supported application of the changes to 
the discount safe harbor to Medicaid as well as to Medicare, other 
Federal health care programs, and the commercial markets.
    Response: For the reasons stated above, we have decided not to move 
forward with our proposal to revise the discount safe harbor as it 
applies to Medicaid MCOs.
    Comment: Several commenters stated that the changes in the Proposed 
Rule, if finalized, would create an unlevel playing field in Medicaid 
programs because they would eliminate safe harbor protection for 
supplemental rebates negotiated by Medicaid MCOs (or PBMs with which 
they have contracted) while continuing to protect supplemental rebates 
received by states directly under Medicaid fee-for-service programs. 
According to several commenters, because states would be able to 
negotiate supplemental rebates even if the Proposed Rule were 
finalized, the changes in the Proposed Rule would incentivize states to 
carve out the outpatient prescription drug benefit or to adopt a state-
mandated preferred prescription drug list to maximize supplemental 
rebates. A commenter also stated that states may seek larger 
supplemental rebates, which a commenter noted do not count towards Best 
Price. Commenters that raised this issue listed several concerns with 
this result. For example, they noted that carve-out arrangements 
inhibit Medicaid MCOs' ability to manage the full range of healthcare 
items and services for beneficiaries under their care.
    Response: We are not finalizing the changes to the discount safe 
harbor with respect to Medicaid MCOs, which addresses the commenters' 
concerns.
    Comment: Multiple commenters discussed the importance of 
supplemental rebates to the Medicaid program and Medicaid MCOs. 
Numerous commenters noted that Medicaid supplemental rebates are an 
important tool for states in controlling drug spending, with a 
commenter noting that 46 states and the District of Columbia have 
supplemental rebate agreements and collected about $1.2 billion in 
supplemental rebates during fiscal year 2017.
    Additionally, various commenters requested clarification relating 
to the treatment of supplemental rebates paid by manufacturers to 
Medicaid MCOs and supplemental rebates paid by manufacturers to state 
Medicaid

[[Page 76676]]

agencies. Specifically, several commenters sought clarification as to 
how Medicaid drug payment provisions in section 1927 of the Act relate 
to protection for supplemental rebates under the Proposed Rule and, in 
particular, whether such supplemental rebates are ``required by law,'' 
which was a carve out to our exception in our proposal to eliminate 
discount safe harbor protection for reductions in price from 
manufacturers to Medicaid MCOs. Certain commenters asserted that 
manufacturers' legal obligations under the MDRP also extend to Medicaid 
supplemental rebates, which the commenters used to support the position 
that the discount safe harbor would continue to protect supplemental 
rebates negotiated between states and manufacturers. Other commenters 
recommended that, if OIG moves forward with including Medicaid MCOs in 
the changes to the discount safe harbor, OIG should clarify that 
supplemental rebates negotiated by Medicaid MCOs but received directly 
by state Medicaid agencies are protected.
    In addition, several commenters noted that Medicaid MCOs often 
retain full risk in connection with prescription drug coverage and use 
supplemental rebates to lower overall costs for state Medicaid programs 
or to defray capitation costs. Another health plan commenter asserted 
that with reduced flexibilities to manage drug costs through Medicaid 
supplemental rebates, the Medicaid program may become less attractive 
to MCOs, which may decrease health insurance choices for consumers. In 
the alternative, a commenter recommended that OIG prohibit all 
supplemental rebates negotiated across Medicaid fee-for-service and 
Medicaid managed care.
    Commenters noted their concerns about the potential for state 
Medicaid program drug expenditures to increase if the changes in the 
Proposed Rule limit the existing ability of Medicaid programs to 
negotiate supplemental rebates. Other commenters estimated that 
Medicaid costs may rise because of the loss of safe harbor protection 
for supplemental rebates to Medicaid MCOs, which could lead states to 
decrease other benefits, cut provider payments, or make other cuts to 
state Medicaid programs to make up for these higher costs. Another 
commenter raised concerns that in the absence of PBMs, states will not 
be able to adapt and negotiate directly with manufacturers for 
supplemental rebates. Another commenter noted that many PBMs operating 
on behalf of Medicaid MCOs already pass through the entire supplemental 
rebate to health plans they contract with, which are bound by federal 
and state rate setting and reporting requirements, so eliminating 
supplemental rebates to Medicaid MCOs will not create any additional 
transparency in this area. However, another commenter stated that more 
transparency regarding supplemental Medicaid rebates collected by PBMs 
and Medicaid MCOs is still needed for states to completely capture the 
value of Medicaid supplemental rebates paid to PBMs.
    Response: As discussed in detail above, we are not finalizing the 
changes to the discount safe harbor with respect to Medicaid MCOs, 
which addresses many of the commenters' concerns. We reiterate that 
this final rule does not alter obligations under the statutory 
provisions for Medicaid prescription drug rebates under section 1927 of 
the Act, including without limitation the provisions related to best 
price, the additional rebate amounts required for certain drugs based 
on 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.
    Comment: Several commenters raised a number of concerns about 
administrative burdens that would be imposed on states and Medicaid 
MCOs with respect to implementing and operationalizing this rule; for 
example, a commenter noted that states would be required to set and 
certify new Medicaid MCO rates. Another commenter stated that affected 
entities (e.g., Medicaid MCOs, states, PBMs, pharmacies) will all need 
to renegotiate their contracts, some of which may require state 
legislative or agency approval. Another commenter explained that 
Medicaid managed care contracts are generally effective for several 
years and states often operate on a fiscal year that differs from the 
calendar year. The commenter believes that providing states limited 
time to renegotiate multi-year contracts, or to make midyear 
adjustments, would be potentially unfeasible.
    Response: We are not finalizing the changes to the discount safe 
harbor with respect to Medicaid MCOs, which addresses the commenters' 
concerns.
    Comment: A number of commenters raised various questions or 
concerns with respect to the implications of the changes included in 
the Proposed Rule for calculations of AMP, Best Price, and Federal 
Upper Limits. For example, several commenters stated that the Proposed 
Rule would result in increased costs to taxpayers because of changes to 
AMP calculations. According to a number of commenters, if changes in 
the Proposed Rule lower the AMP, it will result in reductions to drug 
rebate revenue under the MDRP, which will increase Medicaid program 
costs. Similarly, commenters expressed concern that a lower AMP might 
reduce Federal Upper Limits or the National Average Drug Acquisition 
Cost invoice pricing data and, in turn, could reduce Medicaid 
reimbursement to pharmacies. A commenter contended that it is critical 
that the change to point-of-sale discounts not affect AMP.
    As a result of these concerns and questions, a number of commenters 
requested that CMS issue guidance regarding whether point-of-sale 
chargebacks are included in calculations of AMP. Commenters who did not 
want these chargebacks to be included in AMP calculations generally 
recommended that such guidance explain that point-of-sale chargebacks 
fit into one of several types of statutorily excluded discounts to AMP. 
Another commenter posited that the Proposed Rule was ambiguous and 
could allow a point-of-sale discount to be construed as a PBM or payor 
concession, a pharmacy concession, or a direct-to-patient concession, 
which could have AMP and Best Price implications.
    With respect to the calculation of Best Price, a commenter stated 
its position that point-of-sale chargebacks fall within an exemption to 
Best Price. Other commenters raised concerns that removing the 
protection for Medicaid supplemental rebates and moving toward point-
of-sale discounts would raise Best Price, which the commenters posited 
would ultimately reduce the amount manufacturers pay in rebates under 
the MDRP. Another commenter requested that OIG or HHS confirm whether, 
and how, the final rule may affect existing regulations regarding the 
calculations for the Medicaid fee-for-service program Federal Upper 
Limit calculations as it relates to the formula for the National 
Average Drug Acquisition Cost and the Cost to Dispense pharmacy 
dispensing fee.
    Response: The Department recognizes that the final rule has the 
potential to affect calculations of AMP, Best Price, and Federal Upper 
Limits in ways and to an extent that may be difficult to anticipate. 
However, we are not finalizing the changes to the discount safe harbor 
with respect to Medicaid MCOs. We reiterate that the final rule does 
not alter obligations under the statutory provisions for Medicaid 
prescription drug rebates under section 1927 of the Act, including AMP, 
Best Price, and Federal Upper Limits.

[[Page 76677]]

    Comment: A commenter asserted that brand-name manufacturers launch 
authorized generics to lower a brand drug's AMP (and thus lower the 
manufacturer's statutorily required discounts under the MDRP).
    Response: We did not propose to alter obligations under the MDRP 
and the issue raised by the commenters is out of scope of this final 
rule.
    Comment: Commenters raised concerns about the potential effects on 
value-based arrangements in several Medicaid programs if the Proposed 
Rule were to be finalized. Several commenters highlighted three value-
based contracting models that allow states to align supplemental 
rebates with outcomes-based and value-based measures.
    Response: We believe our decision not to finalize the changes to 
the discount safe harbor with respect to Medicaid MCOs addresses the 
commenters' concern.
    Comment: A commenter requested that the Department clarify in the 
final rule that entities that operate under contract with a state are 
protected under the revised discount safe harbor. The commenter 
provided an example of multi-state purchasing organizations that create 
preferred drug lists, and the commenter explained that it is not clear 
whether these entities would be protected under the revised discount 
safe harbor because they are not ``states.''
    Response: Because we are not moving forward with the proposed 
changes to the discount safe harbor with respect to Medicaid MCOs, we 
believe the commenter's concerns are addressed.
    Comment: A commenter specifically requested that OIG clarify 
whether the final rule would explicitly exclude Puerto Rico's Medicaid 
rebate system from the amendment to the discount safe harbor, because 
Puerto Rico's Medicaid program does not currently participate in the 
MDRP.
    Response: Because we are not moving forward with the proposed 
changes to the discount safe harbor with respect to Medicaid MCOs, we 
believe the commenter's concerns are addressed.
v. Commercial Market
    Comment: Numerous commenters supported the extension of this 
proposal to the commercial market, stating that plans and drug 
companies will be motivated to maintain high list prices if rebate 
arrangements continue to permeate the commercial market. According to 
the commenters, the benefits associated with the proposal, such as 
reduced out-of-pocket costs and improved access to medication, will be 
limited if the proposal is not extended to the commercial market. For 
example, a pharmaceutical-manufacturer commenter in favor of 
eliminating rebates in the commercial sector explained that rebates and 
discounts for its products have increased in Part D and the commercial 
sector, even though the affordability of drugs continues to be a public 
health issue. Another commenter was opposed to extending the provisions 
of the Proposed Rule to the commercial market and stated that rebates 
are an important tool used by PBMs to negotiate lower prices from drug 
companies on behalf of employers and private health plans.
    Response: The scope of the anti-kickback statute is limited to 
remuneration that is offered, paid, solicited, or received in order to 
induce or reward Federal health care program business. Commercial, 
private pay, or self-pay arrangements that do not touch Federal health 
care program beneficiaries in any manner do not implicate the Federal 
anti-kickback statute (except in the context of swapping arrangements 
or pull-through type arrangements in which discounts might be given 
only on private pay business to induce the referral of Federal health 
care program business). In other words, the anti-kickback statute 
generally does not extend to arrangements involving purely commercial 
business; as a result, it is beyond the scope of this rulemaking to 
extend such safe harbors to the commercial market.
    Comment: Several commenters supported future efforts to extend this 
proposal to the commercial market but recommended ensuring successful 
implementation of the rule in Medicare Part D before addressing rebates 
in the commercial market. A commenter noted that the wholesale 
conversion of both Federal health care programs and the commercial 
market could cause confusion in the marketplace and disrupt patient 
access to medications. Specifically, the commenter noted there would be 
many new operational and system requirements for applying the point-of-
sale discount. In addition, the commenter explained that it is vital to 
see how health plans may change their benefit designs in response to 
the rule, which could include changes to formularies and greater cost 
sharing, before this proposal is extended to the commercial market.
    Response: Extension of the revised discount safe harbor and the two 
new safe harbors to the commercial market is beyond the scope of this 
rulemaking.
    Comment: Several commenters asserted that if the Proposed Rule is 
finalized, drug-related costs will shift to the commercial market, with 
a commenter noting that employers may change plan offerings for 
prescription drugs as a result of these increased costs, which could 
harm individuals in private plans.
    Response: Since the changes under the final rule may result in a 
range of market responses, the Department respectfully disagrees that 
drug-related costs will necessarily shift to the commercial market and 
result in harm to individuals in private plans. Instead, the Department 
expects that manufacturers will lower list prices, which could result 
in lower costs across both the Part D and the commercial markets.
    Comment: A commenter requested guidance on when rebates that are 
offered to commercial plans, but not to Medicare or Medicaid, may 
implicate the anti-kickback statute. Specifically, the commenter 
requests acknowledgement that OIG rules relating to ``swapping'' do not 
apply as long as there is no quid pro quo between a manufacturer price 
concession offered on a plan's or PBM's commercial utilization and a 
price concession offered on such a plan's or PBM's Federal health care 
program utilization.
    Another commenter raised concerns about the statements in the 
Proposed Rule that indicated commercial rebates outside of Federal 
health care programs tied to formulary placement across all plans, 
including Federal health care programs, may not be protected by the 
current discount safe harbor or proposed revisions. The commenter 
claimed that this statement could have a chilling effect on 
negotiations between private health plans and employers or individuals.
    Other commenters expressed concern that if the conditions of safe 
harbors included the Proposed Rule do not apply to the commercial 
market, rebates in the commercial market could still be used to induce 
the purchase of products reimbursed by Federal health care programs. To 
address this concern, commenters recommended that the Department 
clearly indicate that rebates in the commercial market will be 
scrutinized to ensure that they are not being offered to influence the 
purchase of products by Federal health care programs.
    Response: While the anti-kickback statute is not implicated in 
arrangements that involve only commercial, private pay, or self-pay 
arrangements, we noted in the Proposed Rule that we have ``a long-
standing concern about arrangements that `carve out' referrals of 
Federal health care

[[Page 76678]]

program beneficiaries or business generated by Federal health care 
programs from otherwise questionable financial arrangements.'' \17\ We 
would have similar concerns with arrangements that involve remuneration 
offered under the guise of an arrangement limited to commercial-pay or 
private-pay patients but is, in reality, part of a broader arrangement 
to induce referrals of Federal health care program business or 
patients. As we noted in our final rule published in 1999, ``such 
`swapping' arrangements, which essentially shift costs to the Federal 
health care programs, continue to be of concern to this office.'' \18\ 
In any of these circumstances, arrangements would need to be reviewed 
for compliance with the anti-kickback statute, but whether a specific 
arrangement constitutes a problematic swapping arrangement depends on 
the facts and circumstances, and we decline to adopt the quid pro quo 
standard suggested by a commenter. Individuals or entities are free to 
request protection from sanctions under the anti-kickback statute for 
specific arrangements through our advisory opinion process.
---------------------------------------------------------------------------

    \17\ 84 FR 2347.
    \18\ 64 FR 63528.
---------------------------------------------------------------------------

    Comment: A commenter asserted that the Department should not 
attempt to reform the current commercial market rebate system through 
the anti-kickback statute and noted that due to the complexity of the 
commercial market, any changes to the commercial market rebate system 
should be undertaken carefully and incorporate feedback from a range of 
stakeholders.
    Response: As discussed above, the anti-kickback statute only 
prohibits remuneration that is offered, paid, solicited, or received to 
induce or reward Federal health care program business. The statute 
generally is not implicated when the arrangements involve purely 
private-pay business.
    Comment: Several commenters noted that certain PBMs and insurers 
have recently announced point-of-sale rebate sharing in the commercial 
market, which may signify that the infrastructure and capacity to adopt 
these reforms in the commercial market already exist. However, a 
commenter indicated that these point-of-sale rebate benefit designs are 
being offered at a higher premium than standard designs and that it is 
too early to determine if enrollment in these options will be robust or 
limited.
    Response: We appreciate the commenters' insights into the dynamics 
of this market. As we discuss above, we understand that some commercial 
plans may be operationalizing point-of-sale benefit designs and, as the 
commenters suggest, we believe that some industry stakeholders have the 
capabilities to operationalize point-of-sale reductions in price that 
would be protected under the new safe harbor.
vi. Value-Based Arrangements
    Comment: Some commenters stated that value-based arrangements would 
not neatly fit into the new safe harbor for point-of-sale reductions in 
price because they typically rely on gathering data after the point of 
sale and making payments after the point of sale. Commenters expressed 
an interest in allowing value-based arrangements to be protected by a 
safe harbor, stating that value-based arrangements provide an important 
opportunity to address drug prices by paying the value of a drug if it 
achieves the desired outcome, while paying a lower price if it does not 
work. Other commenters expressed concern that if the changes to the 
discount safe harbor are finalized but an exception is made so that 
value-based arrangements continue to receive protection under the 
discount safe harbor, parties might recast rebate arrangements that 
otherwise would be prohibited as ``value-based arrangements'' in order 
to continue to receive protection under the discount safe harbor.
    Response: The Department recognizes the importance of value-based 
contracting for prescription pharmaceutical products as an evolving 
tool to improve quality of care and potentially reduce costs.\19\ Upon 
reflection, we agree that not all value-based pharmaceutical 
arrangements for Part D prescription drugs would fit into the revised 
discount safe harbor or the new safe harbor for point-of-sale 
reductions in price. We believe that some value-based arrangements 
involving prescription pharmaceutical products might qualify for 
protection under the new point-of-sale safe harbor but also could 
qualify under other safe harbors (e.g., the personal services and 
management contracts safe harbor, warranties safe harbor). To the 
extent manufacturers wish to use the new point-of-sale safe harbor for 
value-based arrangements, the reduction in price on prescription 
pharmaceutical products must be in the form of a point-of-sale 
discount. Any value-based arrangement (whether under Part D or another 
Federal health care program) must be analyzed on a case-by-case basis 
under the statute and with respect to available safe harbor protection. 
With respect to the concern about recasting rebate arrangements as 
value-based arrangements, we note that labeling an arrangement as 
``value-based'' does not necessarily make it so, and any arrangement 
(whether labeled as value-based or otherwise) must still comply with 
all conditions of a safe harbor.
---------------------------------------------------------------------------

    \19\ See, e.g., 84 FR 55694, 55704 (Oct. 17, 2019).
---------------------------------------------------------------------------

    Comment: Some commenters expressed concern that excluding value-
based arrangements from the discount safe harbor may limit the 
effectiveness of PBMs, plan sponsors, or other third parties that play, 
or could play, a valuable role in designing effective prescription drug 
programs, treatments, and therapies, and in ensuring drug manufacturers 
are held accountable for certain outcomes-based metrics.
    Response: We thank the commenters for raising these concerns. As 
described above, the Department remains committed to promoting value-
based arrangements that have the potential to improve the quality of 
care provided to beneficiaries while lowering overall costs to Federal 
health care programs. The final rule does not prohibit those entities 
highlighted by the commenters, including but not limited to PBMs and 
plan sponsors under Part D, from being able to continue to negotiate 
value-based arrangements with manufacturers that aim to achieve these 
goals.
    Comment: A commenter suggested that, because value-based 
arrangements would remain within the safe harbor, value-based 
arrangements will expand.
    Response: As described above, we recognize that the changes to the 
discount safe harbor may result in certain value-based arrangements no 
longer being eligible for protection under the discount safe harbor. 
However, the Department continues to encourage the development and 
implementation of arrangements that work to transform the health care 
system into one that better pays for value.
    Comment: Several commenters expressed concern that the proposed 
revision to the discount safe harbor, without further guidance from OIG 
on its applicability to value-based arrangements, may deter, chill, or 
impede drug manufacturers, PBMs, or plans from entering into, 
developing, implementing, negotiating, or continuing under value-based 
arrangements. Several commenters expressed concern about and described 
examples of value-based arrangements that may implicate the anti-
kickback statute and not be protected under the safe harbors set forth 
in the Proposed Rule. For example, under an outcomes-based arrangement, 
drug manufacturers may or must, contractually, provide rebates or 
refunds if a specific

[[Page 76679]]

medication is not effective--or not as effective as indicated--after an 
individual has used the specific medication. The commenter then posited 
that a point-of-sale discount would not be practical or possible 
because the rebate or refund is contingent upon or influenced by a 
specific outcome and is provided after the point of sale has already 
occurred. Other commenters requested that OIG allow flexibility or 
sufficient time after the effective date of the final rule for drug 
manufacturers, PBMs, and plans to re-negotiate or terminate value-based 
arrangements that may not satisfy the conditions of the proposed 
revisions to the existing discount safe harbor or the new safe harbor 
at 42 CFR 1001.952(cc). Another commenter expressed concern that, even 
if value-based arrangements are protected under the proposed amendments 
to the discount safe harbor and the proposed new safe harbor for point-
of-sale reductions in price, drug manufacturers may be deterred from 
offering certain discounts if competitors know or can determine each 
other's discount values.
    Response: Value-based arrangements, like all arrangements that 
implicate the anti-kickback statute, must be analyzed on a case-by-case 
basis. We agree with commenters that not all value-based pharmaceutical 
arrangements for Part D prescription drugs may qualify for protection 
under the revised discount safe harbor or the new safe harbor for 
point-of-sale reductions in price. As we note above, other safe harbors 
could apply, such as the personal services and management contracts 
safe harbor or warranties safe harbor. The fact that an arrangement 
does not fit in a safe harbor does not mean it is necessarily unlawful. 
The terms of a particular arrangement would drive whether the anti-
kickback statute is implicated and any safe harbor that might apply. We 
remind stakeholders seeking protection for value-based arrangements 
that the advisory opinion process remains available. Concerns about the 
effective date and transparency are addressed elsewhere in this 
preamble.
    Comment: Another commenter requested that OIG clarify whether the 
revised discount safe harbor and/or the safe harbor for GPOs would, in 
appropriate circumstances, protect value-based contracting between 
manufacturers and healthcare institutions or wholesalers/distributors, 
such as contractual arrangements with hospitals and integrated delivery 
networks.
    Response: Whether the GPO safe harbor is appropriate for value-
based contracting is beyond the scope of this rulemaking. Whether a 
value-based arrangement could use the GPO safe harbor would be a fact-
specific determination.
vii. Enforcement Issues
    Comment: In discussing the operational challenges of implementing 
the Proposed Rule, several commenters noted that it would create a new 
regulatory structure and that any mistakes are subject to criminal 
penalties under the anti-kickback statute. According to a commenter, 
this risk may prevent stakeholders from proceeding with implementation. 
As an example, the commenter explained that pharmacies may not 
operationalize the chargeback proposal because of potential liability 
under the anti-kickback statute.
    Response: Compliance with a safe harbor is voluntary, and 
arrangements that do not comply with a safe harbor--because of mistakes 
or otherwise--are analyzed based on their facts and circumstances. The 
failure to meet the conditions of a new safe harbor does not 
automatically subject one to criminal penalties. The anti-kickback 
statute is an intent-based statute; mere errors or mistakes would not 
trigger concerns absent other facts evidencing unlawful intent to 
induce referrals. In addition, as with our other safe harbors, the 
advisory opinion process remains available for parties that seek to 
determine if an arrangement or proposed arrangement satisfies the 
criteria of the safe harbor.
    Comment: A commenter recommended that OIG work with several 
agencies, including the DOJ and the FTC, to develop guidance for the 
industry with respect to a final rule. The commenter explained that 
this guidance is particularly important as it renegotiates contracts in 
order to avoid possible civil and criminal penalties. As one example, 
the commenter requested guidance on various types of swapping 
arrangements. Another commenter asked for affirmative guidance from OIG 
on a number of enforcement-related topics. For example, the commenter 
requested that OIG declare in the final rule that it expects industry-
wide compliance with the anti-kickback statute with respect to the 
reductions in price and service fee arrangements covered under the new 
safe harbors. The commenter also asked OIG to state that it will 
subject PBMs to heightened scrutiny for any arrangements conditioned on 
formulary placement that do not fit within the new safe harbors.
    Response: The Department regularly collaborates with our government 
partners, as appropriate. Any requests for the Secretary to issue sub-
regulatory guidance jointly with other agencies or to issue affirmative 
guidance is outside the scope of this safe harbor rulemaking. OIG 
publishes guidance from time to time on its web page.
    OIG agrees with the commenter that the proper question is whether 
entities are in compliance with the anti-kickback statute; we 
reiterate, however, that compliance with a safe harbor is voluntary. 
Any arrangement that implicates the anti-kickback statute and does not 
satisfy an exception or safe harbor would be subject to scrutiny; as 
discussed in more detail below, we reiterate our concern about any kind 
of payment to buy or provide remuneration tied to formulary placement 
that is not a safe harbored reduction in price.
    Comment: Several pharmaceutical manufacturer commenters raised 
concerns with respect to PBMs' response to the new safe harbor, stating 
that PBMs may take aggressive positions on interpretations of the anti-
kickback statute or the new safe harbors and require manufacturers to 
accept that legal position to access the PBMs' beneficiaries. For 
example, the commenters stated that a PBM might interpret the anti-
kickback statute to permit rebates to PBMs or might take the position 
that safe harbor compliance is not required.
    Response: With respect to the commenters' concerns surrounding 
PBMs' interpretation of changes to the safe harbor provisions, we 
emphasize that, while compliance with the terms of a safe harbor is 
voluntary, an arrangement is protected only if all conditions of a safe 
harbor are met. We want to take this opportunity to confirm our 
position, as stated in the preamble to the Proposed Rule, that any 
portion of a payment (whether it is called a ``rebate'' or something 
else) that a manufacturer pays to a PBM that is retained by the PBM and 
not passed through to the buyer never was protected under the discount 
safe harbor.\20\ The discount safe harbor protects a reduction in price 
to a buyer. A PBM is not a buyer, and the portion of a payment from a 
manufacturer to a payor that is retained by a PBM is not a reduction in 
price. Dating back to the 1991 Final Rule,\21\ we have made a 
distinction between (i) fees that would fall under personal services 
contracts and (ii) discounts; a discount is a reduction in price, not 
payment for a service. Payments to a PBM for services could be 
protected under other safe

[[Page 76680]]

harbors if all relevant safe harbor conditions are met.
---------------------------------------------------------------------------

    \20\ 84 FR 2343 n.36.
    \21\ 56 FR 35952.
---------------------------------------------------------------------------

    PBMs can provide valuable services for health plans and 
manufacturers and can be compensated for those services. To the extent 
such compensation implicates the anti-kickback statute, it can be 
structured to comply with a safe harbor (such as the personal services 
and management contracts safe harbor or new PBM service fee safe 
harbor). However, we note generally that we would have significant 
concerns with arrangements for services that are not necessary, are 
worthless, or are duplicative and that operate as shams designed to 
reward a party for referrals of Federal health care program items or 
services; these concerns apply with equal force to both the payor and 
the recipient of remuneration, and our approach to enforcement has and 
will, as business practices and incentives evolve, continue to reflect 
that. Such arrangements would not be protected under any safe harbor.
    Comment: Several commenters requested that OIG engage in some type 
of enforcement discretion during implementation of a final rule, with a 
commenter citing to the final rules in 1991 and 1999 as examples of 
instances where the Department has considered enforcement discretion. A 
commenter suggested that, if the rule is finalized, OIG should issue a 
statement of non-enforcement for a period of two years because Part D 
bids will be based on safe harbor rules in effect at the time of the 
bids, while the plans may operate under different safe harbors in the 
plan year. A commenter requested that OIG publish a policy statement 
that it will not enforce the anti-kickback statute where PBMs serve as 
point-of-sale chargeback administrators that implement the point-of-
sale discounts. Another commenter asked that the Department permit the 
distribution of rebates where the terms of the rebate arrangement were 
set prior to January 1, 2020.
    Response: As explained elsewhere in this final rule, the amendments 
to the discount safe harbor at Sec.  1001.952(h)(5) do not take effect 
until January 1, 2022. We recognize that many parties have previously 
structured their arrangements based on the advice of an attorney and in 
good-faith belief that their arrangements were legal under the discount 
safe harbor, and any arrangements that comply with that safe harbor 
remain protected until that effective date. The new safe harbor for 
point-of-sale reductions in price will be effective and available for 
use 60 days after publication of this final rule. The Department 
encourages parties to use the new safe harbor as rapidly as possible. 
We are not issuing an enforcement discretion policy given the length of 
time parties have under the final rule to come into compliance with the 
amended safe harbor. We also decline to adopt the commenter's 
suggestion to exercise enforcement discretion where PBMs serve as 
point-of-sale chargeback administrators that implement the point-of-
sale discounts.
viii. State Law Issues
    Comment: Several commenters raised concerns about various state 
laws, such as state trade secrets or privacy laws, that could be 
implicated by the Proposed Rule.
    Response: We are not in a position to respond to comments on state 
laws. As we stated in our 1991 rulemaking, ``[i]ssues of state law are 
completely independent of the federal anti-kickback statute and these 
[safe harbors]. . . . Thus, conduct that is lawful under the federal 
anti-kickback statute or [safe harbors] may still be illegal under 
State law.'' \22\ Similarly, state laws governing trade secrets or 
privacy issues are outside the scope of this rulemaking.
---------------------------------------------------------------------------

    \22\ 56 FR 35957.
---------------------------------------------------------------------------

ix. Other Legal Issues
    Comment: Some commenters raised Administrative Procedure Act (APA) 
concerns. For example, a commenter urged the Department to adhere to 
the duty to review and take into account public comments received. 
Another commenter stated that the Proposed Rule fails to provide clear 
examples of the harm that it would remediate. In particular, the 
commenter claimed that the rule describes a policy rationale, but it 
does not explain what type of ``inducement'' the Proposed Rule would 
prevent. A commenter suggested that aspects of the Proposed Rule do not 
meet the APA's requirement to include sufficient detail to allow for 
meaningful comment. For example, the commenter stated that the preamble 
does not provide enough detail to explain how chargebacks would work so 
that industry stakeholders can meaningfully comment.
    Response: The Department reviewed all comment letters, took into 
account all relevant public comments, and considered relevant impacts 
and program integrity concerns in developing this final rule. With 
respect to the questions set forth by commenters about the substantive 
sufficiency of the Proposed Rule, we respectfully disagree. Discounts 
of any kind serve as an inducement to purchase an item or service, and 
the anti-kickback statute specifies that a ``rebate'' is a form of 
inducement. The Proposed Rule sets forth the authority from Congress 
for establishing or modifying safe harbors, two of which include an 
increase or decrease in access to healthcare services and any other 
factors that the Secretary deems appropriate in the interest of 
preventing fraud and abuse in Federal health care programs.\23\ The 
Proposed Rule extensively describes the problematic incentives with the 
current rebate system, including, but not limited to, the incentive to 
include higher-priced prescription drugs on formularies to capture 
larger rebates and the impact of higher list prices on 
beneficiaries.\24\ In other sections of the Proposed Rule, such as the 
discussion of ``chargebacks'' that a commenter referenced, we not only 
made specific proposals but we also solicited comments on a number of 
issues. In fact, we received detailed and meaningful comments on 
chargebacks from almost 50 commenters, to which we respond elsewhere in 
this final rule. We did not include in the proposed safe harbor overly 
technical requirements about the administration of the chargeback 
process in order to provide private parties with the flexibility to 
design these systems, while offering numerous opportunities to comment.
---------------------------------------------------------------------------

    \23\ 84 FR 2345.
    \24\ See, e.g., 84 FR 2340-44.
---------------------------------------------------------------------------

    Comment: Some commenters alleged that the Proposed Rule is 
arbitrary and capricious for a variety of reasons. For example, a 
commenter asserted that the Proposed Rule is arbitrary and capricious 
because it treats similar situations differently by continuing to 
protect rebates in Medicare Parts A and B without an adequate 
explanation. A commenter also asserted that there is not a rational 
connection between the concerns identified in the Proposed Rule and the 
proposed changes to the safe harbors. In support of this claim, the 
commenter asserted that a stated objective of the Proposed Rule is to 
reduce government program costs, but the regulatory impact analysis 
shows that costs will rise and noted that the rule expresses concern 
for beneficiary out-of-pocket costs while the impact analysis predicts 
increased beneficiary premiums. This commenter also claimed the 
proposed rule was asserting contradictory purposes in seeking to reduce 
the spread between list and net prices while also seeking to replace 
rebates from manufacturers to PBMs with discounts provided to 
beneficiaries at the point of sale. Another commenter expressed concern 
that the Proposed Rule may be arbitrary and capricious because, in the 
commenter's view,

[[Page 76681]]

significant impacts, consequences, and results were overlooked or 
discarded in developing the Proposed Rule, such as potential effects on 
future enrollment in Part D and Medicaid MCOs, possible impacts on MCO-
negotiated supplemental rebates and the antitrust implications of up-
front discount negotiations. A commenter suggested that estimates of 
the time entities will spend updating systems to comply with the rule 
was underestimated.
    Response: We believe the changes to the safe harbor protections 
that we are finalizing here are a reasonable and appropriate response 
to address harmful effects of rebates on beneficiaries in Medicare Part 
D and other Federal health care programs and will help to ensure that 
safe harbor protection is available only for non-abusive arrangements 
that are transparent and reflect an alignment of incentives among plan 
sponsors, manufacturers, beneficiaries, and the government. We 
appreciate the concern that the changes we proposed could be construed 
as treating similar situations differently by removing protection for 
rebates in some Federal health care programs but not others. However, 
this characterization disregards the fact that many safe harbors, 
including the discount safe harbor, differentiate between the 
protection afforded to arrangements involving different Federal health 
care programs in order to target protection to non-abusive 
arrangements. The Proposed Rule was developed in response to certain 
abusive rebate arrangements that have been identified in the specific 
context of Medicare Part D, and therefore the proposal was structured 
to remove protection for those abusive arrangements. Moreover, we 
solicited comments on whether the amendment also should apply to 
prescription pharmaceutical products payable under other Federal health 
care programs.\25\ As we discuss elsewhere in this final rule, 
commenters agreed that the amendment should not be expanded to other 
programs. Accordingly, we concluded that the amendment should not be 
expanded to other programs. In particular, as explained above, we are 
not finalizing our proposal to apply the amendment to Medicaid MCOs.
---------------------------------------------------------------------------

    \25\ 84 FR 2347.
---------------------------------------------------------------------------

    Similarly, we believe the final rule rationally and effectively 
advances the regulatory goals of transparency and ``alignment of 
incentives.'' \26\ Specifically, the rule addresses the problem that 
rebate arrangements among Part D plan sponsors, pharmacy benefit 
managers, and pharmaceutical manufacturers are not transparent to the 
government or beneficiaries and incentivize higher list prices for 
drugs contrary to the interests of the Federal health care programs or 
beneficiaries. Accordingly, we proposed to eliminate the existing safe 
harbor protection for those abusive arrangements. We disagree that 
there is any conflict between seeking to lower list prices and 
concurrently working to ensure that any negotiated reductions to the 
list prices of drugs are provided in the form of discounts to 
beneficiaries at the point of sale. As discussed in the Proposed Rule, 
the current rebate framework for prescription pharmaceutical products 
does not appear to translate into lower Medicare per beneficiary 
spending on prescription drugs, when age and inflation are accounted 
for. The existing structure may be one of the factors driving list 
prices higher, which harms patients and Federal health care programs. 
The final rule directly addresses these issues.
---------------------------------------------------------------------------

    \26\ 84 FR 2343-44.
---------------------------------------------------------------------------

    Likewise, we disagree with the commenter who suggested that we 
ignored or disregarded certain impacts of the proposed changes to safe 
harbor protection for rebates. In the Proposed Rule, we expressly 
identified and solicited comment on the potential impacts of our 
proposals in the areas the commenter alleged we overlooked, including 
potential effects on future enrollment in Part D and Medicaid MCOs, 
possible impacts on MCO-negotiated supplemental rebates, and the 
antitrust implications of up-front discount negotiations. Furthermore, 
as discussed elsewhere in this final rule, we have taken commenters' 
feedback into account and have made adjustments to our proposals to 
ensure that in each of these areas, the impact of the policies adopted 
in this final rule is not inconsistent with the Department's policy 
goals, including by narrowing the scope of the amendment to the 
existing discount safe harbor to allow for continued safe harbor 
protection of rebate arrangements between manufacturers and Medicaid 
MCOs.
    Comment: Some commenters questioned OIG's authority to promulgate 
this rule because commenters suggested that the resulting rule would 
conflict with other Federal laws. For example, a commenter asserted 
that the Secretary is proposing a rule under one section of the Act 
that the commenter contends conflicts with another section of the Act, 
and in doing so it violates a tenet of administrative law (that an 
agency exceeds its authority when it promulgates a regulation that 
conflicts with a Federal statute). Another commenter asserted that even 
if section 1102 of the Act allows the Secretary to interpret terms in a 
criminal statute, such authority is limited to establishing rules 
consistent with the Act. This commenter stated that the Proposed Rule 
is inconsistent with the statutory discount exception and with 
statutory provisions governing Part D that are within the Act.
    Response: We respond to comments highlighting differences between 
the Proposed Rule and specific statutes elsewhere in this rule. In 
general, however, we note that the safe harbor regulations are 
voluntary. Individuals and entities that choose to comply with a 
particular safe harbor have assurance that their business practice will 
not be subject to an anti-kickback enforcement action. However, the 
safe harbor regulations ``impose[] no requirements on anyone'' and 
therefore do not put stakeholders in a position where they cannot 
comply with both a safe harbor and a Federal law.
    Comment: Certain commenters highlighted specific Federal statutes 
with which they claim the proposed changes conflict and suggested that 
the statutes would control. For example, a commenter stated that 
Congress recognized when enacting the Medicare Prescription Drug, 
Improvement, and Modernization Act of 2003 (MMA) that ``price 
concessions, such as discounts, . . . [and] rebates'' were important 
factors with respect to providing Part D coverage. Because the MMA 
specifically allows for different types of price concessions, the 
commenter asserted that the Department does not have the authority to 
require that all manufacturer price concessions be passed on at the 
point of sale. Another commenter noted that the MMA was enacted decades 
after the anti-kickback statute and includes several references to 
rebates in the Part D program and, as such, if there was a conflict in 
the Part D statute and the anti-kickback statute, then Part D's 
approval of rebates would control, both because it is more specific and 
because it was later-enacted. Several commenters stated that the 
proposed changes to the discount safe harbor directly conflict with the 
Part D program's statutory definition of ``negotiated price.'' 
Commenters stated that CMS has consistently interpreted the definition 
of ``negotiated price'' and related Part D disclosure requirements as 
permitting Part D sponsors to choose how much of the price concessions 
they negotiate with manufacturers would be passed through to 
beneficiaries. A commenter stated that Congress confirmed CMS's 
interpretation in the Patient Protection and Affordable Care

[[Page 76682]]

Act (PPACA) when it established the Coverage Gap Discount Program, 
which defines ``negotiated price'' to include rebates that the Part D 
sponsor has elected to pass through at the point of sale.
    Response: For reasons stated elsewhere in this final rule, we 
disagree that the amendment of the safe harbor regulations conflicts 
with other Federal statutes. As stated previously, the safe harbor 
regulations impose no requirements and do not mandate any particular 
behavior, and thus do not conflict with other laws. The Department 
acknowledges that the Part D statute references manufacturer rebates 
and that CMS has viewed manufacturer rebates as an important factor in 
Part D sponsors' provision of the Part D benefit. However, it does not 
follow that because the Part D statute contemplates, and the Part D 
program historically has involved, manufacturer rebates, such rebates 
are always legitimate. Similarly, neither the statutory definition of 
``negotiated price'' enacted in the MMA nor the subsequent adoption of 
another definition of ``negotiated price'' in the PPACA have any 
bearing on whether manufacturer rebates pose a risk of program abuse. 
As noted elsewhere in this rule, in recent years manufacturer rebates 
have become problematic.
    It would be unreasonable to construe the Part D statute to permit 
under the anti-kickback statute rebates that the Secretary has 
determined pose a risk of program abuse pursuant to authority under the 
anti-kickback statute simply because they are mentioned in the Part D 
statute. Therefore, comments contending that the Part D statute 
``controls'' are unpersuasive. The Part D statute does not--either 
expressly or by implication--limit the Secretary's authority to 
establish and revise safe harbors to curb rebating practices that the 
Secretary determines are abusive to Federal health care programs and 
beneficiaries.
    Comment: Certain commenters claim that aspects of the Proposed Rule 
conflict with OIG guidance documents. For example, a commenter was 
concerned that the language in the point-of-sale reduction in price 
safe harbor requiring that 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 could lead manufacturers to 
apply the entire rebate to a beneficiary's cost sharing, which is 
contrary to OIG guidance on the use of coupons. Similarly, a commenter 
requested that the final rule preserve certain pricing exclusions, for 
example, the value of manufacturer-sponsored drug discount card 
programs, manufacturer coupons, manufacturer copayment assistance 
programs, and manufacturer-sponsored programs providing free goods if 
the benefit is not contingent on other purchases, which are excluded 
from AMP, Average Sales Price, and Best Price reporting. Other 
commenters cited the 2003 Compliance Program Guidance for 
Pharmaceutical Manufacturers,\27\ noting that this guidance implicitly 
acknowledges that price reductions can be contingent on formulary 
placement by explicitly stating that lump sum payments for formulary 
placement would be subject to scrutiny. A commenter also stated that 
OIG has not previously challenged the practice of conditioning 
discounts on formulary placement. Another commenter noted that the use 
of formulary position to negotiate reductions in price is a long-
recognized practice by plans.
---------------------------------------------------------------------------

    \27\ 68 FR 23731 (May 5, 2003).
---------------------------------------------------------------------------

    Response: We thank the commenters for their insights. In this final 
rule we have revised the language of the safe harbor to clarify what we 
meant in the Proposed Rule when we said that the reduction in price 
must be completely reflected in the price the pharmacy charges the 
beneficiary at the point of sale. As we further explain elsewhere, this 
language was not intended to permit a beneficiary to have cost sharing 
waived or for the beneficiary to receive the entire dollar value of a 
discount (unless the beneficiary is in the deductible phase and 
responsible for paying the full cost of the drug). Our intent was for 
the reduction in price to be applied to the price of the drug upon 
which any beneficiary cost sharing is calculated. The issues related to 
AMP, ASP, and Best Price, and linking reductions in price to formulary 
placement are addressed elsewhere in this preamble.
    Comment: Certain commenters cited to fundamental rules of fairness 
or generally urged OIG to acknowledge that the principles set out in 
the Proposed Rule are a change in law and would apply only 
prospectively. A commenter noted that OIG states in the Proposed Rule 
that many financial arrangements would ``no longer'' meet the discount 
safe harbor and that OIG has well-documented its awareness of rebates 
paid to PBMs. Another commenter stated that the Proposed Rule is an 
abrupt change in our longstanding interpretation of the statutory 
exception.
    Response: We agree with commenters and acknowledge that the 
revisions to the discount safe harbor are a change with respect to 
certain rebates that the discount safe harbor at Sec.  1001.952(h) will 
no longer protect. Enforcement of these changes would be prospective. 
However, as explained elsewhere in this final rule, not all payments 
labeled ``rebates'' are (or ever were) reductions in price. We address 
the statutory exception in section III.B.i below.
    Comment: A commenter asserted that an agency's narrowing of 
protected conduct, resulting in expansion of criminal conduct, is not 
authorized and is impermissible. To the extent there is ambiguity, the 
commenter noted that the Rule of Lenity should apply and resolve 
ambiguity in favor of a defendant. The commenter cited to a Supreme 
Court case that held that ``criminal laws are for courts, not for the 
Government, to construe.''
    Response: Revisions to the discount safe harbor at Sec.  
1001.952(h) do not expand the scope of the anti-kickback statute or 
remove protections offered under the statutory exceptions.
    Comment: A commenter suggested that the Proposed Rule requires 
disclosure of rebates and price information and that such disclosure 
and potential for the public to access the information eliminates the 
value of these trade secrets, thus extinguishing a property right. 
Therefore, compliance with the Proposed Rule without compensation would 
violate the Takings Clause of the Fifth Amendment. Similarly, a 
commenter stated that any proposal that requires even a specific 
portion of manufacturer rebates to be passed through at the point of 
sale would expose confidential information in direct violation of the 
Trade Secrets Act.
    Response: As a threshold matter, we reiterate that safe harbors 
were intended to evolve with changes in the health care industry, are 
voluntary, and do not require any party to take any action, including 
any disclosure of rebate or pricing information. Therefore, no property 
right is being extinguished and this final rule does not implicate the 
Takings Clause. Moreover, even for parties seeking to comply with the 
point-of-sale reduction in price safe harbor, we fail to see how the 
Trade Secrets Act at 18 U.S.C. 1905 would be implicated. That law 
prohibits certain Federal officers or employees from disclosing certain 
types of information received through the course of their employment or 
official duties, except where authorized by law. Nothing about this 
safe harbor requires disclosure of rebates or pricing information to a 
Federal agency, so the law would not be implicated.

[[Page 76683]]

    Comment: A commenter expressed concern that the chargeback system 
set forth in the Proposed Rule might incentivize manufacturers to deal 
only with a subset of pharmacies who agree to contract terms that are 
more stringent than what safe harbor compliance would require. The 
commenter noted that this would limit the effect of the any willing 
pharmacy provisions of the Part D program.
    Response: Nothing about this final rule exempts any party from 
complying with other legal obligations, including any willing pharmacy 
provisions. We further note the point-of-sale reduction in price safe 
harbor requires that the reduction in price be completely reflected at 
the time the pharmacy dispenses it to the beneficiary.
    Comment: Some commenters requested that we implement procedures 
outside of the advisory opinion process where parties can request 
interpretive guidance regarding the new safe harbors.
    Response: We decline to implement procedures for parties to request 
individualized interpretive guidance related to the new safe harbors. 
OIG periodically issues materials (e.g., special advisory bulletins, 
special fraud alerts) that provide guidance on compliance with Federal 
health care program standards to relevant stakeholders.
x. Formularies
c. Formulary Placement
    Comment: We received a number of comments related in some way to 
the Proposed Rule's statement that ``[r]ebates paid by drug 
manufacturers to or through PBMs to buy formulary position are not 
reductions in price.'' \28\ Several commenters stated that OIG's 
assertion that rebates negotiated in exchange for formulary position do 
not qualify as ``a discount or other reduction in price'' under the 
statutory exception conflicts with the statutory exception and is 
inconsistent with Federal price reporting rules and the agency's own 
past statements. Commenters requested clear guidance on the extent to 
which manufacturers and plans may consider formulary positioning and 
other utilization management techniques in negotiating discounts under 
the proposed point-of-sale reduction in price safe harbor, asserting 
that negotiating point-of-sale discounts that are contingent on 
formulary placement is an important tool for plans, or their PBMs, 
under the new point-of-sale reduction in price safe harbor and would 
provide an opportunity to lower patients' out-of-pocket expenses. A 
commenter further requested that OIG clarify whether a reduction in 
price for one drug contingent on formulary placement or other condition 
related to another drug would be protected under the proposed safe 
harbor, so long as the price reduction to patients applied at the 
point-of-sale is consistent with, for example, the allocation 
methodology used for price reporting purposes.
---------------------------------------------------------------------------

    \28\ 84 FR 2340.
---------------------------------------------------------------------------

    In contrast, other commenters recommended that OIG eliminate safe 
harbor protection for point-of-sale reductions in price conditioned on 
exclusive or preferred formulary placement when there are generic or 
biosimilar competitors and for multi-year formulary arrangements that 
preclude a plan sponsor or PBM from adding a generic or biosimilar to a 
formulary. In particular, commenters requested that OIG preclude point-
of-sale discounts on a branded product in exchange for a plan not 
covering a competing generic or biosimilar product or placing the 
generic or biosimilar on the same or higher cost-sharing tier compared 
to the brand.
    Response: We recognize that some statements in the Proposed Rule 
may have been misinterpreted, and we are taking this opportunity to 
clarify that reductions in price given to Part D plan sponsors or 
Medicaid MCOs that are conditioned on formulary placement of a 
particular drug can qualify for protection under the new safe harbor 
for point-of-sale reductions in price (and could have been protected 
for Part D plan sponsors under the discount safe harbor, and can 
continue to be protected under the discount safe harbor for Medicaid 
MCOs if all safe harbor conditions are met). As noted by commenters, we 
believe reductions in price contingent on formulary placement can 
foster competition among manufacturers to the ultimate benefit of 
beneficiaries and Federal health care programs, provided that safety 
and efficacy considerations are not disregarded. Accordingly, under 
this final rule, we confirm that point-of-sale reductions in price can 
be conditioned on formulary placement and nonetheless qualify for 
protection under the new safe harbor at Sec.  1001.952(cc), provided 
that there are no required services (e.g., marketing or switching), and 
all conditions of the safe harbor are met. Whether other arrangements 
would be considered a ``service'' that would not be protected, such as 
the scenario suggested by a commenter (conditioning a reduction in 
price on a formulary not covering a competing drug), would be subject 
to a case-by-case analysis.
    Comment: Some commenters recommended prohibiting, through 
additional safeguards in the proposed safe harbor for PBM Service Fees 
or otherwise, drug manufacturers from tying any service fees or other 
compensation paid to PBMs to formulary placement. A commenter 
recommended this prohibition unless the compensation is paid by the 
manufacturer in exchange for services a PBM performs on a 
manufacturer's behalf to support the safe and effective use of 
medicines, for example, through risk evaluation or mitigation 
strategies. Another commenter recommended that OIG ensure payments for 
chargeback processing related to point-of-sale reductions in price are 
not disguised kickbacks related to formulary placement or exclusive 
arrangements.
    Response: We agree with the commenters' concern about linking PBM 
service fees or point-of-sale chargeback administration fees to 
formulary placement. As we stated in the 2003 Compliance Program 
Guidance for Pharmaceutical Manufacturers (2003 CPG), ``[l]ump sum 
payments for inclusion in a formulary or for exclusive or restricted 
formulary status are problematic and should be carefully scrutinized.'' 
\29\ We reiterate here that any type of a ``fee'' (which would include 
any payment retained by a PBM) is not a discount or other reduction in 
price and therefore will not meet the discount safe harbor at Sec.  
1001.952(h) or the new safe harbor for point-of-sale price reductions 
at Sec.  1001.952(cc) if it is tied to formulary placement. Similarly, 
the PBM service fee safe harbor protects fees for services that PBMs 
provide to manufacturers; developing a formulary is a service that a 
PBM provides to a plan. Therefore, those fees cannot be tied to 
formulary placement.
---------------------------------------------------------------------------

    \29\ Office of Inspector General, OIG Compliance Program 
Guidance for Pharmaceutical Manufacturers, 68 FR 23726, 23731 (May 
5, 2003), available at https://oig.hhs.gov/authorities/docs/03/050503FRCPGPharmac.pdf.
---------------------------------------------------------------------------

d. Impact on Formulary
    Comment: Several commenters raised concerns relating to narrow 
formularies, with a commenter noting that plans may look for ways to 
minimize some of the cost increases caused by the loss of rebates by 
moving to exclusive contracts with manufacturers where only one 
manufacturer will be on the formulary in exchange for keeping discount 
levels stable. Another commenter posited that higher-cost prescription 
drugs may be placed on higher tiers or removed from formularies 
altogether.

[[Page 76684]]

    Several commenters predicted that it could take several years 
following the rule's implementation before formularies stabilize, while 
other commenters noted that the possibility of major formulary changes 
should be an essential aspect of any impact analysis and considered 
before the rule is finalized.
    Response: OIG does not administer the Part D program; this 
responsibility lies with CMS. We are informed by CMS that they have and 
will diligently oversee a robust formulary review process to ensure 
sufficient inclusion of all necessary Part D drug categories or classes 
for Medicare beneficiaries. As part of this review, CMS assesses the 
adequacy of a Part D sponsor's formulary drug categories and classes 
along with the plan's formulary drug list to ensure that the formulary 
offers an appropriate range of Part D drugs.\30\
---------------------------------------------------------------------------

    \30\ 79 FR 1918, 1939 (Jan. 10, 2014).
---------------------------------------------------------------------------

    Comment: Another commenter asserted that the forced application of 
point-of-sale reductions in price to brand drugs may lead beneficiaries 
to use more expensive brand drugs instead of generics. The commenter 
indicated that not only will this increase overall program costs and 
disrupt efforts to promote the use of generics, but it may incentivize 
plans to minimize the opportunity for brand drugs to capitalize on this 
circumstance by developing narrower formularies with fewer brand drugs.
    Response: First, we reiterate that safe harbors are voluntary and 
do not mandate any conduct. In particular, the new safe harbor for 
point-of-sale reductions in price provides a pathway to protect certain 
types of price reductions, but it does not require price reductions. 
Second, the final rule does not affect other drug utilization tools 
that plans have at their disposal, such as moving generics to a lower 
tier or moving brands to higher tiers. Furthermore, sponsors have an 
incentive to promote utilization of the lower net cost drug, regardless 
of whether the drug is a generic or brand. Reductions in price applied 
at the point-of-sale will remove an incentive for plan sponsors to game 
rebates in their bidding, as well as create an incentive for plans to 
include more generic drugs of equal safety and efficacy on their 
formularies.
    Comment: A commenter indicated that under the Proposed Rule, Part D 
plans could further reduce or even eliminate their use of fixed 
copayments since simply converting all of their cost sharing to 
coinsurance may make it considerably easier to pass through rebates at 
the point of sale and ensure compliance with the changes included in 
the Proposed Rule. This shift, the commenter further contended, would 
directly expose beneficiaries to drug manufacturers' pricing and be 
particularly problematic for beneficiaries taking brand drugs without a 
rebate.
    Response: We appreciate commenters' concern that there could be a 
transition to coinsurance for more drugs. Nothing in this final rule 
compels plans to discontinue their use of copayments, which many 
consumers prefer; further, upfront discounts on drugs subject to 
copayments can comply with the final point-of-sale safe harbor, so long 
as the discounts are reflected in the point-of-sale price the 
beneficiary is paying and accounted for when setting the copayment 
amount at the time of bidding. Comments related to CMS's administration 
of the Part D program are outside the scope of this rulemaking. 
However, CMS has indicated that actuarial equivalence requirements in 
the Part D program may require that plans adjust copayment amounts when 
setting them at the time bids are submitted to reflect discounts under 
the point-of-sale safe harbor. Additionally, for beneficiaries taking 
brand drugs with a rebate, it is possible that the coinsurance amount 
for some highly rebated drugs may be very close to the current 
copayment amount and that even patients in plans with no deductibles 
and paying only copayments could save as a result of this final rule. 
When accounting for the trends in utilization and costs by phase for 
Part D beneficiaries taking high-cost drugs with high rebates, these 
analyses also suggest it is likely that beneficiaries taking high-cost, 
high-rebate drugs in copayment-based plans will see a decrease in their 
overall out-of-pocket costs.
    Comment: Another commenter discussed the impact of the Proposed 
Rule on those with rare diseases. Noting that manufacturers have less 
of an incentive to offer rebates to secure placement on a formulary for 
therapies for rare diseases since these treatments have fewer competing 
products, and that within the context of Medicare, many rare disease 
therapies fall within the six protected classes that must be included 
on a formulary, the commenter asserted that as a result, there is 
limited use of rebates for rare disease therapies, so any benefits 
expected under the Proposed Rule would be diluted for patients on these 
treatments.
    Response: As stated in the Proposed Rule, we understand that 
beneficiaries using high-cost drugs in protected classes may be 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.\31\ While we also recognize that manufacturers generally 
do not offer rebates on drugs where there are no competing products, 
the Proposed Rule was only intended to address circumstances where 
rebates are used. Furthermore, the Department believes that reductions 
in price that are completely reflected in the price of the prescription 
pharmaceutical product at the time the pharmacy dispenses it to the 
beneficiary may also benefit consumers in poorer health or with higher 
drug costs who are on treatments where rebates are used by decreasing 
their out-of-pocket spending at the pharmacy. The Department also 
believes that the enhanced transparency of premiums and out-of-pocket 
costs that the safe harbor encourages will support beneficiaries in 
making more actuarially sound decisions.\32\ Thus, while the final rule 
may have a differing impact on certain patient groups, the Department 
believes many patients will experience benefits.
---------------------------------------------------------------------------

    \31\ 84 FR 2358 (Feb. 6, 2019).
    \32\ 84 FR 2355 (Feb. 6, 2019).
---------------------------------------------------------------------------

    Comment: A health plan commenter requested that Medicare Advantage 
and Medicare Part D plan sponsors have the ability to temporarily 
exclude all new, high-cost medications from coverage formularies for at 
least six months. According to the commenter, this approach prevents 
pharmaceutical manufacturers from driving any utilization before 
appropriate price concessions are negotiated to better reflect the new 
drug's actual clinical value.
    Response: Recommendations to change Part D program rules are beyond 
the scope of this rulemaking.
    Comment: Various commenters recommended that following the 
implementation of the final rule, CMS actively monitor formulary 
changes and utilization management protocols in order to prevent 
patient discrimination and to ensure patients are able to access needed 
treatments. Several commenters noted that the Proposed Rule, in 
conjunction with previously proposed changes to allow greater 
utilization management for the six protected classes of drugs within 
Medicare Part D, could result in restrictions that would interrupt care 
regimens for those with certain diseases.
    A commenter noted that as a requirement for formulary approval, the

[[Page 76685]]

MMA requires that the Secretary of HHS cannot find that a plan's 
categorization system discourages enrollment by a group of 
beneficiaries. This commenter also recommended various guardrails that 
CMS should consider when evaluating formularies under this proposal, 
including tracking formularies for increases in product exclusions due 
to the heightened potential for adverse selection, aligning formularies 
to existing clinical guidelines, including a wide range of drug 
treatments on formularies, and monitoring formularies for significant 
changes from copay to coinsurance.
    Response: We have coordinated with CMS, which administers the Part 
D program, in promulgating this rule. We agree that it is critically 
important that patients' access to needed treatments be protected, that 
patients not be discriminated against, that patients receive critical 
care uninterrupted, and that plans not discourage enrollment 
impermissibly. Plans should comply with all Part D rules and take 
appropriate actions to guard their enrollees against these harms. We 
are informed by CMS that they have and will diligently use a robust 
formulary review and approval process, which entails in-depth checks to 
ensure sufficient inclusion of all necessary Part D drug categories or 
classes for Medicare beneficiaries, preventing discriminatory benefit 
designs. As part of this review, CMS assesses the adequacy of a Part D 
sponsor's formulary drug categories and classes along with the plan's 
formulary drug list to ensure that the formulary offers an appropriate 
range of Part D drugs.\33\ The formulary review and approval process, 
risk adjustment, and anti-discrimination rules each serve to mitigate 
the incentive for health plans and PBMs to narrow prescription benefits 
for vulnerable populations and to discourage enrollment among high-cost 
patients.
---------------------------------------------------------------------------

    \33\ 79 FR 1918, 1939 (Jan. 10, 2014).
---------------------------------------------------------------------------

    Comment: In order to prevent narrower formularies and increased 
cost sharing, a commenter recommended that in the next payment notice 
for Medicare Part D plans, CMS include discussion of cost-sharing and 
utilization management rules to ensure the changes included in the 
final rule do not lead to violations of existing protections or result 
in decreased access to necessary medicines.
    Response: Suggestions for CMS to issue guidance in the next payment 
notice are outside the scope of this rulemaking.
    Comment: Other commenters discussed the influence of rebates on 
formulary placement. A health plan commenter indicated that while net 
prices factor into the overall value proposition of a drug, review of 
clinical evidence is the essential first step of formulary development, 
and a drug's clinical performance relates in this way to the potential 
magnitude of a rebate, if any. Another health plan commenter stated 
that rebates are only considered for drugs that are in competitive 
classes, where two or more therapeutically similar or equivalent drugs 
exist, and that in the overwhelming number of cases, plan 
determinations regarding drug formulary treatment are well-justified by 
the underlying drug characteristics and economics.
    However, other commenters asserted our current rebate system may 
result in PBMs placing more expensive products in a preferred formulary 
position over less expensive equivalents and that eliminating rebates 
would correct their impact on formulary design.
    Other commenters discussed the influence of rebates on the 
placement of biosimilars on formularies and asserted that PBMs 
generally give preferred formulary placement not to the product with 
the lowest list price, or to the product that provides the lowest cost 
to the patients, but to the product that will provide the PBM with the 
greatest rebate. These commenters stated that because of a biosimilar's 
lower price, it may not have preferred placement on a formulary, which 
can be particularly harmful to patients with chronic illnesses that 
rely on biosimilars. Another commenter was concerned that the absence 
of rebates, combined with the impacts of beneficiary cost-sharing 
differences and Part D subsidies/program design, may make generic or 
biosimilar drugs less lucrative to PBMs or plan sponsors, which could 
result in Part D plans giving preferential or equivalent-tier placement 
to higher-cost brand drugs.
    Another commenter emphasized that decisions about which drugs are 
chosen for formulary inclusion should be based upon the drug's 
effectiveness, safety, and ease of administration, rather than 
financial arrangements like rebates. Other commenters raised concerns 
that PBMs lead to formulary disruptions.
    Response: The Department agrees with commenters asserting that 
clinical factors should be paramount in formulary development and with 
commenters asserting that the current rebate system may result in more 
expensive products or products offering PBMs the largest rebates 
receiving preferred formulary placement, rather than products with 
lower list prices or lower costs to beneficiaries. This concern about 
inappropriate financial influence on formulary placement is an 
important element of the Secretary's decision to finalize the Proposed 
Rule. Nothing in this rule changes any Part D requirements with respect 
to formularies, including which types of drugs should be included in a 
formulary and criteria for including the drugs on the formulary. These 
are matters for CMS under the Part D program. However, as we clarify 
throughout this final rule, we agree with commenters' suggestion that 
formulary placement may be a factor in determining the type or extent 
of a reduction in price that may be available for a particular drug. As 
we also clarify throughout this rule, any portion of a so-called 
``rebate'' that was retained by a PBM was not and is not protected 
under the discount safe harbor, nor will it be protected under the safe 
harbor for point-of-sale reductions in price; such remuneration is a 
payment for a service, not a reduction in price, for purposes of the 
discount safe harbor.
    Comment: Other commenters raised concerns relating to chargeback 
services and formulary placement. A few commenters asked OIG to clarify 
that when a third-party unrelated to a PBM is being paid to perform 
point-of-sale chargeback administration services, PBMs cannot require 
pharmaceutical manufacturers to pay chargeback administration fees, 
chargeback adjudication fees, or similar service fees as a condition 
for formulary placement or position, due to the potential chilling 
effect on third-party chargeback administrators entering into the 
market.
    Response: Point-of-sale chargeback administration fees or similar 
service fees would not be covered under the new safe harbor for point-
of-sale reductions in price at Sec.  1001.952(cc), regardless of 
whether such fees are fair market value; however, payment for these 
services might, depending on the facts and circumstances, be covered by 
another safe harbor. We agree with the commenter that only the party 
performing the point-of-sale chargeback administration should be paid 
for that service. As explained elsewhere in this rule, payments to PBMs 
for formulary placement, or any kind of payment for a service, are not 
covered by either the discount safe harbor or the safe harbor for 
point-of-sale reductions in price.
xi. Impact on List Price
    Comment: Many commenters believed that removing rebates would 
correct distorted incentives and lower list prices. These commenters 
expect that

[[Page 76686]]

removing rebates and moving to upfront discounts will consolidate the 
procurement process and lead to reduced costs, which could be passed on 
to customers. These commenters also expected that manufacturers would 
respond to added competitive pressures from plan sponsors with more 
competitive pricing, and potentially introduce new drugs at lower price 
points.
    Response: We agree with commenters' suggestion that removing the 
existing safe harbor and creating the two new safe harbors should 
promote a more transparent and rational pharmaceutical market that may 
reduce drug prices through competition.
    Comment: Many commenters expressed concern that the rule would be 
unlikely to lower list prices for new drugs or limit price increases 
for existing drugs. These commenters felt that the rule would be more 
likely to either increase drug prices or not significantly affect list 
prices at all.
    Response: We appreciate commenters' concern that the rule may not 
lower list prices. There are a wide range of potential behavioral 
changes from all parts of the prescription pharmaceutical product 
supply chain. The amendment to the discount safe harbor removes the 
positive incentives that come with higher list prices for 
manufacturers, PBMs, and payors. With these incentives removed, and 
with the incentive to get the drug for the lowest possible net price 
retained, the Department believes it is likely that list prices will 
decrease and price increases for existing drugs may be more limited.
    Comment: Many other commenters expressed concern that the 
expectation that the rule would result in lower list prices is not 
supported by historical, economic, or competitive market analysis. 
These commenters noted that there was not enough support for the 
conclusion that rebates are the primary cause of high list prices and 
that drug manufacturers have given no indication that they would lower 
drug prices if the rule were finalized.
    Response: We disagree with commenters' feedback that there is no 
evidence that rebates are a primary cause of high list prices. Rebate 
arrangements in the prescription drug supply chain have been cited as a 
barrier to lowering drug costs.\34\ We also disagree that manufacturers 
have given no indication that they would lower drug prices if the rule 
were finalized.\35\ Finally, while we acknowledge that there are a 
range of potential behavioral changes that could result from the rule, 
we do not agree with the assumption that PBMs will start paying a 
higher net price simply because of the transition from rebates to 
point-of-sale discounts. PBMs and manufacturers already know the 
current net prices that they have negotiated for drugs and PBMs have 
proven to be extremely effective negotiators over the past 15 years. 
Therefore, the Department expects PBMs to continue to work to get the 
best possible deals for their customers, with one likely result being 
lower list prices.
---------------------------------------------------------------------------

    \34\ See, e.g., A perspective from our CEO: Gilead Subsidiary to 
Launch Authorized Generics to Treat HCV. Gilead Pharmaceuticals, 
available at https://www.gilead.com/news-and-press/companystatements/authorized-generics-for-hcv.
    \35\ See Drug Pricing in America: A Prescription for Change, 
Part II, Hearing Before the U.S. Senate Comm. on Finance (Feb. 26, 
2019), available at https://www.finance.senate.gov/imo/media/doc/37143.pdf.
---------------------------------------------------------------------------

    Comment: Several commenters asserted that not only would the 
Proposed Rule fail to lower list prices, but rebates do not contribute 
to high list prices nor do they prevent manufacturers from lowering 
prices. These commenters specifically argued that list price increases 
are primarily driven by drug manufacturers' revenue and profit goals 
and that rebates assist in keeping list prices from being even higher. 
These commenters noted that list prices are increasing at a faster rate 
for drugs with small rebates than for drugs with larger rebates.
    Response: The Department believes rebates are an important driver 
of increased list prices. Rebates and price protection payments 
increase when list prices increase.\36\
---------------------------------------------------------------------------

    \36\ Pharmacy manufacturer rebate negotiation strategies: A 
common ground for a common purpose. Milliman. Nov. 17, 2015.
---------------------------------------------------------------------------

    Comment: Many commenters remarked that the Proposed Rule contains 
no mechanism to bring down list prices, and that absent additional 
rulemaking, the changes included in the Proposed Rule would further 
embolden manufacturers to keep prices high.
    Response: We appreciate commenters' concern that the rule does not 
have a mechanism to lower list prices. As discussed above, the 
Department believes that rebates are a major driver of high list 
prices, and that, by removing the incentives of the rebate system, PBMs 
and payors will have a strong incentive to negotiate lower net prices 
and manufacturers will lower list prices. The Department agrees with 
the many commenters that commend the existing competitive market and 
praise the effectiveness of PBMs as negotiators that have carefully 
managed net prices. The amendment to the discount safe harbor should 
add transparency to an extremely competitive market, which will 
translate into lower list and net prices.
    Comment: Several commenters suggested that high list prices and 
drug costs would be better addressed through increased competition 
among drug manufacturers. These commenters noted that most of the most 
expensive drugs have no competition from other manufacturers and offer 
no rebates. The commenters also noted that there are few meaningful 
legal or economic restrictions on drug manufacturers' ability to set 
and increase prices, arguing that drug manufacturers frequently engage 
in anti-competitive behavior that must be addressed for list prices to 
come down, such as securing longer periods of patent exclusivity and 
pay-for-delay settlements.
    Response: We agree with commenters that high list prices and drug 
costs are an important issue that requires a multifaceted response. We 
further agree that action taken to promote competition in the 
prescription pharmaceutical product space has the potential to curb 
rising drug prices. This final rule is one of many Department 
initiatives that build on each other to lower list prices and reduce 
out of pocket costs, as outlined in the American Patients First 
blueprint.\37\
---------------------------------------------------------------------------

    \37\ American Patients First: The Trump Administration Blueprint 
to Lower Drug Prices and Reduce Out-of-Pocket Costs, Dep't Health & 
Human Servs. (May 2018), available at https://www.hhs.gov/sites/default/files/AmericanPatientsFirst.pdf.
---------------------------------------------------------------------------

    Comment: Several other commenters remarked that because the safe 
harbors and amendments included in the Proposed Rule would not apply to 
commercial markets, list prices are not likely to be lowered. These 
commenters noted that commercial markets represent a majority of the 
U.S. drug market, and therefore, drug manufacturers have little 
incentive to lower list prices where a majority of the industry would 
remain unchanged.
    Response: We acknowledge that the commercial market is not covered 
by this final rule, and that there are a range of potential behavioral 
responses as a result of this rule. While it is possible that the 
market will respond by keeping rebates in the commercial market, as 
commenters suggest, it is also possible that the commercial market will 
follow the Medicare market without direct action. It may be difficult 
to maintain a bifurcated market between commercial and Medicare Part D, 
so plans may prefer to negotiate based on the same discount mechanism 
for efficiency. We note that some commercial plans have already begun 
to pass discounts on to

[[Page 76687]]

patients at the point of sale. While the commercial market is a larger 
portion of U.S. spending on prescription pharmaceutical products than 
Medicare, Medicare is an important part of the market and the 
commercial market often tracks policies implemented in the Medicare 
program. The Department believes it is likely that as parties change 
their operating practices to comply with the safe harbors with respect 
to Medicare Part D business, there may be a spillover effect on their 
practices in the commercial market, and that list prices would decline 
as a result.
    Comment: A few commenters expressed skepticism that switching to 
point-of-sale reductions in price would not translate to lower list 
prices for various reasons, including: There is lack of meaningful 
competition; intellectual property and Food and Drug Administration 
laws empower monopolistic pricing; clinicians have a strong influence 
over prescribing; coverage and reimbursement laws create price floors; 
and the healthcare industry as a whole generally fails to assess 
effective lower-cost alternative drugs.
    Response: We agree with the commenters that there are a number of 
complex factors that have led to high list prices for prescription 
pharmaceutical products, and that the Department will have to use a 
multifaceted approach that addresses many of these issues to 
meaningfully lower list prices and reduce out-of-pocket costs for 
patients. This final rule is addressing the incentives in the existing 
rebate framework that drive up list prices while net prices stay 
neutral or increase only slightly. The Department believes this is an 
important and foundational step for other reforms that can help to 
lower list prices and reduce out-of-pocket costs, as outlined in the 
American Patients First blueprint. The Department will continue to 
consider further reforms to address issues described by the commenters.
    Comment: A commenter argued that the Proposed Rule seems to suggest 
that HHS would prefer a lower list price drug with a net higher cost 
over a drug with a lower net cost and that such a situation would 
increase costs for both beneficiaries and taxpayers.
    Response: We disagree. The Department expects that the net price of 
prescription pharmaceutical products would largely be the same with 
point-of-sale discounts as it has been through the use of rebates. The 
Department expects that PBMs will continue to be effective negotiators 
in a competitive market and does not see any reason why PBMs would 
accept higher net prices. Instead, the Department expects that the rule 
will result in lower list prices and lower out-of-pocket costs for 
patients through point-of-sale reductions in price.
    Comment: Several commenters expressed concern that because the MDRP 
calculates mandatory rebates using the AMP of a product (which is 
impacted by a product's list price), lower list prices could reduce 
rebates states receive under this program.
    Response: The Department recognizes that the final rule has the 
potential to affect calculations of AMP in ways and to an extent that 
may be difficult to anticipate. We reiterate that the final rule does 
not alter obligations under the statutory provisions for Medicaid 
prescription drug rebates under section 1927 of the Act, including AMP.
xii. Definitions
    In the Proposed Rule, we asked for comments on the definitions that 
are necessary to implement the new safe harbors. We received several 
comments that we discuss below.
General Comments on Definitions
    Comment: Many commenters suggest that a number of terms introduced 
in the Proposed Rule, such as ``affiliate,'' ``negotiated price,'' 
``pharmacy negotiated price,'' ``fair market value,'' ``chargeback 
administrators,'' ``administrative fees,'' and ``manufacturer reporting 
requirements,'' must be more fully defined by the Administration to 
ensure that operational changes that will be required by the Proposed 
Rule are reflected in the common understanding of the rules for these 
programs.
    Response: We appreciate commenters' feedback on the terms that 
require a definition to implement this final rule regulation. We 
provide the definitions of the terms that are within the scope of this 
rule below. We provide additional information on terms such as ``point-
of-sale chargebacks'' and ``value-based arrangements'' in other parts 
of this rule. We believe this rule includes the necessary definitions 
for affected entities to comply with the new safe harbors.
Pharmacy Benefit Manager
    The Proposed Rule proposed to define ``pharmacy benefit manager'' 
as ``any entity that provides pharmacy benefits management on behalf of 
a health benefits plan that manages prescription drug coverage.'' A 
number of commenters provided feedback on the definition.
    Comment: One commenter noted that health benefits plans may engage 
PBMs to provide a limited suite of pharmacy benefits management 
services, such as a limited authorization to provide rebate contracting 
services on behalf of the plan. In addition, PBMs may be engaged to 
provide services with regard to prescription drugs dispensed under the 
medical benefit, such as physician administered drugs where a POS 
discount could not be implemented, and thus, such engagements should 
continue to be covered by the existing discount safe harbor. The 
commenter recommended the following definition: ``For purposes of this 
paragraph (h), the term pharmacy benefit manager or PBM means any 
entity that provides pharmacy benefit management services, or a subset 
thereof, to a prescription benefit plan.''
    Response: The definition of a PBM requires that the PBM provide 
``pharmacy benefit management.'' This definition does not require that 
a PBM provide a full range of pharmacy benefit management services; it 
might provide a subset of such services. This is consistent with the 
definition we are finalizing, and we are not making a change to the 
regulatory text.
    Comment: Many commenters recommended that we use a functional 
definition of ``PBM.'' While some of these commenters agreed that the 
role of a PBM may evolve over time, they suggested that if we do not 
use a more detailed definition, the scope of the safe harbor would be 
unclear and PBMs would structure their arrangements to fall within or 
outside of the safe harbor based on their preferences. To develop the 
more detailed definition, commenters recommended including a non-
exhaustive list of PBMs services. Many commenters specifically 
referenced the definition proposed by a trade association:

    ``Pharmacy Benefit Manager'' means any person, business, or 
other entity that, pursuant to a written agreement with plan 
sponsors under Medicare Part D, either directly or through an 
intermediary, acts as a price negotiator on behalf of plan sponsors 
under Medicare Part D or manages the prescription drug benefits 
provided by plan sponsors under Medicare Part D, including but not 
limited to, the processing and payment of claims for prescription 
drugs, the performance of drug utilization review, the processing of 
drug prior authorization requests, the adjudication of appeals or 
grievances related to the prescription drug benefit, contracting 
with network pharmacies, controlling the cost of covered 
prescription drugs, or the provision of services related thereto. 
Under this definition, any person, business, or other entity that 
carries out one or more of the activities above or any entity that 
is owned, affiliated, or related under a common ownership structure 
with such a person, business, or entity is a ``pharmacy benefit

[[Page 76688]]

manager.'' Such entity is not a purchasing agent and therefore is 
not a GPO as defined in paragraph (j) of this section.

    Other commenters recommended additional services (discussed below) 
be included in the definition. Commenters notes that the list should 
not include ``services'' such as ``negotiating rebate arrangements,'' 
that are core functions of a PBM's job for its plan customers, because 
the new safe harbor should protect only fees that are paid for a 
specific service that the manufacturer legitimately needs and that are 
provided to the manufacturer, independent of services a PBM provides to 
its plan customers.
    Response: We decline to define ``pharmacy benefit manager'' with 
the level of specificity suggested by the commenter, e.g., by defining 
a PBM through a list of pharmacy benefit management services, by 
incorporating a common ownership element, or by referencing the 
definition of ``GPO.'' We do not see value in including a list of 
services in the regulatory text, given the variety of potential 
services; we believe the term ``pharmacy benefit management'' is clear 
and commonly understood, and would include both price negotiation and 
management of benefits. We separately provide a non-exhaustive list of 
potential pharmacy benefit management services in this preamble that 
PBMs provide to health plans, and we are adopting some of the 
commenters' suggestions for the preamble list. The list may be useful 
to parties determining whether they are a PBM, and particularly, 
whether the services they provide to a manufacturer for purposes of the 
PBM services fee safe harbor are related to the pharmacy benefit 
management services that the PBM furnishes to one or more health plans, 
which is a requirement of that safe harbor. As commenters acknowledge, 
the role of PBMs may evolve over time, which could make it problematic 
to use a functional definition. We address common ownership elsewhere 
in this preamble.
    Comment: One commenter recommended that the PBM definition should 
further distinguish between the functions of PBMs and GPOs to foreclose 
protection of PBM services arrangements under the GPO safe harbor.
    Response: We are not prohibiting PBMs from potentially qualifying 
for the GPO safe harbor protection. As we explain in greater detail in 
section III.D.vii below, if a PBM otherwise meets the qualifications, 
and follows the limitations, for the GPO safe harbor, then it may be 
able to use that safe harbor.
    Comment: Some commenters noted that the Proposed Rule may lead 
entities to vertically integrate. These commenters expressed concern 
that as PBMs continue to evolve in the market, e.g., by vertical 
integration, merging with other entities, and/or spinning off certain 
business units, there could be new entities that fall outside the 
Proposed Rule's definition for ``PBM,'' but that influence the PBM 
negotiation process.
    Response: This final rule relates only to safe harbor protection 
under the anti-kickback statute; safe harbors protect specified 
arrangements that implicate the anti-kickback statute. Any entity 
seeking protection for an arrangement must meet all conditions of a 
safe harbor, including any applicable definitions. If an arrangement 
does not fit in a safe harbor, it would be subject to case-by-case 
review under the anti-kickback statute. It strikes us as unlikely that 
this final rule itself would lead parties to favor arrangements that do 
not qualify for safe harbor protection.
Pharmacy Benefit Management Services
    Under the Proposed Rule, the services provided to the manufacturer 
must relate to the ``pharmacy benefit management services'' that the 
PBM furnishes to one or more health plans.
    The Proposed Rule proposed a non-exhaustive preamble list of 
examples of pharmacy benefit management services furnished to plans, 
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. In the Proposed Rule, we 
proposed that we would not create a definition for ``pharmacy benefit 
management services'' with the understanding that these services could 
evolve over time. We did not propose a definition for the term 
``pharmacy benefit management services.'' In the Proposed Rule, we 
solicited comments on the approach of providing examples, but not 
providing a definition.
    Comment: Many commenters recommended including the list of the 
pharmacy benefit management services in the definition. Services 
recommended for the definition in addition to those listed in the 
Proposed Rule include processing claims for prescription drugs, 
adjudication of appeals or grievances related to the prescription drug 
benefit, controlling the costs of covered prescription drugs, and 
provision of services related to the services listed. These commenters 
stated that ``negotiating rebate arrangements'' should not be included 
in the list of services, since they are prohibited by the new safe 
harbor.
    Response: We accept, with a modification explained below, the 
commenters' recommendations for additions to the preamble list of 
potential pharmacy benefit management services that PBMs furnish to 
plans and to change the listed service related to negotiation of rebate 
arrangements to negotiation of discount arrangements. Accordingly, the 
following is a non-exhaustive list of pharmacy benefit management 
services that PBMs furnish to plans for purposes of this final rule: 
Contracting with a network of pharmacies; establishing payment levels 
for network pharmacies; negotiating rebates and discount arrangements; 
developing and managing formularies, preferred drug lists, and prior 
authorization programs; performing drug utilization review; operating 
disease management programs; processing and payment of claims for 
prescription drugs; adjudication of appeals or grievances related to 
the prescription drug benefit; and controlling the costs of covered 
prescription drugs. To be clear: This is not a list of services PBMs 
furnish to manufacturers, but a list of examples of pharmacy benefit 
management services that PBMs furnish to any type of health plan. For 
the purposes of this rule, we are listing ``negotiate rebate or 
discount arrangements'' in recognition that PBMs may negotiate both 
discounts and some types of rebates.
    Comment: Some commenters noted that it is unclear how the PBM 
service fee amounts compare with the current definitions of ``Bona Fide 
Service Fees'' (BFSFs) under the Medicare Part D and the MDRP. One 
commenter noted that the definition of BFSFs includes additional 
conditions, meaning that it is not entirely consistent with the terms 
of the safe harbor, which creates questions regarding the reporting of 
these fees by Part D sponsors under Part D as well as by drug 
manufacturers in regards to their determinations of best price and AMP 
under the MDRP. Likewise, PBMs are required to account for BFSFs in 
reporting the aggregate amount of price concessions they negotiate that 
are attributable to patient utilization under a Part D or MA-PD plan. 
This commenter asked that CMS issue guidance regarding any differences 
between these two types of fees and the reporting and FMV implications 
under Part D and the MDRP.
    Response: These comments are outside of the scope of this rule, 
which

[[Page 76689]]

does not address compliance with CMS requirements relating to DIR 
reporting for when a payment may be considered within the point-of-sale 
safe harbor but not a bona fide service fee for purposes of DIR 
reporting.
    Comment: One commenter noted that PBMs do not conduct many of the 
services outlined in the examples for pharmacy benefit management 
services, listed in the Proposed Rule, on behalf of manufacturers. In 
fact, some of the activities attributed to PBMs involve the practice of 
pharmacy which is overseen by state boards of pharmacy. Specifically, 
the commenter noted that negotiating pharmacy networks is an activity 
that is typically done by PBMs on behalf of plans and for which 
community pharmacies pay a type of pharmacy DIR fee to participate in 
such a network (known as a pay-to-play fee). In the PBM-manufacturer 
relationship, PBMs typically receive administration fees from 
manufacturers for acting as a purchasing agent for the underlying plans 
to which PBMs provide services (and also for the provision of data). 
The commenter recommends revising definition of ``pharmacy benefit 
management services'' and narrowing any further description of PBM 
services to the actual services PBMs provide to manufacturers so that 
PBMs do not create a de facto rebate composed of new classes of fees 
charged to manufacturers.
    Response: We clarify that term ``pharmacy benefit management 
services'' as used in the safe harbor at 42 CFR 1001.952(dd), and the 
non-exhaustive list of such services provided above, refers to services 
furnished to health plans, not manufacturers. We agree that we do not 
want to create de facto rebates composed of new classes of fees charged 
to manufacturers. We believe that the condition in the new safe harbor 
for PBM service fees that requires predetermined flat fees that are not 
tied to volume provides a necessary safeguard to prevent abuse of these 
fees.
Manufacturer
    The Proposed Rule proposed to define ``manufacturer'' with the 
meaning ascribed to it in Social Security Act section 1927(k)(5), which 
defines manufacturer as any entity which is engaged in the production, 
preparation, propagation, compounding, conversion, or processing of 
prescription drug products, either directly or indirectly by extraction 
from substances of natural origin, or independently by means of 
chemical synthesis, or by a combination of extraction and chemical 
synthesis, or in the packaging, repackaging, labeling, relabeling, or 
distribution of prescription drug products.
    We did not receive any comments on the definition of manufacturer, 
and we are finalizing the definition of ``manufacturer'' as proposed.
Wholesaler/Distributor
    The Proposed Rule proposed to define the terms ``wholesaler'' and 
``distributor'' as terms that are used interchangeably and carry the 
same meaning as the term ``wholesaler'' as defined in Social Security 
Act section 1927(k)(11). Section 1927(k)(11) defines ``wholesaler'' as 
a drug wholesaler that is engaged in wholesale distribution of 
prescription drugs to retail community pharmacies, including (but not 
limited to) manufacturers, repackers, distributors, own-label 
distributors, private-label distributors, jobbers, brokers, warehouses 
(including manufacturer's and distributor's warehouses, chain drug 
warehouses, and wholesale drug warehouses) independent wholesale drug 
traders, and retail community pharmacies that conduct wholesale 
distributions.
    We did not receive any comments on the definition of ``wholesaler'' 
and ``distributor,'' and we are finalizing the definitions of 
``wholesaler'' and ``distributor'' as proposed.
Medicaid Managed Care Organization
    The Proposed Rule proposed to define ``Medicaid managed care 
organization'' or ``Medicaid MCO'' with the same meaning ascribed to 
these terms in section 1903(m) of the Social Security Act. We did not 
receive any comments on the definition of Medicaid MCOs in the Proposed 
Rule. While we are moving this definition to Sec.  1001.952(cc), we are 
otherwise finalizing this definition as proposed.
Prescription Pharmaceutical Product
    The Proposed Rule proposed to define ``prescription pharmaceutical 
product'' as either a drug or a biological as those terms are defined 
in sections 1927(k)(2)(A), (B), and (C) of the Act.
    Comment: One commenter noted that the definition of prescription 
pharmaceutical product states that the terms ``drug'' and 
``biological'' are defined at Section 1927(k)(2) of the Social Security 
Act, but this is not the case. A commenter recommended that this 
definition be revised to read as follows: ``For purposes of this 
paragraph (h), a prescription pharmaceutical product means any drug, 
biological or insulin product that falls within the scope of Social 
Security Act section 1927(k)(2).''
    Response: We agree that ``defined'' is inaccurate. We are updating 
the definition to use the word ``described'' instead of ``defined.'' In 
addition, because insulin is considered to be a biological product, we 
are not adopting the commenter's recommendation to list that term in 
this definition.
``Fair Market Value'' and ``Arm's-Length Transactions''
    In the Proposed Rule, we stated that the new safe harbor for 
certain PBM service fees would be available for fees if they are 
consistent with ``fair market value in an arm's-length transaction.'' 
Many commenters provided feedback on the definition of ``fair market 
value'' and ``arm's-length transaction.''
    Comment: Multiple commenters recommended that OIG provide guidance 
on certain issues related to fair market value compensation in an 
arm's-length transaction. At least one of these commenters recommended 
that OIG (i) clarify that PBMs are obligated to negotiate services 
arrangements in good faith based on the bona fide needs of 
manufacturers, (ii) clarify the scope of safe harbor protection 
available for arrangements in which a PBM provides services on behalf 
of an affiliated health plan, and (iii) clarify that individual health 
plans that do not provide pharmacy benefits management services to plan 
sponsors under Part D may not attempt to use the safe harbor to 
negotiate administrative fees from manufacturers.
    Another commenter recommended definitions of ``fair market value'' 
and ``arm's-length'' that would set guardrails for purposes of 
negotiations between manufacturers, PBMs, Part D plans, and chargeback 
administrators and would provide further transparency on how HHS 
intends these fees to be determined. Specifically, the commenter 
recommended that OIG clarify that the fair market value standard is 
neither intended to allow free rein for third-party entities to 
continue to keep a disproportionate share of pricing concessions that 
should be used to reduce beneficiary cost-sharing nor to tie fees to 
the list price of a medication.
    Response: We decline to provide further guidance on fair market 
value compensation in an arm's-length transaction. The safe harbor is 
an affirmative defense for criminal violations of the anti-kickback 
statute, so it is the entity's obligation to prove that the 
remuneration meets the conditions of the safe harbor based on the terms 
outlined in this final rule. Moreover, these terms are used in several 
existing safe harbors.

[[Page 76690]]

    Comment: One commenter recommended that OIG clarify the requirement 
that payments be ``consistent with fair market value in an arm's-length 
transaction'' by providing a non-exhaustive list of examples of 
valuation approaches that meet this standard and specify that PBMs must 
negotiate in good faith based on manufacturers' bona fide needs, 
refraining from tactics that would be inconsistent with an arm's-length 
transaction. The commenter asserted that OIG should require that PBMs 
inform manufacturers when seeking manufacturer compensation for 
services also compensated by health plans. This disclosure would enable 
manufacturers to evaluate whether to pay for the services and what a 
fair market value rate might be.
    Response: We decline to provide a non-exhaustive list of examples 
of valuation approaches. We expect that parties seeking protection 
under this safe harbor have experience with the fair market value 
standard and would use generally accepted valuation methodologies and 
principles in any determination of ``fair market value.'' We also 
decline to include a requirement that the PBM inform a manufacturer 
when the PBM is receiving compensation from a health plan for a 
service. This safe harbor protects only payment by a pharmaceutical 
manufacturer for services the PBM provides to the manufacturer, not 
payment for services a PBM provides to a health plan; because we have 
included additional conditions in the safe harbor aimed at clarifying 
that only payment for legitimate services would be protected, we do not 
believe this requirement is necessary.
xiii. Comments Outside the Scope of Rulemaking
    Above we respond to certain comments addressing matters outside the 
scope of this safe harbor rulemaking. We received additional comments 
that are outside the scope of this rulemaking. For instance, several 
commenters recommended that Congress pass legislation or the Department 
create new regulations related to certain issues the Proposed Rule 
appears to address, such as lowering cost-sharing and out-of-pocket 
costs for consumers; promoting competition of generics and biosimilars; 
and ensuring beneficiaries have access to negotiated prices through 
point-of-sale rebates. Requests for Congress to pass legislation are 
outside the rulemaking authority; the other matters raised by 
commenters are programmatic and outside the safe harbor authority. 
Another suggestion involved extending safe harbor protection to the 
commercial market; as noted above, purely commercial arrangements 
generally do not implicate the Federal anti-kickback statute. 
Commenters requested that OIG or CMS establish certain programs or 
other forms of guidance, including creating a rebate index that would 
provide parties with data on the range of rebates currently used in the 
market for each drug receiving rebates under Part D. Another commenter 
recommended focusing on the lack of competition in the drug market and 
restrictions on beneficiary choice rather than trying to reform the 
rebate system; as noted above, this rule is part of a larger set of 
Department actions undertaken and under consideration with respect to 
lowering drug prices. Other commenters requested that OIG create a new 
safe harbor protecting value-based arrangements or proposed 
specifically including value-based arrangements in existing safe 
harbors. OIG has proposed safe harbors for certain value-based 
arrangements in separate rulemaking.\38\
---------------------------------------------------------------------------

    \38\ 42 FR 55694 (Oct. 17, 2019).
---------------------------------------------------------------------------

B. Discount Safe Harbor Amendment

i. Statutory Exception
    Comment: Several commenters stated that, under the terms of a 
rebate arrangement, a manufacturer offers remuneration to a Part D plan 
sponsor or Medicaid MCO to induce the purchase of federally 
reimbursable products, thus implicating the anti-kickback statute. 
However, commenters further asserted that, although the statutory 
discount exception does not explicitly refer to rebates, the language 
encompasses any reduction in price as long as it is properly 
documented, which would include rebates administered by PBMs. Because a 
rebate is a ``reduction in price'' obtained by Part D plan sponsor 
``under a Federal health care program,'' and they are ``properly 
disclosed'' to CMS and ``appropriately reflected'' in costs submitted 
to CMS, including through statutorily required and CMS-established 
processes for reporting DIR, commenters assert that they are protected 
under the statutory discount exception. Similarly, a commenter alleged 
that the Proposed Rule was based on incorrect and incomplete 
assumptions regarding the conduct protected by the statutory discount 
exception.
    Response: The legislative history of the statutory exception states 
that the exception is intended to protect discounts that are properly 
disclosed and appropriately reflected, and notes that providers are 
encouraged to ``seek discounts as a good business practice which 
results in savings to [M]edicare and [M]edicaid program costs.'' \39\ 
As explained elsewhere, as the market has evolved in recent years, we 
do not believe that the way many types of rebates have been used in the 
Part D program function as reductions in price. While we believe that 
the changes that we are finalizing to the safe harbors reflect 
statutory intent and provide a clear pathway to protection, we 
reiterate our longstanding guidance that safe harbors are voluntary. If 
a party believes in good faith that a particular arrangement does not 
implicate the anti-kickback statute or meets the terms of a statutory 
exception, there is no mandate to comply with a safe harbor.
---------------------------------------------------------------------------

    \39\ See H.R. Rep. No. 95-393, pt. 2, at 53 (1977) (emphasis 
added).
---------------------------------------------------------------------------

    Comment: A commenter noted that the Department has acknowledged 
that Congressional intent was to protect price reductions in the normal 
course of business and that post-point-of-sale manufacturer price 
reductions are precisely the type of discounting that occurs in the 
normal course of business. Another commenter noted that Congress did 
not give the Department authority to transform practices that are 
protected under the statutory discount exception into a crime; the 
Secretary's regulatory authority is limited to protecting conduct that 
would otherwise be illegal.
    Response: We agree with the commenter that Congress gave the 
Department authority to protect certain practices that occur in the 
normal course of business. We further agree that the Department does 
not have authority to narrow the reach of the statutory discount 
exception, and that is not our intent. We note, however, that the mere 
fact that a certain practice is performed in the normal course of 
business does not make it legal. As a threshold matter, to be protected 
under the discount exception, an arrangement must involve a reduction 
in price. For example, an arrangement between a manufacturer and a plan 
sponsor to increase the amount of the rebate to the plan sponsor by 
increasing the list price of the drug would be suspect and subject to 
scrutiny under the statute. Given the variety of ``rebate'' 
arrangements that have been created over the past several years between 
pharmaceutical manufactures and Part D plan sponsors (directly or 
through PBMs), many of which are not reductions in price, the Secretary 
has determined that rebates to Part D plan sponsors do not pose a low

[[Page 76691]]

risk of fraud and abuse and should not be protected by a regulatory 
safe harbor. We reiterate that falling outside of a safe harbor does 
not make an arrangement criminal; each arrangement would need to be 
examined on a case-by-case basis.
    Comment: A commenter stated that the Proposed Rule impermissibly 
infringes on protections afforded by the statutory discount exception 
because, taking together the changes to the discount safe harbor and 
the addition of the new safe harbor for point-of-sale reductions in 
price, the Proposed Rule effectively eliminates post-point-of-sale 
manufacturer price reductions, which limits the types of price 
reductions a Part D plan sponsor, a Medicaid MCO, or a PBM could accept 
from a manufacturer. The commenter stated that the new safe harbor for 
point-of-sale reductions in price imposes requirements beyond those in 
the discount exception's text.
    Response: In this final rule, we are carving out a narrow class of 
arrangements that the Secretary believes poses a higher risk of fraud 
and abuse and the potential for increased costs to both beneficiaries 
and Federal health care programs, and we are creating a new safe harbor 
to protect certain reductions in price that pose lower risk. This new 
safe harbor has its own conditions, specific to the particular 
arrangements that are the subject of the safe harbor, and it is not 
intended to mirror the discount exception or safe harbor. As noted 
above, this final rule has no impact on the statutory exception.
    Comment: Other commenters asserted that rebates or other payments 
by drug manufacturers to PBMs may be structured to fit under the GPO 
safe harbor, 42 CFR 1001.952(j), as well as the managed care safe 
harbors 42 CFR 1001.952(m),(t), and (u), and noted that these safe 
harbors have corollary statutory exceptions under the anti-kickback 
statute (the statutory GPO exception, and the statutory shared risk 
exception). Commenters asserted that the elimination of these statutory 
protections through revisions to the regulatory discount safe harbor 
inappropriately reads out of the anti-kickback statute the multiple 
protections available to MCOs under other relevant statutory 
exceptions.
    Another commenter asked OIG to issue guidance or revise the managed 
care safe harbors 42 CFR 1001.952(m), (t), and (u) to ensure they do 
not protect reductions in price or other remuneration that is excluded 
under the discount safe harbor.
    Response: As a threshold matter, and as we discuss in detail above, 
rebates from manufacturers to PBMs were not protected by the discount 
safe harbor. If a payment arrangement can be structured to fit within 
any one safe harbor, it would be protected by that safe harbor 
regardless of any changes to a different safe harbor. Amendments to the 
managed care safe harbors, 42 CFR 1001.952(m),(t), and (u), are beyond 
the scope of this rulemaking.
ii. Effective Dates
    We received many comments on the proposed January 1, 2020 effective 
date for the revisions to the discount safe harbor.
    Comment: Various commenters supported the proposed effective date. 
Some of these commenters noted that it would be challenging to make all 
necessary updates to systems and agreements and that significant 
resources would be required across the industry to meet a January 1, 
2020 effective date, but that the proposed effective date is 
attainable. Some commenters noted that guidance from OIG and CMS and 
cooperation from stakeholders would be required to meet that timeline 
and minimize patient, pharmacy, and supply chain disruptions.
    Response: Based on the comments received and further consideration 
of the appropriate timeframe for implementation, we have modified our 
proposal, and the changes to Sec.  1001.952(h)(5) of the discount safe 
harbor will be effective January 1, 2022, which should provide adequate 
time for parties to come into compliance and to minimize any 
disruption.
    Comment: A commenter strongly supported a January 1, 2020 effective 
date, but the commenter recommended that it be coupled with both a 
flexible 36-month transition process to facilitate implementation and 
guidance issued before the effective date on chargebacks and other 
issues. Other commenters suggested delaying the effective date and 
testing efforts to reform the rebate system before the Proposed Rule is 
implemented across Medicare Part D. Other commenters that did not 
support a January 1, 2020, effective date noted that the April 5, 2019 
Memorandum from CMS provided some guidance, but not enough to submit an 
actuarially sound bid. Another commenter urged OIG to delay the 
effective date of the final rule until 2022 or, alternatively, to issue 
a statement that it will not begin to enforce the new safe harbors 
until after the period of the announced CMS demonstration. A commenter 
also noted that the demonstration program would need to be expanded, 
for example, to account for enhanced benefits to EGWP plans. This 
commenter further stated that if CMS does not expand the demonstration 
program, CMS would have to require plans to submit two bids (one to 
account for rebates, one to account for POS discounts). Another noted 
that this effective date would place an enormous burden on CMS to issue 
required guidance, which could lead to beneficiary disruption if key 
events leading to the open enrollment period are delayed. A commenter 
requested that OIG clarify whether manufacturers, PBMs, and pharmacies 
can leverage existing mechanisms for exchanging data to support point-
of-sale reductions in price, noting that the January 1, 2020 effective 
date is more feasible if extensive systems changes are not necessary.
    Response: Based on the comments received and further consideration 
of the appropriate time frame for implementation, we are finalizing our 
proposal for the changes to Sec.  1001.952(h)(5) of the discount safe 
harbor to be effective January 1, 2022. The CMS demonstration 
referenced by the commenter was contingent on a change in the safe 
harbor rules effective in 2020; because our changes to Sec.  
1001.952(h)(5) of the discount safe harbor will be effective January 1, 
2022, requests for modifications to that demonstration are no longer 
applicable.\40\ Additionally, we confirm that the safe harbor does not 
mandate any particular system or process for implementing point-of-sale 
reductions in price.
---------------------------------------------------------------------------

    \40\ Letter from Seema Verma, Administrator, CMS, to Part D Plan 
Sponsors (Apr. 5, 2019), available at https://www.cms.gov/Research-Statistics-Data-and-Systems/Computer-Data-and-Systems/HPMS/Downloads/HPMS-Memos/Weekly/SysHPMS-Memo-2019-Apr-5th.pdf.
---------------------------------------------------------------------------

    Comment: Several commenters noted that the proposed January 1, 2020 
effective date is particularly problematic for Medicaid MCOs because 
many states' contracts are not renewed annually and often work on a 
July 1-June 30 fiscal year. A January 1 change could require mid-year 
rate adjustments to ensure that capitated payments to managed care 
plans are actuarially sound. Other commenters noted that the proposed 
January 1, 2020, effective date would not give states enough time to 
substitute directly negotiated supplemental rebates for current 
Medicaid MCO rebates. Additionally, a state health department commenter 
indicated that a January 1, 2020, effective date would make it 
challenging to prospectively set Medicaid Managed Care capitation rates 
that appropriately account for anticipated price reductions for 
prescription pharmaceutical

[[Page 76692]]

products, while another commenter stated that the proposed January 1, 
2020, effective date would significantly disrupt current arrangements 
among manufacturers, PBMs, Medicaid MCOs, and pharmacies.
    Response: Based on the feedback we have received from commenters 
and further consideration of the appropriate timeframe for 
implementation, we are finalizing the modifications to Sec.  
1001.952(h)(5) of the discount safe harbor to be effective on January 
1, 2022. Additionally, we are not finalizing our proposal with respect 
to Medicaid MCOs, which we believe addresses the commenters' concerns.
    Comment: Various commenters stated that the effective date should 
be delayed for some period of time (e.g., at least until 2022) to give 
plan sponsors time to understand the impact of the rule. A commenter 
noted that the changes set forth in the Proposed Rule would occur 
simultaneously with many other changes being proposed to or implemented 
in the Part D benefit, including new indication-based formularies. The 
commenter stated that other pending rules would impact Part D protected 
classes, pharmacy DIR changes, shifting drugs from Part B to Part D, 
and others, all of which would make a January 1, 2020, effective date 
more challenging. Commenters noted that, depending on what is 
finalized, plans may need to adjust bids, renegotiate contracts, and 
make systems changes. Another commenter noted that both PBMs and plans 
will have to contract with vendors, who will have to develop, test, 
sell, and have operational products, which the commenter asserts cannot 
happen by 2020. Another commenter indicated that the safe harbor 
changes proposed in the Proposed Rule would require fundamental changes 
to the way drugs are negotiated, reimbursed, and adjudicated at the 
point of sale, which would include new NCPDP electronic health care 
transaction codes for pharmacy claims.
    Commenters suggested that both the proposed January 1, 2020, 
effective date and alternative effective date of January 1, 2021, were 
unreasonable, indicating additional time would be needed to implement 
the point-of-sale reduction in price structure, and that the chargeback 
system referenced in the Proposed Rule would be far more complex and 
require more coordination than what currently exists. Others suggested 
that the same changes would take one year and recommended an 
implementation date of 2021, with a commenter noting that an additional 
year would help protect patients from the negative consequences of 
market disruption and allow more time to educate beneficiaries on any 
finalized changes. Another commenter asserted that the proposed 
effective date of January 1, 2020 should be delayed to allow the market 
to have an opportunity to respond to the new rule. A health plan 
commenter also recommended delaying the effective date of the rule 
beyond January 1, 2020, noting that even with CMS's risk corridor 
assurances, there is still too much uncertainty, which will lead to 
disparities in 2020 bid pricing.
    Response: The final rule is one of many complementary initiatives 
targeted around lowering list prices and reducing out-of-pocket costs, 
as outlined in the American Patients First blueprint. These initiatives 
are meant to build on each other to create a more rational and 
competitive prescription pharmaceutical product market. Based on the 
comments received and further consideration of the appropriate 
timeframe for implementation, we are finalizing the changes to Sec.  
1001.952(h)(5) of the discount safe harbor to be effective January 1, 
2022.
    Comment: Several commenters objected to the proposed effective date 
because of the statutory Part D bid deadline. Commenters stated that 
plans expected all final guidance for the upcoming year to be released 
by CMS in early April 2019 because Part D bid submissions for calendar 
year 2020 were due by June 3, 2019. If a final rule were released 
without sufficient lead time, the commenter cautioned that there will 
be large financial losses for plans and for CMS (who would have to make 
substantial payments when plans enter the risk corridor). A commenter 
expressed concern about the ability to submit an actuarially sound bid 
by the bid deadline.
    An effective date of January 1, 2020, does not provide a reasonable 
amount of time after issuing a final rule for re-negotiating agreements 
involving pharmaceutical manufacturers, pharmacies, health plans, and 
PBMs. Several commenters raised concerns that a January 1, 2020, 
effective date would make it difficult for the online Medicare Plan 
Finder tool to reflect accurate information about premiums, 
deductibles, and cost-sharing and requested that CMS prioritize updates 
to the Medicare Plan Finder and other notices to patients. Some 
commenters also noted that a January 1, 2020, effective date could 
cause significant disruptions in coverage or benefits and confusion for 
beneficiaries. This confusion, a commenter argued, may make it 
difficult for patients to understand and utilize their prescription 
drug benefits or could cause patients to search for new plans.
    Other commenters noted that formularies for Medicare Part D plans 
must be complete by early May for the June bid submission, and that 
given the timing of the rule, an effective date of January 1, 2020, 
would make it extremely challenging to meet the bid requirements.
    Response: Comments related to CMS's administration of the Part D 
program are outside the scope of this rulemaking. We are finalizing the 
changes to Sec.  1001.952(h)(5) of the discount safe harbor to be 
effective January 1, 2022.
    Comment: A commenter stated that a 2020 effective date would harm 
beneficiaries enrolled in MA-PD plans, especially if the rule is 
finalized after bids are submitted on June 3, 2019. The commenter 
suggested that, in order to mitigate losses from the change in rebates 
after premiums and bids have been set, MA-PD plans would have to reduce 
costs in other areas. The commenter stated that it would take years for 
plan sponsors to recover from these losses, threatening improvements in 
quality performance, Star measures, and the benefits of care 
coordination over an extended period.
    Response: We appreciate commenters' feedback and note that we are 
now finalizing an effective date of January 1, 2022, for the amendments 
to Sec.  1001.952(h)(5) of the discount safe harbor, which should avoid 
the disruptions and potential harm described by the commenters. Under 
the final rule, parties are not being asked to change their practices 
after bids and premiums have been set for the 2022 plan year.
    Comment: A health plan commenter indicated that if OIG requires 
point-of-sale reductions in price, health plans will have to determine 
benefit configuration, and there will likely be several formulary 
configuration changes. A PBM commenter indicated that significant 
system development and testing would be required, including system 
modifications to apply formulary exceptions, and that PBMs would need 
to make dramatic formulary changes just prior to the 2020 plan year 
which, according to the commenter, may result in member disruption and 
dissatisfaction.
    Response: We thank the commenter for sharing this concern and note 
that the effective date of the modifications to Sec.  1001.952(h)(5) of 
the discount safe harbor will be January 1, 2022, providing additional 
time for stakeholders to address these and other potential 
implementation concerns.

[[Page 76693]]

    Comment: A commenter noted that employers, including state 
employers, would not receive any benefits from the changes we proposed, 
and they would face additional costs if premiums increase. The 
commenter indicated that this is particularly unfair for public 
employers such as state governments that rely upon taxpayers to help 
fund public employee and retiree health benefit coverage. The commenter 
requested either an exemption from the proposed rule for governmental 
employee benefit plans, which are not subject to ERISA, or if an 
exemption is not granted, then a delay in the effective date 
specifically for non-ERISA plans to January 1, 2021.
    Response: We thank the commenter for sharing this concern and note 
that the finalized effective date of January 1, 2022 for modifications 
to Sec.  1001.952(h)(5) of the discount safe harbor should provide 
sufficient time to address these and other implementation concerns. We 
do, however, disagree with the commenter's suggestion to remove 
employee benefit plans from the final rule. The Department believes 
that the transition from rebates to point-of-sale reductions in price 
can happen based on existing infrastructure, and these plans will 
benefit from the lower list prices that may result from the final rule.
iii. Expand to Other Federal Health Care Programs
    The Proposed Rule stated that the changes proposed were 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 Proposed Rule clarified that the Department intended 
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 payers in other Federal health care 
programs. Commenters provided feedback about whether payments for 
prescription pharmaceuticals paid for by other Federal health care 
programs should be excluded from the safe harbor.
    Comment: Some commenters noted that if Medicaid MCOs, but not 
Medicaid fee-for-service, are excluded from the existing safe harbor, 
the Department would be treating these programs differently and would 
potentially put Medicaid MCOs at a disadvantage. Most of these 
commenters recommended removing Medicaid MCOs from the proposed 
exclusion of the existing safe harbor. A few commenters were 
indifferent on whether or not Medicaid MCOs were excluded from the 
existing safe harbor or not, but they recommended that Medicaid MCOs 
and Medicaid fee for service be treated the same way.
    Response: As discussed above, the final rule removes Medicaid MCOs 
from the exclusion of the existing safe harbor, which addresses these 
comments.
    Comment: Several commenters agreed with our proposal that the 
amendment to the discount safe harbor should not apply to prescription 
pharmaceutical products payable under Medicare Part B. These commenters 
noted that Part B drugs are reimbursed under Medicare fee-for-service 
based on the average sales price (ASP), which already accounts for 
rebates and other price concessions. There were no comments 
recommending that payment for drugs billed by Part B fee-for-service 
providers be excluded from existing safe harbors.
    Response: We are finalizing our proposal that the amendment to the 
discount safe harbor should not apply to prescription pharmaceutical 
products payable under Medicare Part B for the reason noted by the 
commenters.
    Comment: A commenter recommended that OIG remove the safe harbor 
protection for rebates paid to Medicare Advantage plans with respect to 
their coverage of Part B drugs because an increasing number of Medicare 
beneficiaries are covered by Medicare Advantage plans, and these plans 
can use rebates, similar to Part D plans, to manage Part B drug costs. 
Additionally, according to the commenter, many of the most expensive, 
high-spend drugs are physician-administered biologics.
    Another commenter noted that Medicare Advantage generally pays for 
Part B drugs as part of the medical benefit, and because of underlying 
Medicare rules, these drugs are generally not subject to the same type 
of formulary placement negotiations and patient cost-sharing patterns 
as in the Part D prescription drug benefit.
    Finally, additional commenters stated that there are differing 
levels of cost-sharing in Medicare Advantage for Part B drugs and that 
it is likely not necessary to extend the proposed changes to Part B 
drugs. However, they recommend that OIG evaluate how Medicare Advantage 
plans are reflecting potential savings on Part B covered medicines in 
beneficiary cost-sharing.
    Response: We thank the commenters for their recommendations. We are 
finalizing our proposal that the amendment to the discount safe harbor 
should not apply to prescription pharmaceutical products payable under 
Medicare Part B for the reasons noted by the commenters.
    Comment: One commenter noted that the Department of Veterans 
Affairs (VA) could use this rule as an opportunity to assert a self-
serving interpretation of the definition of the non-Federal average 
manufacturer price (non-FAMP). The commenter would like OIG to clarify 
that any transactions governed by the final rule would constitute 
``Federal'' prices and should thus be excluded from the determination 
of a ``non-Federal'' average manufacture price. For the VA to determine 
that these are not ``Federal'' sales would be inconsistent with the 
Veterans Health Care Act.
    Response: In the Proposed Rule, we noted that the VA, 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 FCP is calculated as a percentage of 
non-FAMP. Eligible programs can purchase drugs using the lesser of the 
Federal Supply Schedule (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 the VA may realize some additional savings. This final rule 
does not change the requirements of the FCP and whether Federal 
programs, such as the VA, count transactions governed by this final 
rule as ``Federal'' prices is outside the scope of this rulemaking.
iv. Scope of Amendment
    Comment: A commenter asserted that, as written, the proposed 
amendment to the discount safe harbor would apply not only to rebates 
on prescription drugs dispensed by a community pharmacy but also to 
physician-administered drugs covered in the Medicaid program. According 
to the commenter, Medicaid MCOs would no longer be able to collect 
rebates on these drugs as there is no avenue to pass the rebate on at 
the point of sale. The commenter explained that the change could lead 
to ``white-bagging'' (i.e., where providers purchase a pharmaceutical 
product from a specialty pharmacy in order to receive a discount), 
which the commenter believes raises a number of operational and 
program-integrity concerns. The commenter also noted this change could 
create an access issue for members in rural locations.

[[Page 76694]]

    Response: As discussed in detail elsewhere in this final rule, we 
are not finalizing the changes to the discount safe harbor with respect 
to Medicaid MCOs, which we believe addresses the commenter's concerns.
    Comment: A number of commenters requested clarification regarding 
what specific types of rebates and discounts would still be protected 
under the discount safe harbor. According to these commenters, the 
Proposed Rule, as drafted, could be read to remove protection for 
common purchase discounts that manufacturers provide to wholesalers or 
pharmacies, if those discounted products are later dispensed by the 
pharmacy to a Part D or Medicaid MCO enrollee. A commenter requested 
that the final rule clarify that discounts to wholesalers are 
protected.
    Another commenter requested clarification that pharmacy purchase 
discounts received by any mail-order pharmacy, specialty pharmacy, or 
retail pharmacy owned by a plan sponsor under Part D, Medicaid MCO, or 
a PBM operating on behalf of either, regardless of whether these 
discounts are dependent on formulary placement, are protected, as the 
proposed language could be read to exclude such discounts.
    Response: We note initially that we are not finalizing our proposal 
to amend the discount safe harbor to exclude protection for reductions 
in price to Medicaid MCOs, which we believe partially addresses the 
commenter's concerns with respect to pharmaceutical products dispensed 
to Medicaid enrollees as well as the comments regarding pharmacies 
owned by Medicaid MCOs or their PBMs.
    We confirm in this final rule our statement in the Proposed Rule 
that we ``intend[] 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.'' \41\ Further, we clarify that protection is available 
for these discounts (including rebates) even if the prescription 
pharmaceutical product is ultimately dispensed to a Part D enrollee 
(provided all safe harbor conditions are met). We have revised the 
language in Sec.  1001.952(h)(5)(viii) to state that the term excludes 
``[a] reduction in price or other remuneration in connection with the 
sale or purchase of a prescription pharmaceutical product from a 
manufacturer to a plan sponsor under Medicare Part D either directly to 
the plan sponsor under Medicare Part D, or indirectly through a 
pharmacy benefit manager acting under contract with a plan sponsor 
under Medicare Part D, unless it is a price reduction or rebate that is 
required by law.'' We believe this revised language addresses 
commenters' concerns and reflects our intent as articulated in the 
Proposed Rule.
---------------------------------------------------------------------------

    \41\ 84 FR 2348.
---------------------------------------------------------------------------

    Discounts offered or given to pharmacies owned by a plan sponsor 
under Part D or a PBM generally could qualify under the discount safe 
harbor if all conditions of the safe harbor are met. However, 
remuneration that is labeled as a ``discount'' but that is given to 
pharmacies or other entities owned by or affiliated with a plan sponsor 
under Part D or a PBM to reward the plan or the PBM for referrals of 
other Federal health care program business would be suspect. These 
arrangements would appear to have many of the same features as 
problematic swapping arrangements discussed elsewhere in this rule.
    Comment: A commenter requested that OIG clarify in the final rule 
that all rebates are still protected under the discount safe harbor, 
except for formulary rebates paid by pharmaceutical manufacturers to 
health plans or PBMs. Similarly, a commenter requested that OIG confirm 
that the Proposed Rule does not affect discounts offered to other 
entities (e.g., pharmacies).
    Response: As we stated in the Proposed Rule and confirm in this 
final rule, ``[t]he 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.'' \42\ As discussed above, we are 
finalizing our proposed revisions to the discount safe harbor with a 
slight modification to ensure that the regulatory text is consistent 
with our statement in the Proposed Rule. Specifically, the revisions to 
the definition of ``discount'' apply only to reductions in price or 
other remuneration in connection with the sale or purpose of a 
prescription pharmaceutical product from a manufacturer to a plan 
sponsor under Medicare Part D or through a PBM acting under contract 
with the plan sponsor under Medicare Part D, unless it is a price 
reduction or rebate that is required by law. In other words, the 
revisions apply only to reductions in price offered from manufacturers 
to plan sponsors under Medicare Part D or a PBM acting under contract 
with such entities. For reasons explained above, the revisions to the 
discount safe harbor in the final rule do not apply to discounts 
offered to Medicaid MCOs.
---------------------------------------------------------------------------

    \42\ 84 FR 2348.
---------------------------------------------------------------------------

    Comment: A commenter recommended that OIG clarify that manufacturer 
rebates and discounts may remain protected under other safe harbors. 
The language of any proposed point-of-sale reduction in price safe 
harbor and related amendments should specifically provide that the 
subject remuneration may still receive protection under other available 
safe harbors.
    Response: If a party enters into an arrangement that fits squarely 
within a safe harbor--any safe harbor--the party would be protected 
from liability under the anti-kickback statute.
v. Impact on Volume or Prompt Pay Discounts
    Comment: A commenter expressed concern that the finalizing changes 
that we proposed to the discount safe harbor would enable other 
entities to engage in the exact same practice that the Department is 
trying to eliminate with PBMs; specifically, it will allow other 
entities in the supply chain to be compensated for the provision of 
services based on volume and a percentage of list prices.
    Response: We noted in the Proposed Rule that we intended 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. However, we reiterate that the discount safe harbor 
protects only the reduction in the amount a buyer is charged for an 
item or service; it does not protect payments for services.
vi. Impact on Beneficiary Access
    Comment: A number of commenters were supportive of the Proposed 
Rule. These commenters contended that the Proposed Rule would reduce 
out-of-pocket costs for beneficiaries; safeguard and increase access to 
necessary and affordable treatments and therapies and increase patient 
adherence to those treatments and therapies; and lower list prices for 
drugs or, at least, address the increasing cost of drugs.
    Other commenters contended that the Proposed Rule addresses the 
perverse incentives for manufacturers to provide rebates, which affects 
affordability of drugs; curbs PBMs' practices of preferring high-cost 
drugs; shifts practices so that drug choices are based

[[Page 76695]]

on what is best for patients; and addresses PBMs' role in reducing the 
availability of drugs, patients' access to drugs, and patients' freedom 
to choose certain drugs.
    Response: We thank the commenters for their support. The commenters 
describe goals this rule is intended to achieve.
    Comment: A commenter requested that the Department ensure that some 
form of rebates remain protected to maintain prescription drug choice 
and savings for their enrollees.
    Response: The new safe harbor for point-of-sale reductions in price 
offers a clear pathway for manufacturers to offer price reductions to 
Part D plan sponsors and Medicaid MCOs. In addition, reductions in 
price to Medicaid MCOs remain eligible for safe harbor protection under 
the discount safe harbor.
    Comment: Several commenters were concerned that finalizing the 
changes in the Proposed Rule could result in higher premiums. Some of 
these commenters were specifically concerned that an increase in 
premiums will decrease or deter Part D enrollment, delay enrollment by 
beneficiaries and, therefore, cause them to incur penalties for late 
enrollment, or cause beneficiaries to dis-enroll or drop Part D 
coverage altogether. Other commenters were concerned that uncertainty 
in the Part D program caused by the Proposed Rule, including risks of 
an older and sicker population and higher-than-projected premiums, may 
cause smaller plans to drop out of participation in Part D because they 
may be unable to handle the increased risk, which could, in turn, 
reduce beneficiary choice of plans. Some commenters suggested that an 
increase in premiums may result in a decrease in beneficiary access to 
medically necessary medicines. Commenters stated that an increase in 
premiums could result in changes to beneficiaries', including dual-
eligible beneficiaries', supplemental benefits, contending that an 
increase in those costs may deter enrollment. A commenter suggested 
that an increase in costs, generally, would reduce beneficiary access 
to plans and plan choices.
    Response: We understand commenters' concerns. The Department notes 
that premiums in the Part D program have historically increased at a 
slower rate than inflation, while the list prices of drugs and 
government expenditures have increased more rapidly. Additional 
information about impacts of this rule in areas predicted by the 
commenters can be found in the Regulatory Impact Statement. The 
Department does not believe that the risk of increased premiums or the 
other uncertainties raised by the commenter will lead to plans dropping 
out of the Part D program because Part D plans have methods for 
preventing premium increases, such as tougher negotiation or lower 
overhead, and that plans will be able to share in the savings under 
this final rule.
    Comment: Several commenters raised concerns that, without adequate 
or timely updates to the Medicare Plan Finder, beneficiaries may not be 
able to find appropriate plans and could, potentially, dis-enroll from 
Part D. The same commenters, as well as another commenter, are also 
concerned that beneficiaries may be confused about their cost-sharing 
obligations and may, incorrectly and based on inaccurate or unreliable 
information, assume that they should benefit from lower cost-sharing 
amounts. Commenters requested that the Department create mechanisms for 
beneficiaries to be provided or have access to information about cost 
sharing, discounts received at the point of sale, and the amounts 
reimbursed to pharmacies dispensing the medicine. A commenter suggested 
that one way to mitigate their concerns is to, for example, update the 
Medicare Plan Finder or to ensure that pharmacies and prescribers have 
sufficient information to provide beneficiaries about their cost-
sharing obligations at the point of sale. Other commenters recommended 
the use of electronic tools, such as Real Time Benefit Tools, that 
would allow prescribers to access specific information on patients' 
formularies and out-of-pocket costs for prescription drugs.
    Response: We agree with commenters that it is important for 
beneficiaries to have access to information needed to make informed 
health care decisions. The Department believes the reduced price at the 
point of sale will create the appropriate amount of transparency, and 
that separately providing the amount of the reduction in price is not 
necessary for transparency to be achieved. While the creation of 
mechanisms for beneficiaries and prescribers that provide information 
about cost sharing, out-of-pocket costs, and discounts received at the 
point of sale would be programmatic tools that are outside the scope of 
this rulemaking, we point commenters to a May 2019 final rule published 
by CMS entitled ``Modernizing Part D and Medicare Advantage to Lower 
Drug Prices and Reduce Out-of-Pocket Expenses'' under which CMS 
requires Part D plans by 2021 to adopt Real Time Benefit Tools that 
provide complete, accurate, timely, clinically appropriate and patient-
specific real-time formulary and benefit information to prescribers 
that they can discuss with their patients. CMS has also noted that 
Medicare beneficiaries or their representatives can search an online 
interactive drug plan comparison tool, the Medicare Plan Finder, to 
find formulary and cost-sharing information for Part D plans. 
Additionally, CMS has informed us that through their eMedicare 
initiative, which is a multi-year initiative intended to empower 
patients and update Medicare resources to meet beneficiaries' 
expectation of a more personalized customer experience, the Medicare 
Plan Finder will continue to be improved over time to enhance access to 
information.\43\
---------------------------------------------------------------------------

    \43\ Centers for Medicare & Medicaid Services (CMS), CMS 
announces new streamlined user experience for Medicare 
beneficiaries, (Oct. 1, 2018), available at https://www.cms.gov/newsroom/press-releases/cms-announces-new-streamlined-user-experience-medicare-beneficiaries-0.
---------------------------------------------------------------------------

    CMS has also advised us that it will ensure that beneficiaries 
receive adequate and timely information about cost-sharing obligations 
under Medicare plans, and that the Medicare Plan Finder will reflect 
any necessary updates before the final rule's implementation.
    Comment: A commenter is specifically concerned that the increased 
transparency that results from a final rule may pressure PBMs to reduce 
overall costs in ways that may disadvantage beneficiary access. The 
commenter is concerned that health plans and PBMs may narrow 
prescription benefits for, e.g., vulnerable populations, or discourage 
high-cost patients from enrolling altogether. Other commenters also 
raised concerns relating to narrow prescription benefit design and 
increased cost sharing, indicating that if the amended and new safe 
harbors are finalized, plans and PBMs will have increased pressure to 
reduce costs, which may result in some plans and PBMs significantly 
narrowing formularies, using utilization management tools to a greater 
extent, and/or increasing cost-sharing on brand-name drug tiers in 
order to prevent enrollment by beneficiaries who have costly conditions 
or take certain medications. Other commenters asserted that mandatory 
point-of-sale reductions in price could lead to adverse risk selection, 
where beneficiaries with a specific condition select the one plan with 
the lowest upfront discounted price for their specialty drug, which the 
commenters asserted could result in significant formulary and coverage 
changes.

[[Page 76696]]

    Expressing similar concerns, another commenter stated that CMS 
should enhance its review of Part D benefit design to ensure the 
patient protections of Part D are not undermined and that plans are not 
restricting access to medicines in a manner that would violate the non-
discrimination protections in Part D. Another commenter suggested that 
having safeguards in place to protect patients who are currently stable 
on a medication will be important and requested that OIG or the 
Department provide certain additional safeguards.
    Response: We appreciate and share commenters' concerns that 
beneficiaries be protected from discriminatory practices, including 
improper restrictions on access to drugs. As stated elsewhere in this 
rule, CMS is responsible for administering the Part D program. We are 
informed by CMS that it has a robust formulary review and approval 
process, which entails in-depth checks to ensure sufficient inclusion 
of all necessary Part D drug categories or classes for Medicare 
beneficiaries, preventing discriminatory benefit designs. As part of 
this review, CMS assesses the adequacy of a Part D sponsor's formulary 
drug categories and classes along with the plan's formulary drug list 
to ensure that the formulary offers an appropriate range of Part D 
drugs.\44\ This formulary review process also includes a review of 
utilization management tools to ensure plans do not restrict 
beneficiary access to necessary medication. The Secretary cannot 
approve a prescription drug plan if the plan's design and its benefits, 
including any formulary and tiered formulary structure, are likely to 
substantially discourage enrollment by certain Part D eligible 
individuals under the plan.\45\
---------------------------------------------------------------------------

    \44\ 79 FR 1918, 1939 (Jan. 10, 2014).
    \45\ Social Security Act section 1860D-11(e)(2)(D)(1).
---------------------------------------------------------------------------

    CMS also employs risk adjustment where Medicare plan sponsors 
receive higher payments for beneficiaries who are higher risk (as 
determined by health status). Risk adjustment is intended to minimize 
the incentive for Medicare Part D plan sponsors to engage in practices 
that would result in the enrollment and retention of beneficiaries with 
expected cost below the average, although individual plan experience 
may differ based on the plan's mix of beneficiaries relative to the 
national average and the specific costs that they face relative to the 
national average. CMS believes that the formulary review and approval 
process, risk adjustment, and anti-discrimination rules each serve to 
mitigate the incentive for health plans and PBMs to narrow prescription 
benefits for vulnerable populations and to discourage enrollment among 
high cost patients.
    Comment: A commenter stated that the changes included in the 
Proposed Rule could prevent Part D plan sponsors and PBMs from 
penalizing manufacturers for lowering list prices by removing drugs 
from formularies or imposing significant utilization management 
requirements.
    Response: We agree with the commenter that it is inappropriate to 
penalize lower prices; a key goal of this rulemaking is to encourage 
lower drug prices.
    Comment: Several commenters recommended that, before implementing 
the final rule, the Department or OIG conduct certain demonstrations, 
pilot programs, focus groups, or other assessments or evaluations to 
determine whether and how beneficiaries will benefit from, or be 
adversely affected by, the proposed changes.
    Response: While we appreciate the commenters' suggestions, we are 
not conducting any particular pilot programs or assessments prior to 
finalizing the rule. We analyzed anticipated impacts to beneficiaries 
in the regulatory impact analysis and refer readers to that section for 
further information.
vii. Additional Safeguards
    Comment: Several commenters recommended OIG, CMS, or HHS monitor, 
or implement mechanisms to monitor, the effect of the final rule on 
beneficiaries, PBMs, drug manufacturers, plans, plan sponsors, 
dispensing pharmacies, and other stakeholders in the drug supply chain. 
Some of these commenters recommended that data be gathered on the 
effect of the final rule, specifically related to drug prices, 
beneficiaries' costs, utilization management, access to drugs, 
chargeback amounts, the contracts PBMs enter into with drug 
manufacturers and plans and the terms of those contracts, and formulary 
changes. A commenter specifically recommended a mechanism for 
stakeholders in the drug supply chain to report non-compliance with any 
of the proposed safe harbors. Another commenter specifically requested 
that the data gathered by OIG, CMS, or HHS through its monitoring 
mechanisms be publicly available. Finally, a commenter recommended that 
OIG require pharmaceutical manufacturers to confidentially disclose 
their drug rebates before the Proposed Rule's changes are finalized so 
policymakers can compare net costs for drugs before and after the 
proposed changes go into effect.
    Response: The Department recognizes that, due to the complexity of 
the drug supply chain, the final rule has the potential to affect 
stakeholders in ways and to an extent that may be difficult to 
anticipate. The Department declines the commenter's request to require 
manufacturers to disclose rebate amounts prior to issuance of the final 
rule. The Department intends to monitor the effects of this rule. As an 
independent, objective oversight entity, OIG regularly reviews the Part 
D and other HHS program and has identified ensuring that HHS 
prescription drug programs work as intended as a priority area. OIG's 
reports are routinely made public and available on our website at 
https://oig.hhs.gov/reports-and-publications/index.asp. With respect to 
a mechanism for reporting non-compliance with the requirements of a 
safe harbor, the OIG website provides detailed instructions for 
reporting violations of law, including violations of the anti-kickback 
statute, at https://oig.hhs.gov/fraud/report-fraud/. We note, however, 
that an individual or entity's failure to comply with the requirements 
of a safe harbor does not per se constitute a violation of the anti-
kickback statute. The conduct in question must otherwise meet the 
elements of a violation of that law.
    Comment: Some commenters requested OIG include safeguards in the 
amendment to the discount safe harbor. For example, a commenter 
requested OIG ensure that the only price concessions available to 
health plans, PBMs, or the affiliates in their vertically integrated 
business in Part D are those point-of-sale reductions in price under 
the new safe harbor for point-of-sale reductions in price.
    Response: Arrangements are protected from liability under the anti-
kickback statute if they meet all the requirements of a safe harbor. 
Parties are free to enter any arrangements that do not violate the 
anti-kickback statute or other federal or state law.
viii. Alternative Recommendations
    Comment: A commenter recommended that, in lieu of removing rebates 
to Part D plans and Medicaid MCOs from the discount safe harbor, OIG 
should modify the existing safe harbor by allowing rebates only when a 
minimum percentage, for example 50 percent, is reflected at the 
pharmacy point-of-sale, while the remaining savings continue to be 
spread across

[[Page 76697]]

monthly premiums for all consumers served by the health plan.
    Response: We thank the commenter for this proposal, but we decline 
to adopt this revision. We did not propose this approach, we do not 
believe it would be practical to implement, and we do not believe it 
would achieve the goals of this rulemaking.
    Comment: A commenter recommended that OIG expand the proposed 
amendment to the discount safe harbor to permit manufacturers to offer 
copayment and coinsurance assistance to Part D beneficiaries for 
single-source drugs where the patient has no other choice and thus 
cannot be induced to select one drug over another, while still allowing 
plan sponsors to decide whether to cover drugs under existing rules and 
effectively manage utilization for appropriate patient care and while 
allowing patients who need innovative therapies and cannot afford the 
copayment due to the circumstances of Part D's benefit design to be 
able to access manufacturer copayment support. By contrast, a commenter 
recommended that OIG narrow the existing discount safe harbor to 
prohibit rebate arrangements as a percentage of list price while still 
allowing for price concessions in the form of rebates that are 
beneficial for the healthcare system, including those that would yield 
a fixed net price for a drug over time and those that reimburse plans 
when a drug does not work as promised.
    Response: We decline to adopt the changes proposed by commenters. 
First, we did not propose or solicit comments on including any 
protection for cost-sharing supplements from manufacturers to 
beneficiaries, and we have longstanding concerns with such assistance. 
With respect to the second suggestion, we believe that some value-based 
arrangements involving prescription pharmaceutical products might 
qualify for protection under the new point-of-sale safe harbor but also 
could qualify under other safe harbors (e.g., the personal services and 
management contracts safe harbor, warranties safe harbor). We decline 
to continue protection under the discount safe harbor for rebate 
arrangements between pharmaceutical manufacturers and Part D plans 
(directly or through their PBMs) that might yield a fixed price over 
time. It is unclear how we could separately protect such rebates, and 
beneficiaries would not be able to share in the benefit of the lower 
cost. We note other rebates may be permitted under the discount safe 
harbor, and certain price concessions are permitted under the new 
point-of-sale reduction in price safe harbor at 42 CFR 1001.952(cc).
    Comment: Some commenters recommended that CMS monitor formulary 
changes by plan sponsors, and one of those commenters recommended 
specifically monitoring for the potential emergence of ``discount 
walls.'' A commenter recommended that CMS monitor medical exceptions 
(which, according to the commenter, are ways for beneficiaries to 
access new innovator products that are blocked from formulary access 
(i.e., non-contracted) by rebate walls) to ensure plan sponsors do not 
tighten controls for or restrict access to these medical exceptions as 
a way to manage costs in the absence of rebates. The same commenter 
recommended that CMS ensure that the final rule does not affect ``non-
medical switching'' (which, according to the commenter, involves 
switching between branded products and across therapeutic classes in a 
medically stable patient solely for cost savings and potentially 
without the patient's or provider's consent) so that formulary changes 
made by plan sponsors do not affect patients undergoing therapy.
    Response: We have coordinated with CMS in promulgating this rule. 
As described above, CMS has informed us that it has and will use a 
robust formulary review and approval process.

C. Safe Harbor for Certain Price Reductions on Prescription 
Pharmaceutical Products

    Comment: We received a comment that expressed concern about the new 
safe harbor for point-of-sale reductions in price taking effect 60 days 
after the rule is finalized. The commenter stated that 60 days is not 
enough to adjust bids and amend contracts for compliance.
    Response: The new safe harbor for point-of-sale reductions in price 
does not require any party to take any action within a particular 
timeframe. The safe harbor may be used starting 60 days after the final 
rule is published, but it is just another option for protecting 
discounts.
i. Point-of-Sale Chargebacks
    Comment: Several commenters requested that OIG revise the 
definition of ``chargeback'' proposed in the Proposed Rule. A commenter 
requested that OIG amend the definition to prohibit entities that 
control Part D or Medicaid MCO formularies from processing chargebacks. 
Another commenter recommended that different chargeback amounts should 
not be negotiated for chain pharmacies, community pharmacies, and 
specialty pharmacies.
    With respect to the term ``chargeback,'' a commenter suggested 
defining it as ``a payment made directly or indirectly to the 
dispensing pharmacy that is equal to the price reduction negotiated 
between the manufacturer and the plan or PBM.'' A commenter 
representing pharmaceutical manufacturers recommended that OIG specify 
that the total payment to the dispensing pharmacy be equal to: (1) The 
payment to the pharmacy from the plan or PBM; (2) the point-of-sale 
chargeback due from the manufacturer; and (3) the beneficiary cost-
sharing amount. The commenter recommending these changes expressed 
concern that OIG's proposed definition could result in gaming by other 
entities that would result in pharmacies dispensing medicines at a 
financial loss. Several commenters requested that we change the term to 
``point-of-sale chargeback'' to avoid confusion with how that term is 
used elsewhere in the distribution channel.
    While a commenter asked for the definition of ``chargeback'' to 
include a payment agreed upon by the pharmacy, and not just Part D 
issuers and/or PBMs, another commenter expressed support for chargeback 
to be defined as proposed in the rule but requested clarification on 
whether a chargeback is to be based on the pharmacy actual acquisition 
cost or on Wholesale Acquisition Cost (WAC). Another commenter proposed 
amending the definition of ``chargeback'' to confirm that chargebacks 
are separate and apart from the agreed upon reimbursement to the 
pharmacy.
    Response: We appreciate the range of suggestions received in 
response to our request for comment on the proposed definition. As we 
noted in the Proposed Rule, ``the use of chargebacks [makes] pharmacies 
whole for the difference between acquisition cost, plan payment, and 
beneficiary out-of-pocket payment . . . .'' \46\ Further, we are 
mindful of concerns about pharmacies dispensing prescription 
pharmaceutical products at a loss. We agree with the commenter above 
who recommended clarifying that a chargeback is equal to the amount of 
the discount negotiated by 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. We are revising the 
definition to eliminate any confusion on this point. The revised 
definition is consistent with our goal expressed in the Proposed Rule

[[Page 76698]]

to protect point-of-sale price reduction arrangements in which 
consumers share the full benefit. Any point-of-sale chargeback, as 
defined in this rule, is part of the total reimbursement to the 
pharmacy for the prescription pharmaceutical product.
---------------------------------------------------------------------------

    \46\ 84 FR 2361.
---------------------------------------------------------------------------

    With respect to the request that OIG confirm that different types 
of pharmacies must receive the same chargeback amount, as described 
above, the chargeback amount due to the pharmacy must be equal to the 
reduction in price negotiated by a plan (or PBM operating on its 
behalf) and the manufacturer of the prescription pharmaceutical 
product. If a manufacturer and a plan (or a PBM acting on its behalf) 
have negotiated a point-of-sale reduction in price for a prescription 
pharmaceutical product that complies with the safe harbor, we would 
expect the chargeback to the pharmacy to be the same, regardless of the 
type of pharmacy.
    Finally, we agree with those commenters who recommended that we 
revise the term from ``chargeback'' to ``point-of-sale chargeback'' to 
differentiate this process from other transactions in the 
pharmaceutical supply chain with the same name. We have revised the 
term in the final regulations at Sec.  1001.952(cc).
    Comment: A number of commenters raised concerns about the need for 
CMS to promulgate or revise regulations and to issue technical guidance 
applicable to the chargeback administration process if the new rule is 
finalized. Several of these commenters requested that OIG consult with 
CMS because of its oversight and administration of the Part D program. 
For example, a commenter requested that CMS issue guidance regarding 
how to incorporate chargebacks into the Medicare Plan Finder files. 
Another commenter provided an extensive list of Part D regulations that 
it believes would need to be revised and topics for sub-regulatory 
guidance that it believes would need to be published in order to 
implement the chargeback construct.
    Several commenters also posited that significant involvement by CMS 
would be required because there is currently no regulatory structure or 
oversight mechanism in Part D for these chargebacks, for example, there 
is no structure for invoicing, reconciliation, or auditing and recovery 
functions. As one example, a commenter expressed concern that there are 
no requirements for pharmacies to disclose chargeback amounts to CMS 
and there is no requirement for pharmacies to provide evidence that the 
point-of-sale reduction in price benefited the beneficiary. A commenter 
recommended that there be regulatory oversight of the chargeback 
process by relevant agencies. Furthermore, according to commenters, 
under Part D there is no existing regulatory authority over or 
oversight of wholesalers or other entities that could be facilitating 
the chargeback administration process.
    In addition, several commenters requested guidance from CMS on 
error adjudication or dispute resolution processes. A commenter 
indicated the error adjudication process would be used in those 
instances where a manufacturer erroneously remits a chargeback to a 
pharmacy or where there are errors in the amount that a beneficiary 
pays. Other commenters suggested that pharmacies should not be required 
to reverse and rebill original claims if a price reduction is applied 
in error because it could result in a beneficiary's cost-sharing 
obligation increasing, and a commenter requested guidance from the 
Department explaining that plan sponsors and PBMs are not required to 
collect additional cost-sharing from beneficiaries under these 
circumstances. A number of commenters raised concerns or questions 
about the impact that changes included in the Proposed Rule would have 
on pharmacies. For example, a commenter requested guidance on dealing 
with non-collectible rebates (e.g., if a beneficiary is given a 
discount at the point of sale, which the manufacturer later does not 
honor, must the pharmacy attempt to collect the disallowed amount from 
the beneficiary?).
    Similarly, a commenter requested clarification on the role of 
pharmacies in dispute resolutions involving point-of-sale reductions in 
price and asked that there not be any retroactive adjustments for 
chargebacks paid to pharmacies. Another commenter requested guidance on 
administering chargebacks to pharmacies where the value of the 
chargeback exceeds the ingredient cost.
    Response: This rule provides flexibility for parties seeking safe 
harbor protection to structure back-end, point-of-sale chargeback 
processes that result in fully passed-through point-of-sale discounts. 
Moreover, were we to include detailed technical requirements, we would 
make it more difficult for parties to use and comply with the safe 
harbor for its intended purposes. While we have consulted with CMS in 
this rulemaking, any requests for CMS to issue guidance related to the 
chargeback administration process (e.g., guidance related to dispute 
resolution processes) and questions about CMS authority to do so are 
outside the scope of this rulemaking, as are CMS requirements related 
to PDE reporting and correcting known discrepancies in cost-sharing 
charged to beneficiaries in the event of a mistake or error in the 
calculation of the point-of-sale price.
    With respect to the comments regarding the circumstances under 
which a pharmacy extends a price reduction to a beneficiary that is not 
honored by the manufacturer, we note that if an entity made a practice 
of undercharging beneficiaries for cost sharing, under the guise of 
passing through manufacturer reductions in price, with knowledge that 
the reductions in price would not be paid by manufacturers (thus 
providing remuneration to the beneficiaries), and did so with the 
intent to induce beneficiaries to purchase items paid for in part by a 
Federal health care program, the entity could be subject to liability 
under the anti-kickback statute. Moreover, while occasional errors in 
calculations (e.g., a miscalculation of a beneficiary's cost-sharing 
obligation) would not implicate the anti-kickback statute, a pattern of 
errors could eliminate the protection of the safe harbor (e.g., if a 
manufacturer regularly miscalculates the full value of the reduction in 
price owed to the pharmacy that is required to be provided for safe 
harbor protection) and would be subject to scrutiny for intent.
    We also clarify that there should be no situation in which the 
price at the pharmacy counter is less than zero. A situation in which a 
beneficiary or a Part D plan sponsor theoretically would be owed money 
would not be a reduction in price; that would be a payment to a 
referral source and would not be protected by a safe harbor.
    Comment: A commenter requested additional safeguards related to 
chargebacks for small business community pharmacies, including but not 
limited to the right to: Appeal chargeback decisions, inquire about 
missing chargeback payments, utilize audit processes, and engage in 
dispute resolution. A commenter recommended that, if other parties 
violate the requirements under the Proposed Rule and the anti-kickback 
statute, then community pharmacies should be held harmless from such 
conduct. This commenter stated that independent community pharmacies 
should have the opportunity to do business with any trading partner in 
the supply, billing, or reconciliation chain.
    Response: Nothing in this rule restricts the ability of pharmacies 
to do business with other parties in the supply, billing, or 
reconciliation chain.

[[Page 76699]]

While we appreciate the commenter's concerns, we decline to provide 
additional safeguards in the safe harbor that are specific to community 
pharmacies; the articulated concerns are not unique to any particular 
type of pharmacy, and we believe the safe harbor contains the right 
combination of conditions to protect programs and patients from abusive 
kickback schemes. We note that many of the commenter's requests, e.g., 
the right to appeal chargeback decisions, are outside the scope of this 
rulemaking, which addresses the conditions necessary for protection 
under the anti-kickback statute. Nothing in this rule limits 
pharmacies' ability to inquire about missing chargeback payments or to 
enter into contracts that provide for appealing chargeback decisions, 
utilizing audit processes, and engaging in dispute resolution. We 
further note that community pharmacies would not necessarily be liable 
under the anti-kickback statute if other parties violate the anti-
kickback statute. Whether a party is subject to liability under the 
anti-kickback statute depends upon the actions and intent of that party 
and not solely upon the actions and intent of other parties to an 
arrangement.
    Comment: Several commenters requested that the Department 
facilitate the exchange of information for purposes of implementing the 
chargeback process. For example, a commenter requested that CMS allow 
for the electronic sharing of data so that pharmacies will know 
patients' cost-sharing obligations and create a mechanism for 
pharmacies to receive point-of-sale chargebacks. Another commenter 
asked that OIG require as a safe harbor condition that plans, PBMs, and 
other entities involved in the chargeback administration process 
exchange information and cooperate as necessary to ensure transparency.
    Several commenters raised concerns or questions related to the 
claims-level data needed for chargeback administration. For instance, 
some commenters asked that the Department develop processes and claims-
level data elements to allow manufacturers to administer chargebacks to 
pharmacies. A commenter requested that HHS implement updates to 
existing data and communications file formats to assist with the 
chargeback verification and correction process.
    Other commenters commented on the need for pharmacies to have 
visibility into various claims-level data. For example, a commenter 
explained that pharmacies should have full visibility into the total 
and final reimbursement due the pharmacy and any final amounts due as 
chargebacks so that they can predict their cash flow. A commenter 
indicated that while other parties in the drug supply chain may argue 
that these chargeback amounts are proprietary, access to this 
information is vital to a pharmacy's ability to operationalize its 
business and support the Proposed Rule. Another commenter noted that 
transparent, timely, and plan-validated communication of claims-level 
chargeback amounts due to the pharmacy will enable wholesalers to 
effectively adjudicate the chargeback payment to pharmacies. A 
commenter recommended that the chargeback administrator be required to 
furnish electronic remittance advices with all chargeback amounts 
detailed at the claim level so as to allow pharmacies to substantiate 
the total and final reimbursement. Other commenters had various 
requests for pharmacies to have full visibility into plan-adjudicated 
claims, for example, to allow the pharmacies to extract chargeback data 
or to track price reductions made by an entity who will be paying the 
pharmacies (if the entity making payment is not a plan sponsor under 
Part D or a PBM).
    Response: We do not intend for this rule to stipulate the data that 
must be shared among the parties administering the point-of-sale 
chargebacks. As we stated above, this rule provides flexibility for the 
industry to develop and implement arrangements for the administration 
of chargebacks as necessary to meet the conditions of the safe harbor.
    While we encourage such flexibility, we note that point-of-sale 
chargebacks are defined as a payment made directly or indirectly by a 
manufacturer to a dispensing pharmacy. To the extent the chargeback 
process is used, we expect the manufacturer and the plan sponsor under 
Part D, Medicaid MCO, or PBM to have a writing that sets forth the 
reduction in price negotiated between the parties, which would be equal 
to the chargeback due to the pharmacy.
    Similarly, we would expect a manufacturer to have sufficient 
documentation to prove that the chargeback actually was administered to 
the pharmacy and that the amount of the chargeback was equal to the 
point-of-sale reduction in 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. While we are not specifying 
the form of this documentation, it would be prudent for manufacturers 
to maintain appropriate documentation to show that the condition in 
(cc)(1)(ii) has been met, if applicable.
    We decline to adopt the commenter's request to create a condition 
in the safe harbor related to the exchange of information and 
cooperation among the parties. While increased transparency is an 
important goal of this final rule, we believe such a condition in the 
safe harbor would be vague and would result in significant stakeholder 
confusion.
    Comment: Several commenters noted that NCPDP would need to be 
consulted in order to implement new minimum transaction standards 
related to chargebacks. A commenter posited that a new version of the 
standard transaction is not required but expedited code values would be 
required. Several commenters suggested that every approved pharmacy 
claim (adjudicated through the standard transactions developed by 
NCPDP) should include an itemized chargeback amount due to the 
pharmacy. One of these commenters explained that a number of sources 
(e.g., a manufacturer, a health plan, a pharmacy switch) could 
potentially provide the claims-level chargeback data. Another commenter 
raised concerns, however, that manufacturers and wholesalers do not 
currently have access to the final adjudicated claim or to other 
enrollee-level data, which the commenter believes would be necessary to 
implement the chargeback processing system.
    A commenter that is a not-for-profit standards development 
organization provided guidance on three possible options for 
chargebacks to be administered in accordance with the HIPAA standards 
for electronic healthcare transactions. In two methods, a PBM would 
administer the chargeback process and in the third method a non-PBM 
entity would serve as the chargeback administrator. According to the 
commenter, two of the possible methods for administering chargebacks 
(one involving a PBM and one involving a non-PBM entity) would require 
near-term modifications to the standard transaction through additional 
expedited code values added to the existing HIPAA standard. The 
commenter stated that ten-to-twelve months from the date of a final 
rule would be necessary for the standards development process, with 
additional time needed for modification of industry operations. The 
commenter requested that OIG and the Department provide guidance as to 
which of these methods would support the definition of a 
``chargeback.''
    Response: We appreciate the commenters highlighting changes to the

[[Page 76700]]

HIPAA standard transactions that might be required for certain parties 
to administer point-of-sale chargebacks, although we will note that the 
Department is agnostic as to which entities may choose to implement the 
point-of-sale chargeback process. We thank the commenter for the 
estimate that ten to twelve months would be necessary for standards 
development and implementation. While we do not endorse that estimate, 
we do believe the revised effective date of January 1, 2022 for the 
amendments to Sec.  1001.952(h)(5) of the discount safe harbor will 
provide adequate time for the standards development process and for 
implementation of industry operations to provide the chargeback 
function.
    Comment: A few commenters requested that OIG provide flexibility as 
to the entities that may administer the chargebacks described in the 
point-of-sale reductions in price safe harbor, with various commenters 
highlighting that existing systems used by PBMs, pharmacy switch 
models, and wholesale distributors, among others, could be leveraged to 
operationalize this process. A commenter requested that OIG allow 
market forces to determine the most efficient revenue streams under 
this new system. Another commenter requested that OIG clarify those 
entities that can have a role in the chargeback administration process, 
and whether entities that have formulary decision-making responsibility 
(directly or indirectly) could serve as chargeback administrators. A 
commenter highlighted, however, that the safe harbor only protects 
reductions in the price charged by a manufacturer, which the commenter 
noted could unintentionally limit the chargeback process to wholesalers 
because manufacturers typically only ``charge'' these entities.
    Several commenters supported the use of wholesalers to effectuate 
chargebacks to pharmacies. For example, a trade association 
representing pharmaceutical distributors explained that existing 
distributor systems could be leveraged to process point-of-sale 
reductions in price and to route chargebacks to pharmacies. More 
specifically, some commenters posited that wholesalers are best-
positioned in the distribution channel to facilitate point-of-sale 
discounts because of their existing capabilities and infrastructure, 
and their prior experience with chargeback transactions. According to 
these commenters, the wholesaler system would create a ``cash-less'' 
discount model and would move the industry towards net prices for 
patients, would enhance transparency, and would minimize payment delays 
to pharmacies. A wholesaler commenter noted that the use of wholesalers 
to effectuate chargebacks would increase transparency and would ensure 
wholesaler accountability because pharmacies have the discretion to 
choose a different wholesaler with which to do business. However, the 
commenter emphasized that there is a need for additional accountability 
principles to be set, such as requirements to relay accurate 
information and credits throughout the channel promptly so as not to 
impede manufacturers, wholesalers, or other entities from the proper 
administration of chargebacks. Another wholesaler commenter stated that 
a new remittance transaction would need to be established for the 
payment of the chargeback by the wholesaler to the pharmacy once it is 
authorized by the manufacturer.
    A PBM commenter raised a number of concerns with wholesalers 
serving as chargeback administrators. For example, the commenter 
expressed concern that using a wholesaler-led system could lead to 
pricing collusion. Another commenter raised its concerns that 
wholesalers that administer chargebacks may be incentivized to ignore 
utilization management requirements and pay discounts because, unlike 
plans or PBMs, they are paid per unit sold. A commenter also cautioned 
against unintended consequences of using wholesalers to facilitate 
chargebacks; specifically, the commenter stated that using these 
entities would decrease the AMP and, as a result, would lower the 
amount that states and the Federal government receive under the MDRP.
    Other commenters requested that PBMs be designated to administer 
chargebacks because they are able to use existing infrastructure and 
relationships with manufacturers, plan sponsors, and pharmacies. 
However, a trade association representing community pharmacists 
supported a model in which PBMs would not participate in the chargeback 
administration process. According to the commenter, interactions 
between pharmacies and PBMs have led to a non-transparent environment 
that may hinder patient care. Another commenter cautioned against 
making pharmacies the chargeback administrator, as it would require the 
pharmacy to be privy to a significant amount of new information, such 
as information about the beneficiary's plan, benefit structure, 
position in the benefit parameters, and costs, as well as information 
about the discount negotiated. The commenter also cautioned that such 
responsibilities would significantly change the role of a pharmacy.
    Response: The Department recognizes that stakeholders in the 
pharmaceutical industry are best positioned to determine what entity or 
entities should be responsible for the point-of-sale chargeback 
administration process. In addition, the Department wants to encourage 
current and future innovation and seeks a level playing field so that a 
variety of entities may engage in the chargeback administration 
process. For these reasons, and so as not to be overly prescriptive, 
the final rule does not require a specific category or categories of 
entities to serve as chargeback administrators.
    We did not intend for the use of the word ``charged'' in the safe 
harbor to imply that only wholesalers may effectuate the chargeback 
process, and that term has been changed in the regulatory text. So long 
as all conditions of the safe harbor are met, any entity may administer 
the chargeback process for purposes of compliance with the safe harbor.
    Comment: Many commenters raised concerns about the costs, 
coordination, and development that would be required for all Part D 
stakeholders (e.g., manufacturers, wholesalers, and pharmacies) to 
create and implement new systems to operationalize chargebacks. For 
example, several commenters noted that pharmacies would be required to 
develop mechanisms to track payments at negotiated discount rates and 
to operationalize chargebacks. To address these concerns, a commenter 
requested that OIG minimize burden and financial risk for pharmacies 
and suggested that the responsibility for calculating the total payment 
due to the pharmacy rest with the plan sponsor. On a similar note, a 
commenter raised concerns about the burden on pharmacies to determine 
beneficiary out-of-pocket cost-sharing amounts.
    Commenters noted that entities would incur significant financial 
costs through, by way of the commenters' examples, upfront investments 
in IT; development of systems for invoicing, reconciliation, and 
recovery; and new systems (specific to pharmacies) to collect 
reimbursement from the PBM and chargeback administrator. Such system 
modifications also would be required across the entire drug supply 
chain to incorporate and analyze utilization information at the 
beneficiary level. In addition, some commenters noted that the existing 
wholesaler chargeback systems in place are much simpler and very 
different than what would be

[[Page 76701]]

required in the retail pharmacy context and would need to be modified 
for this context, potentially requiring significant infrastructure 
changes and material investments.
    Commenters also noted that all parties involved would have to 
renegotiate existing contracts or enter into new contracts to 
operationalize this system, which they posited would be a time-
consuming and resource-intensive process. A commenter also requested 
confirmation from CMS that the renegotiation of the terms and 
conditions of contracts between pharmacies and plans (or PBMs) 
implicates the any willing pharmacy provisions of the Act.
    Commenters highlighted that the new chargeback infrastructure would 
need to undergo rigorous testing to avoid adverse impacts, and a 
commenter noted that the proposed deadline does not provide sufficient 
time for stakeholders to develop, test, and deploy these new chargeback 
systems. According to a commenter, requiring pharmacies to implement 
these new processes increases administrative costs for, and requires 
significant upfront investment by, these entities, with no added 
benefit. Several commenters noted that these burdens, challenges, and 
risks would be worse for independent community pharmacies and specialty 
pharmacies.
    Response: While we recognize that some system changes may be 
required in order to administer point-of-sale chargebacks, we note that 
nothing in the point-of-sale reduction in price safe harbor requires 
parties to utilize this process. While the Department encourages rapid 
adoption of point-of-sale price reductions, we note that we are 
finalizing a later effective date than originally proposed for the 
amendments to Sec.  1001.952(h)(5) of the discount safe harbor, which 
should help address commenters' concerns about implementation 
timelines. As we set forth in Sec.  1001.952(cc)(1)(ii), the reduction 
in price must not involve a rebate unless the full value of the 
reduction in price is provided to the dispensing pharmacy by the 
manufacturer, directly or indirectly, through a point-of-sale 
chargeback or series of point-of-sale chargebacks, or is required by 
law. We view this criterion of the safe harbor as applying only if a 
rebate is involved (in the form of a point-of-sale chargeback). If the 
pharmacy receives the full value of the reduction in price at the time 
of sale of the prescription pharmaceutical product to the beneficiary, 
then a chargeback (and the requirements for chargebacks under this safe 
harbor) would not be needed.
    We are not providing specific guidance and rules around 
reimbursement methodologies or processes in the safe harbor to allow 
flexibility, as further explained below. If the chargeback process is 
used, then in order to receive protection under the safe harbor the 
payment must be made from the manufacturer (directly or indirectly) to 
the pharmacy, and the amount of the payment must be equal to the 
reduction in price negotiated between the plan sponsor and the 
manufacturer. Moreover, we agree that the new safe harbor should not 
restrict patient access to drugs because of delays in reimbursement at 
the pharmacy.
    Comment: A commenter raised concerns that the chargeback system may 
allow manufacturers to access pharmacy systems for auditing purposes, 
which the commenter believes raises privacy issues.
    Response: Nothing in this final rule would alter in any aspect 
existing obligations of Covered Entities under the HIPAA privacy and 
security rules. We would expect such entities to structure their 
interactions in full compliance with applicable laws.
    Comment: A commenter asked if payments to pharmacies will be 
subject to prompt payment rules, particularly with regard to chargeback 
payments where, according to the commenter, CMS has no regulatory 
authority over wholesalers. The commenter noted that if the chargeback 
system fails to timely compensate pharmacies at the point of sale, 
pharmacies may refuse to participate in Part D plans or networks that 
rely on chargebacks rather than existing PBM-facilitated transaction 
systems, decreasing beneficiary access to medicines at pharmacies.
    Commenters also noted that there could be a significant delay 
between a pharmacy's dispensing of a product and receipt of a 
chargeback, which the commenters believe will create significant 
financial burdens, substantial operational challenges, and increased 
financial risk for pharmacies. A commenter asked for clarification as 
to what entity holds the financial risk in the period between when the 
price reduction is applied at the point of sale and when pharmacies are 
made whole. According to the commenters, this lag also could jeopardize 
patient access to needed medications.
    Commenters suggested solutions to this issue such as tracking 
systems to account for each specific discount, applying chargebacks as 
credits due from the wholesaler to the pharmacy, immediate 
communication of the discount at the time of invoicing, or daily 
adjudication for rebate payments. Several commenters posited that 
pharmacies may choose not to participate in the Part D program if they 
are not compensated in sufficient time or are required to implement 
these new operations.
    Some commenters recommended that CMS amend its regulations to apply 
the Part D prompt-payment requirements to point-of-sale reductions in 
price, while another commenter opposed application of these regulations 
to chargeback payments. At least one commenter requested that the safe 
harbor require as a condition of protection that any chargeback process 
be consistent with prompt payment laws. Similarly, a commenter 
requested that pharmacies be permitted to charge interest for delayed 
payment of chargebacks in addition to being paid in full for the total 
and final reimbursement.
    Response: We thank commenters for highlighting these issues. As a 
threshold matter, the Proposed Rule did not propose prompt payment as a 
condition of meeting the safe harbor condition regarding chargebacks. 
We did not propose this condition, and, in any event, it would add 
unnecessary technical detail to the safe harbor to stipulate the 
specifics related to the timing of any payments made via the chargeback 
process or which party assumes the financial risk during the process. 
In large part, these comments concern questions that must be resolved 
through arrangements negotiated by the relevant parties. The Part D 
program is a private sector-based program in which the participating 
entities negotiate with their partners to make what they believe are 
the most effective arrangements to participate in the Part D market. 
Entities have been and continue to be required to establish these 
arrangements in compliance with programmatic requirements as well as 
the anti-kickback statute.
    We expect terms related to chargebacks to be in the agreements 
between the relevant parties, but we note that, to the extent the 
chargeback process is used, the chargeback must be made from the 
manufacturer to the pharmacy, directly or indirectly, in order for the 
safe harbor to protect the reduction in price.
    Comment: A trade association representing pharmacy benefit managers 
stated that the rule, if finalized, would require parties to create a 
new system to handle chargeback transactions unless rebates can be 
transferred through a PBM. In lieu of the Proposed Rule, the commenter 
provided a detailed description of an alternative in which

[[Page 76702]]

PBMs would be responsible for administering price concessions at the 
point of sale.
    Response: The Department does not intend for this rule to prescribe 
those individuals or entities that may serve as chargeback 
administrators, and we see no compelling reason to do so. The 
Department believes that PBMs as well as other individuals or entities 
(including entities that currently or may in the future participate in 
the pharmaceutical supply chain) would be able to develop the means and 
infrastructure necessary to effectuate the chargeback process. By 
remaining agnostic in this safe harbor, the Department believes that 
innovation and competition will be encouraged in the marketplace.
    Comment: A commenter requested that HHS modify Medicare and 
Medicaid policy to ensure point-of-sale chargebacks will continue to be 
treated as plan discounts because they are established through 
manufacturer-plan relationships, rather than being treated as pharmacy 
discounts because this may affect pharmacy reimbursement.
    Response: We have consulted with CMS as part of this rulemaking and 
are informed that point-of-sale chargebacks should be treated as plan 
discounts.
    Comment: A commenter noted that key portions of the Proposed Rule 
related to the chargeback process are vague and ambiguous, which 
heightens enforcement concerns for these parties under the anti-
kickback statute. The commenter requested that OIG re-propose the rule 
with additional clarifications.
    Response: While we appreciate the commenter's concerns, we 
respectfully disagree that the portion of the proposal related to the 
chargeback process is vague and ambiguous. By design, the proposed safe 
harbor is not overly prescriptive with respect to the chargeback 
process to allow for private sector flexibility, competition, and 
innovation, and to avoid creating technical barriers to the safe 
harbor's utility. We intend for this safe harbor to provide flexibility 
in terms of the parties responsible for chargeback administration as 
well as how that process is operationalized.
    Comment: Several commenters requested that OIG revise the safe 
harbor for point-of-sale reductions in price to add disclosure 
requirements for chargeback administrators that mirror the disclosure 
requirements in the PBM service fees safe harbor.
    Response: We decline to accept the commenter's suggestion. As we 
explained in the Proposed Rule, the ``transparency requirement is 
important to ensure that 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 
believe the transparency requirement is important for purposes of the 
PBM service fee safe harbor because of the agency relationship and 
functions in that safe harbor, because of the potential for a wide 
variety of services and compensation structures and amounts, and 
because there are defined parties (i.e., the pharmaceutical 
manufacturer, the PBM, and the health plans to which the PBM provides 
pharmacy benefit management services). Because the point-of-sale 
reductions in price safe harbor specifically requires the point-of-sale 
chargeback (if used) to be equal to the discount negotiated between the 
manufacturer and plan and is agnostic as to the entity that serves as 
chargeback administrator, and because a range of individuals and 
entities could potentially be involved in this process, we believe the 
same disclosure requirements are not appropriate or necessary for 
purposes of this safe harbor.
    Comment: Commenters who commented on the chargeback process raised 
a number of questions about fees that may be charged to administer 
chargebacks. For instance, a commenter recommended that pharmacies not 
be responsible for any chargeback administration fees, and another 
commenter recommended that pharmacies be held harmless for these 
processing fees. Commenters also asked that the compensation and 
disclosure requirements set forth in the new PBM service fees safe 
harbor apply with respect to fees for chargeback administration 
services. A commenter recommended that OIG establish a form for a 
chargeback administration fee (e.g., specify that the fee must be on a 
per-chargeback basis), and recommended that OIG mandate that chargeback 
administration fees not vary substantially by manufacturer or by drug.
    Response: We did not propose, and are not finalizing in this rule, 
requirements regarding chargeback administration arrangements. We note, 
however, that chargeback fee arrangements should not be used to reward 
the generation of Federal health care program business and would need 
to comply with the anti-kickback statute. Other existing safe harbors 
(e.g., the personal services and management contracts safe harbor) 
could be used to protect such arrangements. We note that chargeback 
administration fees based on the cost of the drug, or that vary 
substantially by drug, would share many of the same problematic 
features of those rebate arrangements that are no longer protected 
under the discount safe harbor and would be suspect.
ii. Reverse Engineering
    Comment: Various commenters expressed concerns that the proposed 
point-of-sale reduction in price safe harbor would provide sufficient 
data to reverse engineer the manufacturer's or the PBM's discount 
structure, with certain commenters asserting that point-of-sale 
reductions in price would not likely be incentivized because disclosure 
of sensitive price and bargaining information inhibits competition. 
However, another commenter noted that this reverse engineering may 
allow stakeholders to have a better understanding of drug discounts and 
pricing and may result in increased competition and lower prices.
    Response: We appreciate commenters' concerns about price 
transparency and agree that providing the market with additional 
information could have unintended effects in certain, limited 
circumstances. However, the Department is not persuaded, on net, that 
this would increase overall program costs or reduce competition. Price 
transparency lowers a key barrier to entry and increases competition in 
most competitive markets. Additionally, as commenters suggest and 
program performance indicates, PBMs have been extremely effective 
negotiators in the Medicare Part D program, and the Department does not 
anticipate that additional price transparency would weaken their 
negotiating leverage and ability to obtain price concessions. PBMs are 
aware of the rebates they currently receive, and, in the Department's 
view, they are unlikely to accept higher net prices going forward as 
they compete to attract Medicare beneficiaries.
    Comment: Numerous commenters were concerned that requiring the 
disclosure of discounts would, for example, lead to collusion among 
manufacturers; higher prices; and lower, unvaried discounts because, in 
part, negotiation leverage diminishes, manufacturers will be able to 
determine the contract terms offered by their competitors to each plan, 
and manufacturers will lose the incentive to negotiate the lowest 
possible discounts, in order to protect market share. In support of 
these assertions, several commenters cited statements from the FTC 
indicating that, if pharmaceutical manufacturers learn the exact amount 
of rebates offered by their competitors,

[[Page 76703]]

tacit collusion among manufacturers is more feasible.\47\
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    \47\ U.S. FTC, Letter to Assembly Member Greg Aghazarian, 2004, 
available at https://www.ftc.gov/sites/default/files/documents/advocacy_documents/ftc-comment-hon.greg-aghazarian-concerning-ca.b.1960-requiring-pharmacy-benefit-managers-make-disclosures-purchasers-and-prospective-purchasers/v040027.pdf.
---------------------------------------------------------------------------

    Several commenters recommended that OIG consider implementing 
commercial best practices and safeguards that maintain the 
confidentiality of proprietary contract data and ensure point-of-sale 
discounts that manufacturers negotiate with plans and their PBMs are 
not made public. A commenter also requested that CMS not display the 
value of rebates on Medicare Plan Finder but only require display of 
the final discounted drug prices, net of any pharmaceutical 
manufacturer discounts.
    By contrast, a commenter asserted that, while some stakeholders 
fear full price transparency will undermine the negotiating power of 
payers and increase the potential for collusion, the disclosure of 
price concessions represents the best way of assuring plan sponsors 
that formulary development is not being influenced by rebates.
    Response: We appreciate commenters' concerns that manufacturers may 
raise their prices or engage in tacit collusion as a result of this 
final rule. However, the Department has seen very limited evidence that 
this will occur.
    Additionally, although we recognize that the pharmaceutical market 
is different than other markets in some respects, in most consumer 
markets where prices are known, transparency increases competition, 
rather than harms it. In the Department's experience, a hallmark of the 
prescription drug market is that manufacturers are less concerned about 
other manufacturers knowing the level of discounts they offer. Indeed, 
manufacturers can generally estimate the discount their competitors are 
offering, based on negotiations they have won or lost. Manufacturers 
are more concerned about each PBM knowing the discount the other PBMs 
have received, because that will enable PBMs to seek the lowest 
discount offered by a manufacturer for a particular product. This 
places downward pressure on net prices, rather than enabling collusion.
    Echoing a sentiment of many commenters, the Department recognizes 
that PBMs are extremely effective negotiators. Nothing in this final 
rule takes away a PBM's ability to negotiate lower drug prices in 
exchange for better formulary access, and the Department expects that 
PBMs will continue to be effective negotiators.
iii. Common Ownership
    Comment: Various commenters raised concerns regarding changes 
proposed in the Proposed Rule and common ownership between PBMs, 
pharmacies, and health plans. Commenters noted that many of the largest 
PBMs have vertically integrated business lines, such as health plans or 
pharmacies. Some commenters asserted that OIG's proposed definition of 
``PBM'' might allow vertically integrated organizations to circumvent 
the proposed requirements, with a commenter noting that this potential 
loophole could give PBM-affiliated pharmacies improper competitive 
advantages over non-PBM-affiliated pharmacies. Another commenter 
highlighted the potential anti-competitive behavior of PBMs, including 
requesting that drug manufacturers provide higher discounts for drugs 
sold through PBMs' own pharmacy operations.
    To address this issue, commenters recommended that OIG adopt a 
functional definition of PBM that includes any person, business, or 
other entity that carries out specified PBM services to a manufacturer, 
where directly or through an owned, affiliated, or other related entity 
under a common ownership structure with a PBM, with a commenter 
recommending that PBM- and plan-affiliated pharmacies be able to access 
non-abusive purchase discounts, such as those on generics. A commenter 
suggested that PBMs be required to provide the same conditions and same 
reimbursement to independent, non-vertically integrated pharmacies as 
are provided to PBM-owned pharmacies, while another commenter 
recommended that all discounts and rebates from any source and PBM 
service fees be disclosed at the point of sale and PBM service fees 
paid by the pharmaceutical industry be disclosed and separated from any 
discounts and rebates provided to PBM-owned pharmacy operations.
    However, another commenter noted that only extending the revisions 
proposed in the Proposed Rule to PBM-owned pharmacies could raise anti-
competitive issues with non-PBM-owned competitors. This commenter 
recommended expanding the scope of the amendment to include all 
intermediaries involved in drug distribution and payment transactions, 
whether or not they take possession of the drugs. Another commenter 
specifically noted that the provisions in 42 CFR 1001.952(dd)(2)(iii) 
for PBM services must also include language to prohibit the PBM's 
activity between the manufacturer and another business entity in which 
the PBM has operational control or an ownership interest.
    Another commenter suggested that the changes we proposed could 
result in unfair competition because they would exclude from safe 
harbor protection all purchase discounts received by any mail-order 
pharmacy, specialty pharmacy, or retail pharmacy owned by a PBM or a 
plan sponsor, regardless of whether the purchase discounts (offered to 
the buyer in its capacity of a dispensing pharmacy, not in the capacity 
of a formulary manager) are dependent on formulary placement of the 
manufacturer's pharmaceutical product. The same commenter is concerned 
that, if purchase discounts are not offered to PBM-owned and plan 
sponsor-owned pharmacies because of the safe harbor exclusion, class-
of-trade pricing could prevent manufacturers from offering purchase 
discounts to any mail-order pharmacy, specialty pharmacy, or retail 
pharmacy.
    Response: We appreciate the comments on any potential issues that 
ownership interests might create under our proposed revisions to the 
discount safe harbor and suggestions on how best to address these 
issues. However, we intend 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 (directly or 
through a PBM), including, but not limited to, wholesalers, hospitals, 
physicians, and pharmacies. As explained previously, we are not 
expanding the amendment to include entities other than plan sponsors 
under Medicare Part D, such as PBM-affiliated pharmacies. We note, 
however, that arrangements in which PBMs funnel discounts through 
affiliated or commonly owned entities, or arrangements where it appears 
that a PBM is channeling kickbacks through a commonly owned entity or 
otherwise in order to evade this rule, are highly suspect. The anti-
kickback statute prohibits remuneration offered, paid, solicited, or 
received, directly or indirectly, to induce or reward referrals of, or 
the purchase (or arranging for the purchase) of, an item or service 
paid for in whole or in part by Federal health care programs. If a 
discount offered to a pharmacy is for the purpose of inducing a 
commonly owned entity, e.g., a PBM, to arrange for the purchase of a 
drug paid for by Federal health care programs, through formulary 
placement or otherwise, then the discount would not be protected by the 
discount safe harbor.

[[Page 76704]]

    Finally, while we appreciate the commenter's suggestion to require 
disclosure of all discounts and rebates from any sources and PBM 
service fees paid by the pharmaceutical industry, we note that this 
safe harbor is limited to reductions in price by manufacturers for 
prescription pharmaceutical products payable by a plan sponsor under 
Medicare Part D or a Medicaid MCO. The safe harbor does not protect 
discounts or rebates offered to or from other sources and it does 
protect any service fees. Given this limited scope of this safe harbor, 
we decline to adopt the commenter's suggestion for broader disclosure 
requirements.
    Comment: Other commenters recommended that OIG monitor for 
inappropriate business practices involving PBMs and PBM-affiliated 
entities, with several pharmaceutical company commenters pointing to 
price concessions from manufacturers to specialty pharmacies that are 
owned by or affiliated with PBMs and may be used to subvert the 
requirements set out in the Proposed Rule. A commenter also encouraged 
OIG to assert in the preamble to the final rule that these types of 
price concession arrangements will be viewed as highly suspect if 
certain facts are present.
    Response: We acknowledge the issues that common ownership interests 
between PBMs and other entities may cause and understand that this may 
be a potential area of risk following the implementation of the final 
rule. We reaffirm that this rule is intended to explicitly exclude from 
the discount safe harbor certain reductions in price and other 
remuneration offered by manufacturers of prescription pharmaceutical 
products to Part D plan sponsors that may pose a risk to certain 
Federal health care programs and beneficiaries. As discussed above, 
pricing arrangements that enable PBMs to retain these types of 
discounts through an affiliated or commonly owned entity, instead of 
flowing to Part D plans, are excluded from the discount safe harbor and 
would not qualify for protection under the new point-of-sale reductions 
in price safe harbor. The determination as to whether a particular 
pricing arrangement would receive safe harbor protection would be 
dependent upon the facts of that particular case.
    Comment: Some commenters recommended that DOJ monitor and increase 
its scrutiny related to vertical and horizontal mergers, especially 
given that three PBMs appear to control a majority of the market, 
allowing the PBMs to leverage their market power to the detriment of 
plan sponsors (government and commercial), providers, and consumers.
    Response: We appreciate the commenters' feedback. This issue is 
outside the scope of this rule.
    Comment: A commenter stated that pharmaceutical companies should 
provide to all pharmacies in the same circumstances, irrespective of 
their ownership, access to the same drug product's actual acquisition 
cost and discounts.
    Response: The amendment to the discount safe harbor and the two new 
safe harbors promulgated in this final rule do not address discounts or 
other pricing arrangements between manufacturers and wholesalers, 
pharmacies, or other entities.\48\
---------------------------------------------------------------------------

    \48\ See 84 FR 2348.
---------------------------------------------------------------------------

iv. Incentives for Point-of-Sale Reduction in Price
    Comment: Several commenters were uncertain how manufacturers, 
health plans, and PBMs would react to the new safe harbor for point-of-
sale reductions in price for and how those reactions would affect the 
prescription drug marketplace. These commenters were generally unsure 
whether the new safe harbor would incentivize point-of-sale reductions 
in price and requested that HHS further analyze how manufacturers may 
alter pricing strategies, particularly longer-term impacts, before 
enacting a final rule.
    Response: We appreciate commenters' concerns regarding uncertainty. 
The Department intends to monitor the effects of this final rule. 
However, we note that the new safe harbor for point-of-sale reductions 
in price is designed to offer more flexibility for manufacturer 
discounts and several manufacturers commented that they would be 
incentivized to offer point-of-sale reductions in price, noting their 
support for lowering out-of-pocket costs for beneficiaries.
    Comment: A few commenters questioned whether manufacturers would 
provide point-of-sale reductions in price to fully offset the rebates 
that would be prohibited if the amendment to the discount safe harbor 
were finalized, especially because point-of-sale reductions in price 
have been offered by PBMs for some time in the commercial market, and 
there has not been widespread adoption.
    Response: We appreciate commenters' observations about the dynamics 
of the commercial market. As we discuss elsewhere in this rule, we are 
aware that some commercial plans may be operationalizing point-of-sale 
benefit designs and believe that at least some industry stakeholders 
have the capabilities to operationalize point-of-sale reductions in 
price that would be protected under the new safe harbor.
    Comment: A commenter requested clarification on how PBMs will 
negotiate for discounts without using rebates. For example, the 
commenter requested clarification on what compensation would be 
available to PBMs, how PBMs would be incentivized to negotiate lower 
prices for patients, and how drug manufacturers would negotiate for 
formulary placement, all in the absence of rebates.
    Response: This rule does not require any particular method of 
negotiation of discounts, and parties are free to pursue all lawful 
forms of negotiation. With respect to negotiations between PBMs and 
manufacturers, PBMs are supposed to be acting as an agent of health 
plans and, in this role, we would expect them to negotiate with 
manufacturers on behalf of plan sponsors under Part D for point-of-sale 
reductions in price. We leave it to the applicable parties to determine 
how negotiations of point-of-sale reductions in price will evolve and 
how financial arrangements will be structured between these parties to 
comply with the anti-kickback statute.
    Comment: A few commenters expressed concern that errors or delays 
in the implementation of point-of-sale reductions are likely, which 
could leave beneficiaries without prescriptions at all or with 
prescriptions at higher costs. Commenters questioned whether a pharmacy 
would be liable for such errors via retroactive reconciliation. Without 
clarity on these issues, commenters believed manufacturers were not 
likely to be incentivized to offer point-of-sale reductions in price.
    Response: Questions regarding billing errors are outside the scope 
of this rulemaking. However, we note that while all conditions of a 
safe harbor must be met to ensure protection, falling outside a safe 
harbor does not necessarily result in liability under the statute. 
Moreover, mere errors do not create liability under the anti-kickback 
statute.
    Comment: A couple of commenters questioned whether point-of-sale 
reductions in price were viable as constructed under the Proposed Rule 
as they would require significant operational changes, ultimately 
discouraging point-of-sale reductions in price from being offered. 
These commenters recommended that the Department should require Part D 
plans to provide a point-of-sale rebate plan as one of their plan 
offerings instead.

[[Page 76705]]

    Response: We appreciate the commenters' concerns regarding the 
viability of point-of-sale reductions. The Department believes that 
industry stakeholders have or can develop the capabilities to 
operationalize point-of-sale reductions in price that would be 
protected under the new safe harbor. Regarding commenters' 
recommendation that the Department require Part D plans to provide a 
rebate plan, we note that changes to Part D rules related to required 
plan offerings are outside the scope of this rulemaking.
    Comment: A few commenters expressed concern that manufacturers 
would not likely be incentivized to offer point-of-sale reductions in 
price unless HHS clarified whether discount safe harbor protection will 
continue to be available for formulary and utilization management 
arrangements.
    Response: As we explain above, reductions in price to a plan 
sponsor or Medicaid MCO that are conditioned on formulary placement and 
utilization management tools can qualify for protection under the new 
safe harbor for point-of-sale reductions in price.
    Comment: A few other commenters expressed concern that 
manufacturers were not likely be incentivized to enter into 
arrangements to offer point-of-sale reductions in price unless the 
Department clarified whether manufacturers have an option to provide 
these discounts via plans, directly to each pharmacy, or through 
another mechanism.
    Response: We thank commenters for their concern. We note that the 
discount safe harbor continues 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 clarify, 
however, that under the new safe harbor at Sec.  1001.952(cc), the 
reduction in price must be set in advance with a plan sponsor under 
Medicare Part D, a Medicaid MCO, or a PBM acting under contract with 
either. While a chargeback may be paid directly to the pharmacy, the 
Medicaid MCO or Part D plan is the anticipated recipient of the 
reduction in price.
    Comment: A few other commenters expressed concern that 
manufacturers were not likely be incentivized to enter into 
arrangements for point-of-sale reductions in price unless HHS clarified 
whether point-of-sale discounts are required to be uniform across all 
stages of the benefit design.
    Response: We appreciate the commenters' concern. We clarify that 
because the reduction in price must be set in advance with a plan 
sponsor under Medicare Part D, a Medicaid MCO, or a PBM acting under 
contract with either, we would expect the point-of-sale reduction in 
price to be uniform across all stages of the benefit design, and would 
not expect the reduction in price to be negotiated on a beneficiary-by-
beneficiary basis. Any such arrangement would be difficult to know at 
the point of sale and thus could not be applied accurately to the 
point-of-sale price, creating risk of violating the requirements of the 
new safe harbor for point-of-sale reductions in price.
    Comment: Another commenter expressed concern that manufacturers 
would not likely be incentivized to provide point-of-sale reductions in 
price, or only provide limited reductions at the point of sale, because 
manufacturers would more likely set single discount levels across all 
payers due to the increased transparency requirements.
    Response: As we discuss in more detail in the Regulatory Impact 
Statement, we acknowledge that there may be a wide range of behavioral 
changes throughout the prescription pharmaceutical product supply 
chain. However, PBMs will continue to have access to important 
negotiation tools, such as formulary placement. Additionally, PBMs know 
the net prices that plans paid before the revisions to the safe 
harbors. Accordingly, the Department believes it is unlikely that 
parties will dramatically change the prices they negotiate due to 
transitioning from rebates to point-of-sale reductions in price.
    Comment: A few commenters noted that since drugs are not typical 
consumer products, offering point-of-sale reductions in price would not 
likely impact demand; therefore, manufacturers would not likely be 
incentivized to offer them. However, another commenter expected that 
the new safe harbor would increase competition and create a strong 
behavioral response among plans and manufacturers. Another commenter 
believed that some manufacturers would be highly incentivized to offer 
point-of-sale reductions in price if the drug was already in a highly 
competitive market.
    Response: We thank commenters for their insights into the dynamics 
of drug markets. We agree that manufacturers are more likely to be 
incentivized to offer point-of-sale reductions in highly competitive 
drug markets and less likely to be incentivized in drug markets with 
less competition, as was the case with rebates. However, as explained 
elsewhere in this final rule, we believe there is a decreased risk of 
fraud and abuse when the reductions in price are offered at the point 
of sale rather than as rebates.
v. During 100 Percent Cost Sharing
    Comment: A commenter noted that the Proposed Rule did not address 
how point-of-sale discounts would apply to beneficiaries with 100 
percent cost sharing. Other commenters provided examples of how they 
interpreted the point-of-sale discount to apply during phases with 100 
percent cost sharing, e.g., the deductible phase. A commenter suggested 
that such beneficiaries should pay 100 percent of the discounted net 
cost. The commenter provided the following example: If a drug's list 
price is $200 and a beneficiary's plan sponsor under Part D has 
negotiated a point-of-sale reduction in price of 10 percent, then the 
price of the drug is $180. According to the commenter, during a period 
of 100 percent cost sharing, the beneficiary would pay $180.
    Response: We agree with the example offered by the commenter. 
Specifically, if a drug's list price is $200 and a plan sponsor under 
Part D has negotiated a point-of-sale discount of 10 percent, the price 
of the drug for enrollees of that plan is $180. If a beneficiary is in 
the deductible phase, the beneficiary would pay the full discounted 
price of the drug (i.e., $180) at the pharmacy counter.
vi. Additional Safeguards
    Comment: A commenter recommended OIG require entities to ``refrain 
from doing anything that would impede'' their contracting counter-party 
from meeting its own obligations under the safe harbor. The commenter 
noted that this is a condition of the discount safe harbor.
    Response: The proposed safe harbor for point-of-sale reductions in 
price for prescription pharmaceutical products differs from the 
discount safe harbor at 42 CFR 1001.952(h), in that the latter has 
separate sets of requirements for buyers and sellers or offerors of 
discounts. Because the ability of the buyer to meet its obligations 
under the discount safe harbor depends in part on cooperation of the 
seller or offeror, the safe harbor includes requirements that the 
seller or offeror refrain from impeding the buyer from meeting the 
buyer's own obligations. Because the proposed safe harbor for point-of-
sale reductions in price does not include conditions that similarly 
require the cooperation of other parties to the transaction, we did not 
propose to include this safeguard, and we decline to include it in the 
final rule.

[[Page 76706]]

    Comment: A commenter recommended that the point-of-sale reductions 
in price not be contingent upon agreement between the manufacturer and 
the PBM as to PBM service fees.
    Response: We did not propose, and therefore are not finalizing in 
this rule, a condition of the point-of-sale reduction in price safe 
harbor that would prohibit a reduction in price being contingent upon 
agreement between the manufacturer and the PBM on PBM service fees. We 
note, however, that the point-of-sale reduction in price safe harbor 
protects only the reduction in price; it does not protect a demand or 
request for concession with regard to a PBM service fee arrangement. 
Such a demand or request itself could constitute a solicitation for 
remuneration (the remuneration being the service fee agreement, or a 
concession on the terms of the service fee agreement) prohibited by the 
anti-kickback statute that would not be protected by any safe harbor.
    Comment: Some commenters recommended revising the proposed safe 
harbor for point-of-sale price reductions to require any individual or 
entity administering point-of-sale chargebacks to meet the same 
compensation requirements set forth in the proposed PBM service fees 
safe harbor.
    Response: We did not propose, and therefore are not finalizing in 
this rule any requirements for payments related to chargeback 
administration. We note, however, that the point-of-sale reduction in 
price safe harbor protects only a reduction in price 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 MCO; it 
does not protect any payment arrangements that parties may enter into 
for services such as chargeback administration.
    Comment: Several commenters requested that OIG require certain 
transparency requirements, for example: Plans or PBMs should be 
required to exchange information to enable manufacturers to validate 
that the full value of the reduction in price is provided to the 
dispensing pharmacy; data from plans and PBMs should be available to 
manufacturers to confirm that patients receive point-of-sale reductions 
in price; information from plans or PBMs be available to patients and 
pharmacies at the point-of-sale; and information from plans or PBMs, 
including chargeback amounts due and paid, be available to pharmacies 
in real time. By contrast, some commenters opposed general transparency 
requirements and requested that OIG ensure that point-of-sale 
reductions in price remain confidential by explicitly stating that 
transparency is not required for this proposed safe harbor. For 
example, pharmacies are not parties to the agreements between plans, 
PBMs, and manufacturers and, thus, should not be allowed to know their 
terms.
    Response: We appreciate the commenters' suggestions for and 
concerns about certain transparency requirements for the proposed 
point-of-sale reductions in price safe harbor. As explained elsewhere 
in this final rule, we believe that creating a new safe harbor for 
point-of-sale reductions in price will increase transparency, including 
transparency to plans and beneficiaries, and improve alignment of 
incentives among parties that could result in lower list prices and 
out-of-pocket costs. However, as explained earlier in this rule, we 
decline to adopt the commenter's request to create a condition in the 
safe harbor related to the exchange of information and cooperation 
among the parties, such as the suggested disclosures to manufacturers.
    Comment: Some commenters recommended that OIG ensure that 
pharmacies are further protected by, for example, ensuring that a 
reduction in revenue for PBMs is not compensated by reduction in 
payment to pharmacies not affiliated with the PBM, or ensuring that the 
chargeback accounts for costs incurred by the pharmacy or that 
pharmacies are reimbursed for medication costs and costs to acquire, 
handle, and dispense medications.
    Response: We are not specifying the reimbursement terms of an 
agreement between a PBM or plan and a pharmacy for prescription 
pharmaceutical products in the final safe harbor. To the extent point-
of-sale chargebacks are used, the payment from the manufacturer to the 
pharmacy must be equal to the reduction in price negotiated between the 
manufacturer and the plan or PBM. As we stated in the Proposed Rule, we 
intend for the point-of-sale chargeback to make ``pharmacies whole for 
the difference between acquisition cost, plan payment, and beneficiary 
out-of-pocket payment.''
    Comment: A commenter requested that OIG clarify the meaning of 
``completely applied'' as set forth in paragraph (cc)(1)(iii). Another 
commenter requested OIG revise paragraph (cc)(1)(iii) to indicate that 
the reduction in price must be completely applied to the price upon 
which the patient's out-of-pocket spending at the point-of-sale is 
based. Another commenter recommended revising paragraph (cc)(1)(iii) to 
ensure that the rule does not inadvertently permit point-of-sale 
reductions in price to operate like a branded drug manufacturer coupon 
program for Medicare and Medicaid beneficiaries.
    Response: We agree with the commenter's interpretation of 
``completely applied'' as it was set forth in paragraph (cc)(1)(iii) of 
the Proposed Rule and confirm that a protected reduction in price 
cannot operate like a coupon program. We have revised the language for 
clarity in this final rule. The reduction in price is from the 
manufacturer to the plan sponsor under Medicare Part D or a Medicaid 
MCO, but the reduction in price negotiated by a Part D plan sponsor or 
Medicaid MCO (or a PBM on the plan sponsor's or Medicaid MCO's behalf) 
must be reflected at the pharmacy counter. The amount paid by a 
beneficiary at the pharmacy counter will depend on the benefit design 
of a particular plan, the phase of the benefit year in which the 
prescription is filled, and the price negotiated by the plan sponsor or 
PBM for the prescription pharmaceutical product that may include, e.g., 
reductions in price negotiated with the pharmaceutical manufacturer or 
dispensing fees negotiated with the pharmacy. For example, if a 
pharmaceutical product has a list price of $120 and the manufacturer 
gives a reduction in price of $20, then that entire $20 would need to 
be reflected completely in the price upon which the beneficiary's cost-
sharing obligation is based. We are informed by CMS that their guidance 
allows for this reflection of the entire discount at the point of 
sale.\49\ For purposes of safe harbor protection, the reduction in 
price must be completely reflected at the point of sale.
---------------------------------------------------------------------------

    \49\ CMS, Medicare Prescription Drug Benefit Manual, ch. 5, 
section 20.6 (describing that Part D plan sponsors must provide 
enrollees with access to negotiated prices for covered Part D drugs 
as part of their qualified prescription drug coverage).
---------------------------------------------------------------------------

    If a Part D beneficiary has a 20 percent coinsurance obligation, 
the beneficiary typically would pay 20 percent of $100, or $20, at the 
pharmacy counter (plus any portion required by the benefit design for, 
e.g., dispensing fees). If the beneficiary were in the deductible phase 
at the time the prescription was filled, the beneficiary would pay $100 
at the pharmacy counter (plus any portion required by the benefit 
design for, e.g., dispensing fees). If, however, the beneficiary's plan 
used copayments instead of coinsurance, then the beneficiary would pay 
the copayment amount according to Part D rules. Part

[[Page 76707]]

D plan sponsors must meet actuarial equivalence standards when 
designing plans and benefit structures during the Part D bidding 
process. The reduction in price must be reported in accordance with 
existing rules and regulations governing the reporting of discounts and 
other reductions in price under the Part D program. We reiterate that 
if a PBM operating on behalf of a Part D plan sponsor or Medicaid MCO 
retains any portion of the reduction in price, the remuneration 
retained by the PBM would not be protected under this new point-of-sale 
safe harbor.
    To provide additional clarity for stakeholders, we include the 
following example from the Proposed Rule regarding the current rebate 
framework and then explain how a reduction in price would be reflected 
at the point of sale consistent with the new safe harbor. Consider a 
branded prescription drug dispensed at a retail pharmacy that has a 
WAC/list price of $100. A manufacturer sells the drug to a wholesaler 
at a 2 percent discount from 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. 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). Thus, in this 
example, the plan receives back $30 in rebates, reducing the net cost 
for the drug to $74 (i.e., $104-$30). This process is reflected in the 
following chart, which has been revised slightly with technical edits:
---------------------------------------------------------------------------

    \50\ 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.

------------------------------------------------------------------------
            Transaction                  Brand              Notes
------------------------------------------------------------------------
List Price........................            $100  (A).
Pharmacy Reimbursement/POS Price..            $104  (P).
Manufacturer Rebate to Plan.......             $30  (B) = 30% of (A).
Net Drug Cost.....................             $74  (C) = (P)-(B).\50\
Patient Coinsurance...............           ($26)  (D) = 25% * (P).
Net Cost to Plan..................             $48  (E) = (C)-(D).
Patient's Share of POS Price......             25%  (H) = (D)/(P).
Patient's Share of Net Cost.......             35%  (I) = (D)/(C).
------------------------------------------------------------------------

    The difference in the patient's cost sharing relative to that of 
the plan is even more acute when the beneficiary is in the deductible 
phase and is fully responsible for the total pharmacy reimbursement. In 
this case, the beneficiary pays the full $104, more than 40 percent 
higher than what the plan negotiated, but never paid any fraction of 
it. In fact, the plan netted $30 when the beneficiary picked up the 
prescription.

------------------------------------------------------------------------
            Transaction                  Brand              Notes
------------------------------------------------------------------------
List Price........................            $100  (A).
Pharmacy Reimbursement/POS Price..            $104  (P).
Manufacturer Rebate to Plan.......             $30  (B) = 30% of (A).
Net Drug Cost.....................             $74  (C) = (P)-(B).
Patient Coinsurance...............          ($104)  (D) = 100% of (P).
Net Cost to Plan..................           ($30)  (E) = (C)-(D).
Patient's Share of POS Price......            100%  (H) = (D)/(P).
Patient's Share of Net Cost.......            140%  (I) = (D)/(C).
------------------------------------------------------------------------

    As we stated in the Proposed Rule, this example reflects the 
Department's concern that, 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. 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's out-of-pocket costs. Similarly, the 
beneficiary's coinsurance, which is often partly a percentage of WAC, 
will often increase as list price

[[Page 76708]]

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.
    Under this final rule, beneficiaries would be able to share--at the 
pharmacy counter--in the discounts that plans and PBMs negotiate with 
manufacturers. Using the examples above, if the rebate were fully 
reflected in the point-of-sale price, the beneficiary's cost-sharing 
obligations would drop from $104 to $74 if the beneficiary were still 
in the deductible phase, and from $26 to $18.50 if she had a 
coinsurance obligation of 25 percent. The plan's share of the discount 
would be proportional to the coinsurance: The plan would get no share 
of the discount if the beneficiary were to pay full cost, but it would 
get 75 percent of the discount if the beneficiary had 25 percent 
coinsurance. The following provides an illustration of this point:

------------------------------------------------------------------------
                                            100 Percent
               Transaction                  coinsurance     25 Percent
                                           (deductible)     coinsurance
------------------------------------------------------------------------
List Price..............................            $100            $100
Pharmacy Reimbursement..................            $104            $104
Negotiated POS Discount.................           ($30)           ($30)
Net Drug Cost/POS Price.................             $74             $74
Patient Coinsurance.....................             $74           $18.5
Net Cost to Plan........................              $0           $55.5
Patient's Share of POS Price............            100%             25%
Patient's Share of Net Cost.............            100%             25%
------------------------------------------------------------------------

    Comment: A commenter recommended that OIG restrict, through a 
revision to the proposed safe harbor, the provision of identifying 
patient and prescriber information the drug manufacturer can receive 
from a Medicaid MCO or PBM acting on behalf of a Medicaid MCO in 
exchange for providing a price reduction. Specifically, the commenter 
recommended that a new paragraph (cc)(1)(iv) be added: (iv) The 
reduction in price does not involve the provision of identifying 
patient or prescriber information to the pharmaceutical manufacturer by 
a Medicaid MCO, or the PBM acting under contract with it.
    Response: Nothing in this final rule affects obligations under 
existing privacy and security rules. We do not expect manufacturers to 
need patient- or provider-specific information. The plan sponsor under 
Part D, Medicaid MCO, or PBM must have a writing with the manufacturer 
that sets in advance the reduced price for a prescription 
pharmaceutical product. The plan sponsor under Part D, Medicaid MCO, or 
PBM is best positioned to ensure that the reduction in price is 
completely reflected in the price of the prescription pharmaceutical 
product at the time the pharmacy dispenses it to the beneficiary, and 
we would expect these parties to maintain documentation showing that 
these reductions in price were completely reflected at the time of 
dispensing.
    Comment: A commenter requested that OIG clarify that under the 
point-of-sale safe harbor, point-of-sale reductions in price can be 
made contingent on bundled sales arrangements. Such arrangements can 
provide additional value to patients by expanding the types of discount 
arrangements available to manufacturers and payors. Another commenter 
recommended that any point-of-sale reductions in price that are 
contingent on bundled sales arrangements are passed along to consumers 
in a non-allocated, disaggregated fashion. This commenter further 
stated that if a method for allocating bundles at the point-of-sale is 
needed, OIG should look to CMS's definition of ``bundled sale'' at 42 
CFR 447.502 and that OIG should encourage manufacturers and PBMs to 
agree upon a written method for estimating and allocating, in advance, 
effective rates for products subject to a bundle and that these 
effective rates are provided to the dispensing pharmacy. This commenter 
also recommended that price protection payments are passed along as 
point-of-sale chargebacks.
    Response: The conditions of the new safe harbor for point-of-sale 
reductions in price do not limit the types of negotiation methods the 
parties may use, as long as the reduction in price can be completely 
reflected at the point of sale. Elsewhere in this final rule, we make 
clear that a reduction in price must be simply a reduction in price and 
not payment for a service. Therefore, making a reduction on price 
contingent on a bundled sale arrangement (e.g., by providing for a 
reduction in price for one drug contingent on formulary placement of 
another drug) is not prohibited. However, we caution that to be 
protected under the safe harbor, the reduction in price must be 
reflected in the price of the product at the point of sale and a 
reduction in price that is not known at the time of sale (and therefore 
cannot be reflected at the time of sale) would not meet this condition 
of the safe harbor. For example, we could see a bundled arrangement 
based on formulary placement (such as in the example above) to be 
feasible; the parties will know at the time of sale, what the reduction 
in price would be. However, some types of bundling arrangements (e.g., 
an arrangement that might be contingent on volume of sales of different 
items in a bundle) would make it difficult to reflect the final price 
at the time of sale, and therefore would not be consistent with the 
requirements of the safe harbor. We also clarify that there should be 
no situation in which the price at the pharmacy counter is less than 
zero. A situation in which a beneficiary or a Part D plan sponsor 
theoretically would be owed money would not be a reduction in price; 
that would be a payment to a referral source and would not be protected 
by a safe harbor.
    Comment: A commenter suggested that OIG coordinate with the FTC to 
identify and address anti-competitive rebate schemes, such as rebate 
walls (which, according to the commenter, block competition by coupling 
volume-based discounts across multiple indications with retaliatory 
measures, such as the clawback of rebates by a market leader), when 
they run afoul of antitrust law.
    Response: We appreciate the commenter's feedback. We work closely 
with our Government partners, including the FTC, as appropriate.
    Comment: A commenter proposed an alternative model relating to 
point-of-sale reductions on drugs covered under Federal health care 
programs--namely, safe harbor protections for manufacturer cost-sharing 
assistance programs that provide point-of-sale reductions on 
prescription drugs covered under Federal health care programs when

[[Page 76709]]

there is no less expensive and equally effective generic available, 
such as for biologics.
    Response: We did not propose to protect manufacturer cost-sharing 
assistance programs and have long-standing concerns with these types of 
arrangements; for these reasons, we decline to adopt the commenter's 
suggestion in this final rule.
    Comment: Some commenters requested that OIG clarify how the point-
of-sale discounts should be structured. For example, a commenter 
requested that OIG clarify whether manufacturers would be required to 
or have the option to provide the point-of-sale discounts by plans 
directly to the pharmacies, individually, or through another mechanism.
    Response: If safe harbor protection is desired, point-of-sale 
reductions in price can be structured in any way that complies with the 
requirements of this safe harbor and any other applicable law. We note, 
however, that the safe harbor protects the price reduction from the 
manufacturer to the plan (directly or through a PBM). Discounts to 
pharmacies are not included in this safe harbor, but they are eligible 
for protection under the discount safe harbor if all safe harbor 
conditions are met. We have made minor changes to the regulatory text 
at Sec.  1001.952(cc)(1) to clarify this point.
    Comment: Some commenters recommended that patients with higher cost 
sharing be provided preferential treatment. A commenter requested that 
OIG provide manufacturers with the ability to pass through differential 
discounts to patients with, for example, copayments or higher cost 
sharing. Another commenter requested that patients with copayments, 
specifically, pay the lesser of the negotiated price of the drug, after 
it is reduced to reflect the point-of-sale discounts, or a reduced 
copayment reflecting a reduction that must, at a minimum, be 
proportional to the point-of-sale discount.
    Response: We have clarified above the treatment of copayments under 
this final rule. We are not providing specifically for differential 
discounts under the safe harbor. We note, however, that this safe 
harbor protects reductions in price that manufacturers offer to plan 
sponsors under Part D and to Medicaid MCOs; the amount that gets passed 
through to beneficiaries is part of a plan's design and would not be 
determined by the manufacturer.
    Comment: Several commenters identified that there is no mechanism 
in the proposed safe harbor to influence or even monitor drug 
manufacturer behavior, particularly related to lowering drug prices. 
Some commenters recommended that OIG require manufacturers to lower 
drug prices, while another commenter recommended that drug 
manufacturers be required to ``price drugs fairly'' as a condition for 
receiving government-funded research monies. A commenter recommended 
that OIG enforce penalties for ``egregious price increases'' that have 
the effect of increasing costs for plans, Federal health care programs, 
or patients. Another commenter recommended that OIG require not just 
manufacturers, but also PBMs and payors to lower drug prices. Another 
commenter recommended that CMS leverage the condition of participation 
standards by implementing new conditions on drug manufacturers that (1) 
would limit price increases for existing drugs to a measure of 
healthcare cost inflation and (2) allow managed care companies the 
option to exclude new drugs from their formularies if their price is 
higher than existing, peer drugs, but the differences in their clinical 
effectiveness relative to existing, peer drugs are not statistically 
different. A commenter recommended that the Department establish 
requirements on drug manufacturers that are similar to the medical loss 
ratio, for example, drug manufacturers should be held to standards 
based upon a ratio of expenditures on research and development and 
required to provide detailed reports of their expenses with penalties 
or other consequences for non-compliance. A commenter recommended that 
OIG require not only manufacturers, but also PBMs and payors, to lower 
drug prices.
    Response: OIG does not have the authority to require that 
manufacturers or others lower drug prices, and comments recommending 
CMS take certain actions are outside the scope of this rulemaking. This 
final rule is limited to the issue of safe harbor protection under the 
anti-kickback statute for certain arrangements that implicate the 
prohibition on referral payments but pose an acceptably low risk of 
fraud or abuse. To that end, we have revised the discount safe harbor 
and added two new safe harbors. We have not required any particular 
level of discounts or price reductions.
    Comment: Several commenters were concerned that the changes 
included in the Proposed Rule would not influence manufacturers' 
behavior and would not impose requirements on manufacturers to engage 
in good faith negotiations with all entities of the supply chain.
    Response: As we stated in the Proposed Rule, it is difficult to 
predict any particular manufacturer's behavior. We are finalizing a 
safe harbor that permits manufacturers to offer reductions in price 
that meet certain conditions, including that the reduction be 
completely reflected in the price of the prescription pharmaceutical 
product at the time the pharmacy dispenses the drug to the beneficiary. 
Like all safe harbors, this safe harbor is optional and does not 
require manufacturers to offer discounts.
    Comment: A commenter identified that the Proposed Rule does not 
provide a mechanism by which manufacturers can monitor or validate 
whether the reductions in price from manufacturers are passed through 
at the point of sale. Thus, the commenter recommended that OIG allow 
for manufacturers to be insulated from liability if certain discounts 
are not passed through at the point of sale, until OIG can establish a 
mechanism for monitoring and validating the pass through actually 
occurs.
    Response: We decline to adopt this suggestion. Under the anti-
kickback statute, parties are always required to comply with the law 
regardless of whether the OIG monitors for compliance with it. With 
that said, we recognize that each party has certain responsibilities 
for complying with the safe harbor. Whether a party has complied with 
the law is a fact-specific inquiry, including with respect to the 
intent of the parties.
    Comment: Some commenters recommended that OIG require all 
participants or intermediaries in the drug supply chain be regulated 
and subject to the proposed safe harbor.
    Response: For reasons explained elsewhere, we are not expanding the 
scope of the safe harbor beyond what we proposed. The commenters' 
suggestion would be impractical. Further, a safe harbor offers 
protection under the Federal anti-kickback statute for the remuneration 
described in the safe harbor; it does not generally regulate parties in 
the industry.

D. Safe Harbor for Certain PBM Service Fees

    The Proposed Rule proposed a safe harbor to protect remuneration in 
the form of flat, fixed fees that manufacturers pay to PBMs for 
services the PBM provides to a manufacturer.
    Comment: Many commenters who commented on the proposed safe harbor 
for PBM service fees were generally supportive of the safe harbor and 
its requirements. According to a commenter, the conditions limit the 
potential for PBMs to perform services with the incentive to increase 
costs for beneficiaries and programs. Another

[[Page 76710]]

commenter supporting the proposal stated that it will allow parties to 
receive appropriate payment for the value of their services, rather 
than the volume or value of the pharmaceutical products.
    Response: We appreciate the commenters' support for this safe 
harbor.
    Comment: Some commenters raised concerns about or opposed the 
proposed safe harbor for PBM service fees. For example, according to a 
commenter, the proposed safe harbor does not address what the commenter 
believes to be a conflict of interest when a PBM provides services to 
plan sponsors and patients while profiting from their relationships 
with manufacturers. The same commenter also said that manufacturers and 
PBMs can mislead parties by how they classify rebate payments and 
service fees in their financial arrangements.
    Another commenter said that the safe harbor will not lower the 
surplus that PBMs with market power receive because, according to the 
commenter, such PBMs can demand a flat fee as easily as they can 
negotiate for percentage-based fees under the current rebate system. 
According to this commenter, payments from manufacturers to PBMs should 
first flow to the payor before being split between the payor and the 
PBM.
    Response: We appreciate the commenters' responses. While we agree 
that PBMs can negotiate for flat fees just as they can negotiate for 
percentage-based fees, this safe harbor includes safeguards to reduce 
the risks associated with remuneration that may be tied to referrals. 
For example, the fees must be consistent with fair market value in an 
arm's-length transaction and cannot be determined in a manner that 
takes into account the volume or value of referrals or business 
otherwise generated between the parties, or between the manufacturer 
and the PBM's health plans that is payable, in whole or in part, by a 
Federal health care program. In addition, protected fees would be only 
for services that the PBM provides to the manufacturer, not for 
services provided to health plans. Fees for services furnished to 
health plans may be structured to comply with the personal services and 
management contracts safe harbor at Sec.  1001.952(d).
    Comment: Several commenters requested that OIG clarify the meaning 
of ``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,'' and requested that OIG specify 
the types of services protected by the proposed safe harbor. A 
commenter recommended OIG narrow the list of ``pharmacy benefit 
management services'' listed in the preamble to the Proposed Rule so 
that, for example, PBMs do not create rebates composed of new classes 
of fees, or otherwise disguise rebates as fees, charged to and paid by 
manufacturers. Another commenter recommended OIG restrict PBM services 
to adjudicating claims only. Other commenters suggested that OIG issue 
guidance on the types of PBM services that OIG views as appropriately 
compensated by plans instead of by manufacturers, with a commenter 
pointing to claims adjudication and utilization management as examples 
of services performed for plans, and member aggregation as an example 
of a service appropriately provided to manufacturers.
    Response: We are not specifying the services to be protected under 
the PBM service fees safe harbor because we do not want to set a static 
list of services that will be protected. Moreover, the types of 
services a PBM might provide to a health plan are not necessarily the 
same types of services that a PBM might provide to a manufacturer. 
Using the commenter's example, adjudicating claims is a service that a 
PBM performs for a health plan, but not for a manufacturer; further, 
while member aggregation might be one type of service provided by PBMs 
to manufacturers, to the extent that any compensation for such services 
is determined based on the volume or value of Federal health care 
program business, the compensation would not be protected by this safe 
harbor. We decline to specify a list of services that the PBM provides 
for plans as opposed to manufacturers. We believe it should be clear to 
the contracting parties whether the PBM is providing a service for a 
manufacturer or a plan.
i. Scope of Protected Fees
    The Proposed Rule proposed a new safe harbor to protect certain PBM 
service fees that were flat service fees 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. The compensation paid to the PBM must be 
consistent with fair market value in an arm's-length transaction, be a 
fixed payment, not based on a percentage of sales, and 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 Proposed Rule provided a non-
exhaustive list of ``pharmacy benefit management services,'' but 
proposed not to create a definition because the role of the PBM may 
evolve over time. We address the definition of pharmacy benefit 
management services in the definition section. This section discusses 
the scope of the protected fees.
    Comment: Some commenters suggested clarifying that the services 
must be performed ``on behalf of'' the manufacturer instead of ``to the 
manufacturer'' or ``for the manufacturer's benefit.'' Commenters also 
recommend that the safe harbor be limited to fees for services ``that 
the manufacturer would otherwise perform (or contract for) in the 
absence of the service arrangement.''
    Response: For purposes of this safe harbor, and in this context, we 
believe that ``to the manufacturer'' is sufficiently clear. The PBM 
would be providing a service to a manufacturer (which also might be on 
behalf of the manufacturer). While we are not incorporating the 
particular language suggested regarding the services that the 
manufacturer would otherwise perform (or contract for), we agree that 
the safe harbor protects payment only for legitimate services.
    Comment: Several commenters recommended broadening the proposed 
safe harbor related to PBM Service Fees to all fees, especially all PBM 
arrangements with manufacturers. These commenters wanted to ensure that 
the ``related to'' language does not unduly limit the scope of the safe 
harbor or risk noncompliance if manufacturers contract with PBMs for 
services that may not clearly ``relate to'' the PBM services that they 
typically provide to health plans.
    Response: We thank the commenter for this suggestion but decline to 
accept it. If a service does not relate to pharmacy benefit management 
services that the PBM provides to a health plan, then it is unclear how 
the PBM could meet the condition that requires certain annual 
disclosures to health plans. As we note elsewhere, other services that 
PBMs provide could be protected by

[[Page 76711]]

other safe harbors, including the GPO and personal services safe 
harbors.
    Comment: One commenter recommended that OIG clarify the PBM 
services covered by the safe harbor by removing the requirement that 
the services must ``relate to'' services the PBM furnishes to health 
plans and clarify the types of PBM services that might be provided for 
the benefit of the manufacturer.
    Response: We decline to remove the requirement in the new safe 
harbor for PBM service fees that the fees for which safe harbor 
protection is sought ``relate to'' pharmacy benefit management services 
that the PBM furnishes to health plans. This proposed condition fosters 
transparency for health plans. As we stated in the Proposed Rule, the 
Department believes that PBMs are agents of the health plans with which 
they contract and that transparency is important to ensure that a PBM's 
arrangements with pharmaceutical manufacturers are not in tension with 
the services it provides to the health plans for which it is acting as 
an agent. Disclosures of specific services will allow a plan to see 
what services a PBM is contracting with a manufacturer that relate to 
the health plan. Thus, we proposed to protect only those fixed fee 
arrangements between manufacturers and PBMs where plans could have 
visibility into the arrangements, in other words, arrangements related 
to services the PBM was providing the plans. We solicited comments on 
limiting the safe harbor to fees that pharmaceutical manufacturers pay 
to the PBMs that relate to the PBM's arrangements to provide pharmacy 
benefit management services to health plans.
    The language of the final rule clarifies that the fees for which 
safe harbor protection is available are fees for services provided for 
the benefit of the manufacturer who is paying for them. As noted in the 
Proposed Rule, such services might include services rendered to a 
manufacturer that depend on or use data gathered from PBMS from their 
health plan customers (whether claims or other types of data), subject 
to all applicable privacy and security rules. PBMs also might provide 
services for manufacturers to prevent duplicate discounts on 340B 
claims. Nothing in this rule preempts any contractual terms that a PBM 
has with health plans that limit uses of health plans or enrollees' 
data.\51\
---------------------------------------------------------------------------

    \51\ 84 FR 2349-50.
---------------------------------------------------------------------------

    Comment: As noted in the definition section, many commenters 
recommended that the PBM services and their related fees be tied to 
bona fide services. Additionally, these commenters recommended that the 
services be itemized to clearly show that the fees are paid for 
specific services at a market value. These commenters recommended that 
this guidance clarify that these services cannot be negotiated as a 
fixed suite of services or services that are applied on an ``all or 
nothing basis.''
    Response: As we explain above, we have included additional 
conditions aimed at clarifying that only payment for legitimate 
services would be protected. We did not propose, and are not 
finalizing, a specified format for disclosure of the services to health 
plans, nor would PBMs be required to disclose the fees to health plans. 
However, PBMs would be required to disclose both the services and 
associated fees to the Secretary upon request. Therefore, it would be a 
best practice to maintain documentation that could demonstrate how each 
element of the safe harbor (e.g., fair market value, fixed fees) is 
met.
    Comment: One commenter recommended that the safe harbor fees be 
narrowed to protect only service fees paid for the purposes of 
administering point-of-sale reductions in price and related 
chargebacks.
    Response: We decline to adopt this suggestion. The safe harbor for 
point-of-sale reductions in price protects a different stream of 
remuneration (i.e., the reduction in price from a manufacturer to a 
plan sponsor under Part D or a Medicaid MCO). This safe harbor for PBM 
service fees is not related to the safe harbor for point-of-sale 
reductions in price and therefore should not be limited to arrangements 
protected under it.
    Comment: A commenter requested that OIG protect only fees paid to 
PBMs independent of services a PBM already provides to plans.
    Response: The PBM service fees safe harbor protects payments ``for 
services the PBM provides to the pharmaceutical manufacturer.'' 
Services provided to plans are not services provided to manufacturers, 
and therefore payments for services to plans are not protected by the 
safe harbor.
ii. Fair Market Value
    Comment: A commenter recommended that the fair market value of the 
payment to PBMs reflect the value of the services, not the value of the 
products involved.
    Response: By its terms, the proposed safe harbor for PBM service 
fees protects compensation paid for services performed by a PBM for a 
pharmaceutical manufacturer. The safe harbor provides that the 
compensation must (1) be consistent with fair market value in an arm's-
length transaction; (2) be a fixed payment, not based on a percentage 
of sales; and (3) not be determined in a manner that takes into account 
the volume or value of Federal health care program business. We believe 
it is clear from this context that the compensation must reflect the 
fair market value of the service rendered, and not the value of the 
products involved.
    Comment: Several commenters requested that OIG clarify the meaning 
of ``fair market value.'' A commenter asked OIG to provide examples of 
valuation approaches to meet the standard. Other commenters requested 
that OIG either adopt CMS's statements regarding fair market value in 
the context of CMS's bona fide service fees guidance for the MDRP or 
clarify the ``fair market value'' standard is consistent with CMS's 
statements. Another commenter asserted that in order to establish fair 
market value, PBMs and manufacturers should provide specific 
disclosures and demonstrate that the performed services are of real 
value to manufacturers, instead of simply showing that many 
manufacturers are willing to pay PBMs comparable amounts of money for 
general, nondescript services.
    Response: The requirement that compensation paid for PBM service 
fees be ``consistent with fair market value in an arm's-length 
transaction'' is nearly identical to a requirement of the safe harbor 
for personal services and management contracts, 42 CFR 1001.952(d), 
which has been in effect since 1991. 56 FR 35952 (July 29, 1991). In 
addition, both the personal services and management contracts safe 
harbor and the proposed PBM service fees safe harbor include a 
requirement that the compensation not be determined in a manner that 
takes into account the volume or value of any Federal health care 
program business. (Because of this requirement, a fair market value 
determination cannot be made through comparison to transactions where 
compensation may have taken the value of referrals into account.) \52\ 
The

[[Page 76712]]

proposed PBM service fees safe harbor also specifically excludes from 
protection compensation based on a percentage of sales. In addition, as 
we explain elsewhere, we include certain additional requirements 
similar to the personal services and management contracts safe harbor 
at 42 CFR 1001.952(d).
---------------------------------------------------------------------------

    \52\ See, e.g., Letter from D. McCarty Thornton, Associate 
General Counsel, Inspector General Division, to T. J. Sullivan, 
Office of the Associate Chief Counsel, Internal Revenue Service, 
Dec. 22, 1992 (``When considering the question of fair market value, 
we would note that the traditional or common methods of economic 
valuation do not comport with the prescriptions of the anti-kickback 
statute. Items ordinarily considered in determining the fair market 
value may be expressly barred by the anti-kickback statute's 
prohibition against payments for referrals. Merely because another 
buyer may be willing to pay a particular price is not sufficient to 
render the price paid to be fair market value. The fact that a buyer 
in a position to benefit from referrals is willing to pay a 
particular price may only be a reflection of the value of the 
referral stream that is likely to result from the purchase.''), 
available at https://oig.hhs.gov/fraud/docs/safeharborregulations/acquisition122292.htm.
---------------------------------------------------------------------------

    We decline to provide further guidance on the setting of 
compensation for PBM service fees, nor do we adopt the guidance 
provided by CMS in a different context.\53\
---------------------------------------------------------------------------

    \53\ A commenter on the Proposed Rule cited CMS's response when 
asked to provide guidance on the meaning of ``fair market value'' as 
used in its definition of ``bona fide service fees.'' 81 FR 5170, 
5179-5180 (Feb. 1, 2016). Among the comments cited in that 
rulemaking was one that ``encouraged CMS to acknowledge that many or 
most fee arrangements common in the industry tend to be percentage 
based agreements and that manufacturers can establish a fair market 
value rationale for a percentage based fee through industry 
benchmarking by comparing types of specific services outlined in an 
agreement with ranges of payments observed throughout the 
industry.'' 81 FR 5179. While CMS did not respond to this particular 
comment and declined to further define fair market value for 
purposes of the bona fide service fee definition, it stated its 
belief that manufacturers should retain flexibility in determining 
whether service fees are paid at fair market value. We are not 
adopting CMS' terminology nor its definition of ``bona fide services 
fees,'' for purposes of this final rule. To the extent that CMS's 
guidance on the topic of service fees leaves room for percentage-
based arrangements, it should be noted that percentage-based 
arrangements are expressly excluded from protection under the PBM 
service fees safe harbor.
---------------------------------------------------------------------------

iii. Take Into Account Volume or Value
    Comment: Commenters suggested that, if OIG does not believe that 
all fees based on volume or value would generate a significant risk, 
OIG should adopt clear guidance excepting lower risk arrangements from 
the volume or value requirement. More specifically, several commenters 
recommended that OIG exempt any arrangement that involves varying 
numbers of transactions, provided that the fee for each individual 
transaction is fixed in advance and consistent with fair market value 
in an arms-length transaction, as it presents a low risk of fraud. This 
would facilitate practical service fee arrangements between 
manufacturers and PBMs. Alternatively, commenters suggested that the 
rule could clarify that the reference to volume or value of business 
``otherwise generated'' between parties means that payment terms under 
the PBM service fee arrangement in question should not take into 
account other arrangements outside of the contract, but would not 
preclude per-unit fees based on volume or value of the services 
furnished under the service fee agreement itself. According to 
commenters, these types of arrangements present a low risk of fraud or 
abuse if certain safeguards are incorporated into the safe harbor. 
Specifically, a few commenters recommended including the factors 
identified in OIG's Advisory Opinions 10-14 and 11-18 \54\ to deem 
certain fair market value, arms-length, per-unit fees as not taking 
into account the volume or value of referrals or other business 
generated between the parties. A commenter requested that the safe 
harbor protect fees where PBMs are paid less per claim as the number of 
claims increases in light of certain fixed costs.
---------------------------------------------------------------------------

    \54\ Advisory Opinion 11-18 was terminated on April 1, 2014.
---------------------------------------------------------------------------

    Response: We agree with the general premise of the commenters' 
concerns, that compensation for services may be determined on a per-
unit of work basis and thus vary with the volume of work performed. 
This particular safe harbor condition excludes compensation that takes 
into account the volume or value of referrals or other business that 
are payable in whole or in part under a Federal health care program. 
For example, if a per-unit-of-work fee is fixed in advance at fair 
market value for services actually provided to the manufacturer and is 
not based on volume or value of Federal health care business, then that 
arrangement could be protected, so long as the unit-based compensation 
does not vary during the course of the compensation arrangement in any 
manner that takes into account referrals or other Federal business 
generated. On the other hand, the safe harbor would not protect per 
unit compensation that varies with either increases or decreases in 
volume (e.g., X amount per unit for the first 1,000 units, X + 1 per 
unit for additional units), as we believe that compensation determined 
in this manner is not low risk. In addition, we emphasize that this 
safe harbor would not protect any per-unit-of-work fee that is based on 
or otherwise connected with drug prices.
    Comment: According to a commenter, the Proposed Rule would allow 
all entities (other than PBMs) in the drug supply chain that supply 
services to manufacturers to be compensated for the provision of 
services based on volume and a percentage of list price. The commenter 
recommended requiring all payments by manufacturers for services 
provided by third parties to be applied equally and to be set in 
advance, fixed, and based on fair market value.
    Response: In the Proposed Rule, we proposed a new safe harbor 
specifically to protect fees paid from manufacturers to PBMs for 
services rendered to the manufacturers, if all the conditions of the 
safe harbor are met. This safe harbor does not ``allow'' payments to 
other entities that do not meet these conditions; it simply does not 
protect them, whether they meet the conditions or not. Manufacturer 
payments to entities other than PBMs may be protected by other safe 
harbors, such as the safe harbor for personal services and management 
contracts, 42 CFR 1001.952(d). (This safe harbor also requires that 
compensation be set in advance, consistent with fair market value in 
arm's-length transactions, and not determined in a manner that takes 
into account volume and value of Federal health care program business.) 
However, compliance with the terms of each safe harbor is voluntary. If 
parties choose not to comply with such requirements with regard to 
particular arrangements, it may be that they do not believe that these 
arrangements implicate the anti-kickback Statute or that they otherwise 
comply with the law.
iv. Fixed Fees
    Comment: Several commenters were supportive of the condition in the 
safe harbor requiring that the compensation paid to a PBM be a fixed 
payment rather than a payment based on a percentage of sales. A 
commenter noted that this proposal may increase the placement of less 
expensive drugs on preferred formulary tiers and could reduce out-of-
pocket costs for certain patients. Some commenters noted that a flat-
fee system aligns fees with the value of the services provided.
    Response: We appreciate the commenters' support for this condition 
of the safe harbor. Based on the comments received, we are finalizing 
this condition, as proposed.
    Comment: Several commenters suggested changes to the scope of fees 
that can be protected under the PBM service fees safe harbor. For 
instance, several commenters recommended that the safe harbor apply to 
fees for any service a PBM provides to or on behalf of a manufacturer. 
Many commenters either requested that the safe harbor protect fees for 
all bona fide services provided by PBMs to manufacturers or asked that 
we incorporate (or consider incorporating) the standards from the bona 
fide service fee definition under the MDRP (42 CFR 447.502). According

[[Page 76713]]

to at least one commenter, if we do not limit the scope of the safe 
harbor to bona fide services, PBMs may seek to convert costs and lost 
revenue to service fees.
    Response: We are finalizing a modification to the new safe harbor 
to protect payments by a pharmaceutical manufacturer to a PBM for 
legitimate 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 with certain conditions. We share 
commenter's concerns about the use of this safe harbor to convert costs 
and lost revenue to service fees. Therefore, we are clarifying in the 
regulatory text that the safe harbor applies only to ``legitimate'' 
services; thus, this safe harbor does not protect arrangements between 
manufacturers and PBMs for services that are not necessary, are 
worthless, or are duplicative. Because we are not adopting or 
incorporating by reference the term ``bona fide service fee,'' as CMS 
may use that term, we wanted to use a different term to convey a 
similar concept.
    Comment: A commenter requested clarification as to how fixed fees 
would be structured to comply with this safe harbor. In particular, the 
commenter raised concerns that a fixed-fee model could lead PBMs to 
pass down higher administrative costs to Medicaid MCOs that could, in 
turn, increase costs for states and the Federal Government. Another 
commenter raised concerns that flat fees will be used by manufacturers 
as another way to encourage utilization of their products. According to 
these commenters, the fixed fees are a mechanism for entities to offset 
rebate losses.
    Response: We appreciate the commenter's concerns about how a fixed-
fee model could affect costs for states and the Federal government, and 
we do not intend for this safe harbor to protect fixed fees that serve 
only as a mechanism for entities to offset rebate losses. As discussed 
above, we are finalizing a modification to the new safe harbor to 
protect payments by a pharmaceutical manufacturer to a PBM for 
legitimate 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 with certain conditions. If the 
fee arrangement does not meet all safe harbor conditions, then it would 
not be protected.
    Comment: A commenter sought clarification from OIG that the PBM 
service fees protected under the safe harbor would replace the existing 
administrative fees received by PBMs that are based on a percentage of 
WAC. Additionally, the commenter requested that OIG not protect any 
administrative fees based on a percentage of WAC that are paid to PBMs 
or any other intermediaries.
    Response: We proposed to add, and are finalizing, a new safe harbor 
specifically designed to protect certain fixed 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. With respect to the commenter's 
second request, we note that nothing in this final rule is intended to 
affect any existing protections that may be available under other safe 
harbors for the types of administrative fee arrangements the commenter 
described.
    Comment: A commenter disputed OIG's assertion that a PBM service 
fee becomes a kickback because the basis for setting it is a percentage 
of list price, especially since this is typically the best measure of 
fair market value. To address this concern, the commenter recommended a 
prohibition on any manufacturer requirement that the service fees be 
dependent on formulary placement. This would permit specifying that 
service fees tied to a fixed percentage of sales may qualify as a 
permitted fixed fee under the rule.
    Response: Our Proposed Rule stated that service fees tied to a 
product's price ``could function as a disguised kickback.'' Whether a 
service fee based on a percentage of list price rises to the level of 
an unlawful kickback under the anti-kickback statute would depend on 
the facts and circumstances. As we noted in the Proposed Rule, we 
proposed a safe harbor that would protect flat fees because they ``pose 
lower risk of abuse and conflicts of interest.'' Because of these 
concerns, we decline to adopt the commenter's suggestion to protect 
service fees tied to a fixed percentage of sales.
v. Disclosure Requirement
    Comment: Many commenters expressed general support for PBM 
disclosures arguing that plans should have full information about PBM 
relationships with manufacturers, including fees that manufacturers pay 
to PBMs.
    Response: We appreciate the commenters' support. To promote 
transparency, we are finalizing our proposals that information about 
both the services and the associated fees be disclosed to the Secretary 
upon request. In the Proposed Rule we said we were considering and 
solicited comments on requiring additional information about the fee 
arrangements, including information about valuation, valuation 
methodologies, compliance with the ``volume or value'' criterion, and 
other characteristics. For purposes of compliance with the final safe 
harbor, we are not requiring disclosure of each of these additional 
elements. However, maintaining documentation of these elements would be 
prudent to demonstrate safe harbor compliance.
    Comment: Many commenters recommended additional disclosure 
requirements, including: Requiring PBMs to disclose service fee 
arrangements with plans to manufacturers; requiring PBMs to disclose 
all arrangements with manufacturers and wholesalers that are related to 
health plans; requiring PBMs to disclose all information related to the 
fees PBMs are paid for the services protected under the safe harbor; 
requiring PBMs to disclose to manufacturers when they seek manufacturer 
compensation for services also compensated by a plan; requiring PBMs to 
annually disclose to the Department information that explains their 
valuation methodology and demonstrates their fee arrangements meet the 
volume and value criteria; and requiring PBMs to disclose service fees 
that are separated from any discounts or rebates. A commenter requested 
clarification regarding the specific information that must be included 
in the disclosures under the new safe harbor, particularly as it 
related to the ``additional information about fee arrangements'' that 
PBMs would be required to disclose to the Secretary.'' See 84 FR 2350. 
Another commenter requested that PBMs' written agreements with 
pharmaceutical manufacturers be made publicly available on both the 
manufacturer's and PBM's websites and that CMS should also compile and 
display these agreements on the agency's website.
    Response: Although we appreciate commenters' suggestions, we did 
not propose transparency requirements for agreements between PBMs and 
health plans or wholesalers and, therefore, could not finalize such 
requirements here. Moreover, the additional disclosure requirements 
suggested by the commenters exceed what we believe should be necessary 
for safe harbor compliance, given the overall structure of the safe 
harbor, and to protect against abusive fee arrangements between 
manufacturers and PBMs. Additionally, we see no need to require the 
public disclosure of this type of private agreement between two parties 
as a

[[Page 76714]]

requirement under the safe harbor. However, we note that under the 
final rule, PBMs would disclose to the Secretary upon request the 
services provided and fees paid for the services. Of course, to the 
extent a PBM was subject to an enforcement action and asserting the 
safe harbor as a defense, the PBM would have to show that it met each 
element of the safe harbor. Therefore, as a best practice, the PBM 
should have documentation of how it met each element (e.g., a fair 
market value analysis for the fees).
    Comment: A commenter proposed that beneficiaries should have 
similar access as health plans to information regarding PBM contracts 
and another commenter requested clarification as to whether the PBM 
disclosures would be required to the pharmacy or beneficiary.
    Response: We did not propose and are not finalizing any requirement 
for PBMs to make disclosures to pharmacies or beneficiaries. We believe 
the safe harbor conditions we are finalizing provide the appropriate 
protections against abusive kickback schemes.
    Comment: Another commenter proposed that disclosures of contracts 
and service fees should be made at the time of agreement rather than 
annually, because obtaining the information earlier would aid plans in 
contemporaneously addressing possible conflicts in PBMs' 
recommendations. The same commenter recommended adding a new subsection 
to prohibit Medicaid-identifying patient or prescriber information from 
being provided to the manufacturer.
    Response: We appreciate the commenter's suggestion, but we decline 
to delete the requirement for PBMs to report on arrangements with 
manufacturers annually. We believe that this information can change 
over time and should be updated. Medicaid-identifying patient or 
prescriber information is not part of the disclosure requirement and 
its disclosure may be governed by other laws.
    Comment: A commenter supported general disclosure of the types of 
services that PBMs may provide to manufacturers but objected to 
disclosures of specific services provided to manufacturers on the 
grounds that such disclosure would be unwieldy and provide no 
additional transparency. Another commenter objected to the disclosure 
requirements, because PBMs and their clients already engage in arm's-
length negotiations, including what is disclosed and not disclosed, and 
called any additional disclosure requirements unnecessary, burdensome, 
and invasive.
    Response: Although we appreciate the commenters' concerns, we 
respectfully disagree. The transparency requirement is important to 
ensure that a PBM's arrangements with pharmaceutical manufacturers are 
not in tension with the services it provides to the health plans for 
which it is acting as an agent. Disclosures of specific services will 
allow a plan to see what services a PBM is contracting with a 
manufacturer for on its behalf.
    Comment: A commenter requested clarification regarding the scope of 
``associated costs'' and ``associated compensation'' for services 
rendered to pharmaceutical manufacturers that are to be disclosed under 
the new PBM service fees safe harbor. The commenter objected to the 
disclosure to plan sponsors of fees paid by manufacturers to PBMs, 
stating that the disclosure of fees to plan sponsors would not provide 
any additional transparency and would negatively affect competition due 
to widespread dissemination of the fees paid by each manufacturer to 
each PBM.
    Response: We appreciate the commenter's concern. The terms 
``costs'' and ``compensation'' as used in the Proposed Rule were meant 
to be synonymous. We further note that while we considered and 
solicited comments on whether PBMs should be required to disclose fee 
arrangements to health plans, we are not finalizing this requirement. 
We are, however, finalizing the proposal that PBMs are required to 
disclose fee arrangements to the Secretary upon request.
    Comment: Regarding ``additional information about fee 
arrangements'' to be disclosed to the Secretary upon request, a 
commenter recommended that PBMs disclose information to the Department 
that demonstrates fee arrangements do not duplicate other arrangements 
for which the PBM might receive payments. Conversely, other commenters 
cautioned that duplicative services may not always constitute ``double 
dipping'' and that duplicative services may not necessarily indicate 
that an arrangement is fraudulent or abusive. As an example, these 
commenters noted that ``PBMs may provide the same data to more than one 
entity, and such data could represent value to each recipient, even if 
the data is also received by others.''
    Response: In the Proposed Rule, we said we were considering and 
solicited comments on a range of additional information we might 
require be disclosed to the Secretary, upon request, including 
information related to duplicative payments and double-dipping. 
However, we are not requiring that the PBM proactively disclose 
information that specifically demonstrates a lack of duplicate 
services. The safe harbor requires that a PBM disclose to the Secretary 
upon request the services it rendered to each pharmaceutical 
manufacturer related to the PBM's arrangements to furnish pharmacy 
benefit management services to the health plan and the fees paid for 
such services. We believe this disclosure requirement will provide 
sufficient transparency and that additional disclosure requirements are 
not necessary to achieve the goals of the safe harbor. The requirement 
to provide information about services and the fees paid for those 
services to the Secretary on request does not constitute a 
determination that any particular arrangement is abusive. We recognize 
that particular fees and services cannot be examined in a vacuum, and 
we would look at the totality of facts and circumstances in reviewing 
an arrangement.
    Comment: A commenter argued that, as proposed, the definition of 
pharmacy benefit manager services eligible for protection under the 
proposed safe harbor meets the definition of a bona fide service fee 
and urged HHS to specify that if administrative service fees meet the 
bona fide services fee definition they would no longer be treated as 
reportable price concessions.
    Response: Determinations of what services are or are not reported 
as price concessions are the purview of CMS, which administers the Part 
D program.
vi. Scope of Agreement
    We solicited comments regarding whether the safe harbor for 
pharmacy benefit manager fees 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).
    Comment: A commenter recommended that the rule should not dictate 
the format of a PBM agreement, which could vary based on the services 
to be provided and the preferences and standards desired by the 
parties. The commenter suggested that requiring separate agreements for 
each of a PBM's plan sponsor clients would impose tremendous costs on 
the parties while providing no benefit or protection to Federal health 
care programs. The commenter also pointed out that PBMs may need 
separate agreements for Federal and commercial business.
    Response: The final rule does not specify the format of a PBM 
service fee

[[Page 76715]]

agreement and does not mandate that the PBM have separate agreements 
with each health plan with which it contracts.
vii. Statutory Exception and Safe Harbor for Group Purchasing 
Organizations
    Comment: Various commenters asked OIG to affirmatively rescind 
statements from its 2003 CPG that indicate rebates or other payments to 
PBMs may be structured to fit under the GPO safe harbor at 42 CFR 
1001.952(j) \55\ and to indicate in revised guidance that these 
statements have been superseded and replaced by the point-of-sale 
reductions in price and PBM service fees safe harbors, as of the 
effective date of the final rule. Another pharmaceutical manufacturer 
commenter asserted that allowing PBMs to rely on the GPO safe harbor 
would create a loophole to the new safe harbors and reduce uptake of 
point-of-sale discount arrangements and service fees based on flat, 
fair market value payments.
---------------------------------------------------------------------------

    \55\ Specifically, several commenters requested OIG rescind the 
following statements from the ``Payments to PBMs'' section in 68 FR 
23736: ``Any rebates or other payments by drug manufacturers to PBMs 
that are based on, or otherwise related to, the PBM's customers' 
purchases potentially implicate the anti-kickback statute. 
Protection is available by structuring such arrangements to fit in 
the GPO safe harbor at 42 CFR 1001.952(j). That safe harbor 
requires, among other things, that the payments be authorized in 
advance by the PBM's customer and that all amounts actually paid to 
the PBM on account of the customer's purchases be disclosed in 
writing at least annually to the customer.
---------------------------------------------------------------------------

    Commenters also asked for clarification as to whether OIG still 
recognizes the GPO safe harbor as a possible source of protection for 
rebates or other payments by manufacturers to PBMs. Similarly, other 
commenters recommended that OIG clarify or revise the 2003 CPG in light 
of the final rule because of the potential for confusion by 
stakeholders on the status of rebates or other payments paid by 
manufacturers to PBMs.
    Conversely, a PBM commenter indicated that it intends to continue 
to utilize the GPO safe harbor, 42 CFR 1001.952(j), to protect the 
receipt of administrative fees from manufacturers. Another commenter 
stated the GPO safe harbor also has a corollary statutory exception 
that would protect these payments.
    Response: To qualify for protection under the GPO safe harbor, 
certain requirements must be met. First, the safe harbor protects only 
payment by a vendor to a GPO as part of an agreement to furnish goods 
or services to an entity. Second, the GPO must have a written agreement 
with each individual or entity for which items or services are 
furnished that specifies either that the fee the GPO receives will be 
three percent or less of the purchase price of the goods or services 
provided by that vendor or specifies the amount (or if not known, the 
maximum amount) the GPO will be paid by each vendor (where such amount 
may be a fixed sum or a fixed percentage of the value of purchases made 
from the vendor by the members of the group under the contract between 
the vendor and the GPO). Third, if the entity that receives the goods 
or service from the vendor is a health care provider of services, the 
GPO must disclose in writing to the entity at least annually, and to 
the Secretary upon request, the amount received from each vendor with 
respect to purchases made by or on behalf of the entity. In addition to 
meeting the requirements above, a PBM, as a threshold matter, would 
have to meet the definition of a GPO: An entity authorized to act as a 
purchasing agent for a group of individuals or entities who are 
furnishing services for which payment may be made in whole or in part 
under Medicare, Medicaid or other Federal health care programs, and who 
are neither wholly-owned by the GPO nor subsidiaries of a parent 
corporation that wholly owns the GPO (either directly or through 
another wholly-owned entity).\56\
---------------------------------------------------------------------------

    \56\ 42 CFR 1001.952(j)(2).
---------------------------------------------------------------------------

    Thus, for a PBM to qualify as a GPO acting as a purchasing agent on 
behalf of its members, the PBM could not wholly own the members, nor 
could the members be wholly owned by the same parent corporation as the 
PBM. This may limit the utility of the safe harbor for many PBMs. The 
propriety of any particular arrangement and whether it can fit under a 
safe harbor is highly dependent upon the facts and circumstances of 
each particular case. Any statements in this final rule should be not 
construed as approval of an individual arrangement. PBMs and 
manufacturers wishing to use the GPO safe harbor should closely 
scrutinize their arrangements for full compliance with all safe harbor 
conditions and definitions, including all requirements relating to 
written agreements and disclosures.
    Requests for amendments to the regulatory safe harbor for GPOs are 
beyond the scope of this rulemaking. In addition, as we state above, 
fees to PBMs are not protected by the discount or point-of-sale 
reduction in price safe harbors, so nothing in this rule would suggest 
those amendments would replace or supersede a PBM's ability to have 
fees protected by a different safe harbor. The new PBM service fee safe 
harbor is an additional avenue for protection for arrangements between 
pharmaceutical manufacturers and PBMs that meet the conditions of that 
safe harbor. As with any safe harbor, only offers or payment of 
remuneration that meet all safe harbor conditions, including any 
applicable definitions and disclosure requirements, would be protected.
    Comment: Another commenter encouraged OIG to clarify and 
distinguish the GPO safe harbor term ``purchasing agent'' from PBM in 
the final rule or future rulemaking. The commenter asserted that the 
term ``purchasing agent'' is used but not defined in both the GPO 
statutory exception and safe harbor. The commenter requested that OIG 
define the term ``purchasing agent'' narrowly, e.g., as an entity that 
is distinct from a PBM and represents members that take title and 
possession of purchased products, which, the commenter asserted, would 
better ensure the objectives of the Proposed Rule. Similarly, another 
commenter encouraged OIG to clearly distinguish PBMs from GPOs based on 
the types of entities that they represent and services they perform for 
those entities.
    Response: Defining the term ``purchasing agent'' and distinguishing 
between GPOs and PBMS as those terms are used in the GPO statutory 
exception and safe harbor is outside the scope of this rulemaking, 
which does not address the GPO safe harbor.
viii. Additional Recommendations
    Comment: Several commenters requested that OIG clarify, expand, or 
restrict the definition of PBM for purposes of the proposed safe harbor 
for various reasons. For example, some commenters recommended a 
definition that is based on an entity's function or incorporates the 
types of services an entity provides, rather than the label of its 
name. A commenter recommended that a definition of ``PBM'' not include 
``negotiating rebate arrangements'' because it could create the 
impression of protecting PBM services provided to manufacturers that 
are not legitimate and/or necessary. Some commenters recommended OIG 
include in the definition all PBM-owned and PBM-affiliated entities, 
including PBM-owned pharmacies.
    Response: We thank the commenters for their suggestions. We decline 
to expand or limit the definition of ``PBM'' that we included in the 
Proposed Rule. We included only the core function of a PBM in the 
definition because we recognize that one PBM may perform more or fewer 
services than another

[[Page 76716]]

PBM, and we do not want a defined term to dictate a business model for 
purposes of safe harbor protection. We also decline to include all PBM-
owned or PBM-affiliated entities in the definition. Other safe harbors 
(such as the personal services safe harbor) might be available to 
protect services performed by other types of entities.
    Comment: Some commenters requested that OIG clarify or remove 
altogether the ``related to'' aspect of the proposed safe harbor so 
that the safe harbor protection could be more broadly available to, for 
example, all PBM services arrangements with manufacturers.
    Response: We are not adopting this suggestion. The conditions in 
this safe harbor are designed to ensure that protection is offered only 
for service fees if the services are related or (i.e., connected in 
some way) to pharmacy benefit management services that the PBM provides 
to health plans. If there is no connection to health plan services, 
certain conditions in the safe harbor would be inapplicable (e.g., the 
requirement to make certain disclosures to health plans). We note, 
however, that other safe harbors, such as the personal services and 
management contracts safe harbor at Sec.  1001.952(d) may be available 
to protect other types of service arrangements between PBMs and 
manufacturers.
    Comment: Some commenters recommended that OIG incorporate certain 
requirements of the personal services and management contracts safe 
harbor to the PBM service fees proposed safe harbor. Specifically, the 
commenters recommended requiring that (1) the agreement for the service 
be signed by the parties; (2) the services performed under the 
agreement do not involve the counselling or promotion of a business 
arrangement or other activity that violates any State or Federal law, 
and (3) the aggregate services contracted for do not exceed those that 
are reasonably necessary to accomplish the commercially reasonable 
business purpose of the services.
    Response: The proposed safe harbor for PBM service fees includes 
certain safeguards adapted from the personal services and management 
contracts safe harbor, including a requirement that compensation be 
fair market value for services rendered.
    With regard to the suggestion that the safe harbor include a 
requirement that the agreement for PBM services be signed by the 
parties, we believe that such a requirement is implicit in the 
requirement that the agreement be in writing in order to establish and 
memorialize the agreement of the parties. However, we acknowledge that 
the personal services and management contracts safe harbor includes an 
explicit requirement of signatures. For the sake of consistency, and to 
avoid any implication that an inconsistency on this point means no 
signatures are required for compliance with the PBM service fees safe 
harbor, we are adding this explicit requirement to the final rule.
    As noted by commenters, the personal services and management 
contracts safe harbor also includes a requirement that the services 
performed under the agreement do not involve the counselling or 
promotion of a business arrangement or other activity that violates any 
State or Federal law. While the proposed PBM service fees safe harbor 
did not include such a requirement in regulatory text, we think it is 
obvious that the proposed safe harbor was not intended to protect 
payments for the counselling or promotion of illegal activities. For 
the sake of clarity, we are adding this explicit requirement to the 
final rule.
    The commenters also noted that the personal service and management 
contracts safe harbor requires that ``the aggregate services contracted 
for do not exceed those that are reasonably necessary to accomplish the 
commercially reasonable business purpose of the services.'' While we 
are not including this specific condition in the final rule, we note 
that considering whether services are commercially reasonable would 
likely be useful in meeting the condition that payments protected by 
the safe harbor be ``for services the PBM provides to the 
pharmaceutical manufacturer related to the pharmacy benefit management 
services that the PBM furnishes to . . . health plans'' and not for 
favorable treatment of the manufacturers' products.
    Comment: A commenter recommended that OIG provide guidance stating 
that companies will be held accountable for their own compliance, 
noting that the discount safe harbor requires entities to ``refrain 
from doing anything that would impede'' their contracting counter-party 
from meeting their own obligations under the safe harbor. The 
contractor further noted that the 1999 preamble to the discount safe 
harbor states that, if a seller meets its obligations under the safe 
harbor in good faith, while the buyer fails to meet its obligations, 
the seller would be protected by the safe harbor. 64 FR 63518, 63527 
(Nov. 19, 1999).
    Response: The safe harbor for PBM service fees differs from the 
discount safe harbor at 42 CFR 1001.952(h), in that the latter has 
separate sets of requirements for buyers and sellers. The PBM service 
fee safe harbor has only one condition that is the responsibility of 
only one party: The PBM is responsible for certain disclosures, which 
we believe it is able to make without the assistance of any other party 
to the agreement. We confirm that, provided that all other requirements 
of the safe harbor are met, and provided that the manufacturer party to 
an agreement with a PBM has taken no steps to discourage or impede the 
PBM from meeting the disclosure requirements, the PBM's failure to meet 
the disclosure requirement will not, by itself, cause the manufacturer 
to lose the protection of the safe harbor. We note, however, that if 
the manufacturer were aware of a failure to disclose and took no steps 
to remedy it, liability might attach to the manufacturer through 
various legal theories, depending on all the facts of the arrangement 
and the conduct of the parties.
    Comment: A commenter explained that bona fide payments for services 
performed by PBM intermediaries should be converted to fee-for-service 
arrangements that are tied to the fair market value of the services 
performed rather than a percentage of WAC. The commenter requested that 
OIG provide similar protections for pharmacies, wholesalers, and 
outpatient providers.
    Response: The commenter did not explain how the referenced service 
arrangements with pharmacies, wholesalers and outpatient providers 
implicate the anti-kickback statute while posing low risk of abuse, and 
therefore are suitable for protection by a safe harbor. If the 
arrangements do not fit in a safe harbor, they would be analyzed on a 
case-by-case basis for compliance with the statute.
    Comment: Some commenters requested that pharmacies' reimbursement 
not be affected by the negotiated rate between plans or PBMs and 
manufacturers and that pharmacies not be expected to pay any of the 
service fees owed by manufacturers to PBMs.
    Response: There is no expectation under the final rule that 
pharmacies pay any of the service fees owed by manufacturers to PBMs. 
Pharmacy reimbursement from plan sponsors and the relationships between 
pharmacies and manufacturers are beyond the scope of this rulemaking. 
However, we note that the PBM service fee safe harbor protects only 
payments to PBMs by manufacturers, provided all conditions of the safe 
harbor are met. Payments that are made by pharmacies, even indirectly 
through reimbursements to

[[Page 76717]]

manufacturers, are not protected by the safe harbor.
    Comment: Some commenters requested that OIG clarify what ``arm's-
length transaction'' means. In particular, a commenter specifically 
requested that OIG clarify: (1) That PBMs are obligated to negotiate 
services arrangements in good faith based on the bona fide needs of 
manufacturers; (2) the scope of safe harbor protection available for 
arrangements in which a PBM provides services on behalf of an 
affiliated plan; and (3) that individual health plans that do not 
provide pharmacy benefits management services to plan sponsors under 
Part D may not attempt to use the safe harbor to negotiate 
administrative fees from manufacturers.
    Response: The term ``arm's-length transaction'' has appeared in 
safe harbor regulations since 1999 \57\ and has been subject to 
interpretation in advisory opinions and other OIG guidance,\58\ as well 
as court cases,\59\ since that time. We decline to provide further 
interpretation here.
---------------------------------------------------------------------------

    \57\ See, e.g., 64 FR 63518 (Nov. 19, 1999).
    \58\ See, e.g., 2003 CPG, Special Advisory Bulletin: Contractual 
Joint Ventures (April 23, 2003, available at https://oig.hhs.gov/fraud/docs/alertsandbulletins/042303SABJointVentures.pdf.
    \59\ See, e.g., U.S. ex rel. Gale v. Omnicare, Inc., 2013 WL 
3822152 (N.D. Ohio, July 23, 2013).
---------------------------------------------------------------------------

    Comment: A commenter suggested that alternative, transparent, flat-
fee based pharmacy benefits models that reduce costs already exist (and 
were not considered by OIG or HHS) that generate savings, which are 
used by health plans in a variety of ways, including (1) reducing plan 
spending and/or providing member savings, such as offsetting premium 
costs; or (2) lowering copayments for enrollees and not charging an 
enrollee more than the cost of the drugs themselves.
    Response: The Proposed Rule does not prohibit the use of other 
models but only provides protection from liability for PBM service 
fees, in certain circumstances, because they implicate the anti-
kickback statute and are considered to be low-risk.
    Comment: A commenter urged OIG to clarify that, if an arrangement 
fell under the protection of other safe harbors, including discount, 
personal services and management contracts, managed care, and GPO 
administrative fee, those arrangements can only now be protected under 
the proposed PBM service fees safe harbor.
    Response: An arrangement that satisfies all conditions of any safe 
harbor can be protected without satisfying conditions of other 
potentially applicable safe harbors. Thus an arrangement between a PBM 
and a manufacturer that does not satisfy the conditions of the safe 
harbor for PBM service fees could be protected by a different safe 
harbor, if the arrangement met all the conditions of that other safe 
harbor.

E. Technical Comments

    We received several comments requesting that we make technical 
revisions to certain provisions in the regulatory text. We summarize 
the comments received below.
    Comment: Commenters requested that we revise ``reduced price'' to 
``reduction in price'' in Sec.  1001.952(cc)(1)(i) to ensure 
consistency with the term used in Sec.  1001.952(cc).
    Response: We agree with the commenters and have made the technical 
correction.
    Comment: Commenters noted that we use the term ``health benefits 
plan'' in the proposed definition of ``pharmacy benefit manager'' but 
use the term ``health plan'' throughout the rest of the Proposed Rule. 
The commenters requested that we avoid introducing inconsistency and 
use the term ``health plan'' in this definition.
    Response: We agree with the commenters and have made the technical 
correction.

IV. Provisions of the Final Regulation

    This final rule incorporates, in large part, the amendments to the 
discount safe harbor and the new safe harbors we proposed in the 
Proposed Rule, but with some changes to the regulatory text.

A. Revision to the Discount Safe Harbor

    We are finalizing, with certain revisions, our amendments to the 
discount safe harbor (42 CFR 1001.952(h)). In the Proposed Rule, we 
proposed to exclude from safe harbor protection 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 or to a Medicaid MCO. In response to comments, we 
are not finalizing our proposal to exclude from protection those 
reductions in price from pharmaceutical manufacturers to Medicaid MCOs.

B. New Safe Harbors

    We are finalizing, with certain revisions, a new safe harbor in 
Sec.  1001.952(cc) to protect point-of-sale reductions in price 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. In addition, we are finalizing, 
with minor revisions, a new safe harbor that protects payment by a 
pharmaceutical manufacturer to a 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.

C. Technical Corrections

    We are correcting a numbering error in the new safe harbor in Sec.  
1001.952(dd). Specifically, we inadvertently failed to include a (1) 
before the opening language for Sec.  1001.952(dd). In this final rule, 
we have inserted the (1) and renumbered the subsequent paragraphs 
accordingly to correct this oversight.

V. 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 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 
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 $78.0 million in annualized costs at a 7 percent 
discount rate, discounted relative to 2016, over a perpetual time 
horizon.
    The Regulatory Flexibility Act (RFA) 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

[[Page 76718]]

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 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 2020, 
that threshold is approximately $156 million. The rule may have effects 
on states through its effects on the MDRP, under which rebates are 
shared between the Federal Government and the states based on the 
Federal Medical Assistance Percentage (FMAP) for each state.
    The rule does not alter obligations under the statutory provisions 
for Medicaid prescription drug rebates under Section 1927 of the 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.
    Although it is difficult to anticipate the final rule's potential 
effects on AMP, if the rule reduces AMP, 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.\60\
---------------------------------------------------------------------------

    \60\ Milliman, Inc., Impact of Potential Changes to the 
Treatment of Manufacturer Rebates (Jan. 31, 2019). This citation is 
corrected from the Proposed Rule and reflects the document that was 
posted as supplementary material in the docket for this rule at 
regulations.gov in February 2019.
---------------------------------------------------------------------------

    The VA, Department of Defense, Coast Guard, and the Public Health 
Service (including the Indian Health Service) are eligible to purchase 
drugs under the FCP Program. The FCP is calculated as a percentage of 
non-FAMP. Eligible programs can purchase drugs using the lesser of the 
FSS Price and FCP. Although it is difficult to determine the effects of 
the final 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 the VA may realize some 
additional savings.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a 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.
    Comment: One commenter suggested that the Proposed Rule did not 
comply with the requirements under E.O. 13771 to offset costs of 
significant rules by eliminating costs from at least two prior final 
rules and suggested the E.O. 13771 cost estimate was calculated 
incorrectly.
    Response: We appreciate the comments but disagree. The Proposed 
Rule complied with the requirements under E.O. 13771, as described in 
more detail in OMB guidance.\61\
---------------------------------------------------------------------------

    \61\ For general guidance, see https://www.whitehouse.gov/sites/whitehouse.gov/files/omb/memoranda/2017/M-17-21-OMB.pdf. For 
guidance on accounting methods, see https://www.reginfo.gov/public/pdf/eo13771/EO13771_accounting_methods.pdf.
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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 
for consumers, because their out-of-pocket costs during the deductible, 
coinsurance, and coverage gap phases of their benefits are based on the 
retail price derived from pharmacy acquisition costs with negotiated 
additional markups and dispensing fees. 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).\62\ 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 U.S. invoice spending (the amount paid by distributors) and net 
spending (which accounts for all price concessions) across all 
distribution channels has increased from approximately $38 billion in 
2009 to $135 billion in 2018 for retail drugs.\63\
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    \62\ ``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.
    \63\ IQVIA Institute for Human Data Science, Medicine Use and 
Spending in the U.S.: A Review of 2018 and Outlook to 2023, May 
2019, p. 20.
---------------------------------------------------------------------------

    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.

[[Page 76719]]

[GRAPHIC] [TIFF OMITTED] TR30NO20.000

    Comment: One commenter suggested that the Proposed Rule does not 
adequately justify the need for regulation, does not adequately 
describe and assess the impacts of alternatives, and does not carefully 
weigh effects on stakeholders.
    Response: We appreciate the commenter's feedback and additional 
information but disagree with the conclusion. One of the purposes of 
the Proposed Rule was to get feedback and information from the public 
that we could not otherwise access. We have updated the regulatory 
impact analysis and the rule based on the comments, and the regulatory 
impact analysis represents our best thinking in these areas with 
consideration of these comments. We note that while we only had 
qualitative evidence on benefits in the Proposed Rule, the Department 
now quantifies some of these benefits, and these benefits exceed the 
rule's cost estimates.

B. Background on Costs, Benefits, and Transfers

    This rule eliminates safe harbor protection for rebates received by 
plan sponsors, or PBMs under contract with them, from manufacturers in 
connection with Medicare Part D prescription pharmaceutical products 
and offers new safe harbor protection for certain price reductions 
offered at the point of sale. As a result, manufacturers will have an 
incentive to lower list prices, PBMs will have greater incentive to 
negotiate larger discounts from manufacturers, and beneficiaries will 
benefit from more transparency enabling them to better choose a plan 
that meets their needs. The goal of this policy is to lower out-of-
pocket costs for consumers, reduce government drug spending in Federal 
health care programs, and create transparency that increases choice, 
competition, and program integrity.
    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 rule to result in 
manufacturers lowering their list prices and replacing rebates with 
point-of-sale reductions in price. One way to quantify this impact is 
to simply replace all manufacturer rebates paid to PBMs with point-of-
sale reductions in price to consumers and estimate the effect of this 
transfer on stakeholders. However, this approach does not consider the 
range of strategic behavioral 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. In some 
places, the analysis in this section is premised on the proposed 
effective date of January 1, 2020. We recognize that impacts will not 
occur in 2020, but did not feel that updated analyses would 
significantly change the discussion of the range of potential impacts 
or resolve uncertainty around estimates from the proposed rule stage. 
Impacts will occur at a later point in time, relative to the proposed 
rule, due to the delayed effective date. As at the proposed rule stage, 
the precise timing of impacts depends on external factors, such as when 
regulated entities implement adjustments to their business 
arrangements.
    Today, prescription drug manufacturers prospectively set the WAC, 
or list price, of the drugs they sell to wholesalers and other large 
purchasers. Manufacturers also retrospectively make payments to 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 PBMs, 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.\64\ 
PBMs may favor drugs with higher rebates over drugs with lower costs, 
or otherwise discourage the adoption of lower-cost brand or generic 
drugs and biosimilars. As a result, rebates may increase costs for

[[Page 76720]]

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 (which 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.
---------------------------------------------------------------------------

    \64\ 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; Alliance of Community Health Plans, The Spike 
in Drug Costs: Rheumatoid Arthritis, available at https://www.achp.org/wp-content/uploads/Rheumatoid-Arthritis_Final.pdf; 
Alliance of Community Health Plans, The Spike in Drug Costs: 
Diabetes, available at https://www.achp.org/wp-content/uploads/Diabetes_FINAL_Revised-12.7.15.pdf.
---------------------------------------------------------------------------

    This rule removes safe harbor protection for rebates from a 
manufacturer of prescription pharmaceutical products to plan sponsors 
under Part D (either directly or indirectly through PBMs under contract 
with them), and creates two new safe harbors protecting certain 
reductions in price at the point of sale by manufacturers and 
protecting certain flat fees paid by manufacturers to a PBM for 
services that the PBM renders to the manufacturer. To the extent that 
this rule results in manufacturers reducing the list price of drugs, it 
will impact all cash flows throughout the system.
    The intent of this rule is to remove discount safe harbor 
protection for rebates and other reductions in price from manufacturers 
to plan sponsors under Part D or PBMs under contract with those 
sponsors and to provide a new avenue for point-of-sale reductions in 
price that will benefit beneficiaries at the pharmacy counter. This 
change will 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.\65\ For most 
health care services, consumer deductibles and coinsurance are based on 
the prices that 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.
---------------------------------------------------------------------------

    \65\ IQVIA, Patient Affordability Part One: The Implications of 
Changing Benefit Designs and High Cost-Sharing (May 18, 2018), 
available at https://www.iqvia.com/locations/united-states/patient-affordability-part-one.
---------------------------------------------------------------------------

    With a reduced price used to adjudicate the benefit, patients with 
coinsurance or deductible plans will likely experience reductions in 
cost-sharing for rebated brand-name drugs at the point of sale. Because 
of actuarial equivalence requirements in the Part D program, patients 
with fixed co-payments may also 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, as the Department anticipates, the benefit of lower 
premiums and out-of-pocket costs would 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, formulary coverage, and in-network providers. Research 
shows that consumers often do not understand their health insurance 
plans and would better understand a simpler plan.\66\ Research specific 
to Medicare Part D suggests beneficiaries place a greater weight on 
premiums than out-of-pocket costs, are most likely to choose the plan 
with the lowest premiums.\67\ Oftentimes they select the plan with the 
lowest premiums when plans with higher premiums and more comprehensive 
coverage were actuarially favorable.\68\ 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 
percent coinsurance on a drug with a $100 WAC and 30 percent rebate 
effectively pays 28 percent 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.
---------------------------------------------------------------------------

    \66\ Loewenstein G et al. Consumers misunderstanding of health 
insurance. Journal of Health Economics. 32 (2013) 850-62.
    \67\ Abaluck and Gruber. Evolving Choice Inconsistencies in 
Choice of Prescription Drug Insurance. Am Econ Rev. 2016 Aug., 
106(8): 2145-84.
    \68\ Heiss, Leive, McFadden and Winter. Plan Selection in 
Medicare Part D: Evidence from Administrative Data. J Health Econ. 
2013 Dec., 32(6): 1325-44.
---------------------------------------------------------------------------

    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 (LIS). If 
this rule increases or decreases premiums, Federal spending on premium 
subsidies will also increase or decrease, potentially outweighing 
estimated Federal savings associated with this rule. These potential 
effects are described in the transfers section of this regulatory 
impact analysis.
    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.
    After the close of the comment period, CBO independently estimated 
the impact of the Proposed Rule.\69\ The CBO analysis was substantially 
similar to the CMS Office of the Actuary (OACT) analysis of the 
Proposed Rule. One significant difference is that CBO expects that 
rather than lowering list prices, manufacturers would offer the 
renegotiated discounts in the form of point-of-sale chargebacks. In 
addition, the CBO analysis includes transfer effects related to the 
costs of implementation of the rule. Despite

[[Page 76721]]

these differences, the transfer effects of the rule estimated by CBO 
are within the range of estimates presented in the Proposed Rule, and 
as a result, we do not provide additional substantial discussion of 
CBO's estimates of these transfers in the final rule.
---------------------------------------------------------------------------

    \69\ Congressional Budget Office. ``Incorporating the Effects of 
the Proposed Rule on Safe Harbors for Pharmaceutical Rebates in 
CBO's Budget Projections--Supplemental Material for Updated Budget 
Projections: 2019 to 2029,'' May 2019, https://www.cbo.gov/system/files/2019-05/55151-SupplementalMaterial.pdf.
---------------------------------------------------------------------------

    The CBO analysis also includes additional analysis not conducted 
for the Proposed Rule. Part of this analysis related to guidance on 
Part D bids for the 2020 plan year and a CMS demonstration that was 
contemplated, but not finalized, in 2019. CBO analyzed the impact of 
the rule on Medicare Part A, B, and D utilization. On net, these 
changes are expected to reduce Medicare spending. According to the CBO 
analysis, the rule will increase prescription drug utilization, 
resulting in increased Part D spending. This increase in Part D 
spending is estimated to be offset by savings in Medicare Parts A and 
B. As previously described in detail in this impact analysis, the range 
of actuarial estimates for this rule range from $100 billion in reduced 
federal spending if more than 100 percent of rebates are converted into 
list price concessions and Part D plans exert greater formulary 
control, to $196 billion in increased Federal spending, if 
manufacturers reduce price concessions in Part D. There is wide 
variation in the analyses conducted that makes it difficult to project 
with certainty the impact of the policy change on federal spending. The 
Secretary, in applying the modeling assumptions and the range of 
available estimates, coupled with the fifteen-year history of the 
program (including its competitive dynamic), has projected that there 
will not be an increase in federal spending, patient out-of-pocket 
costs, or premiums for Part D beneficiaries as required by the 
Executive Order. The Department further believes that the rule will 
make beneficiary medications more affordable and lead to lower cost 
sharing for patients.
    The Department has considered the wide variation of potential 
transfer impacts in the analyses conducted and has decided to proceed 
with this rulemaking based on its view that the rule will have 
significant transparency and prescription adherence benefits for 
Medicare beneficiaries.
    Comment: Multiple commenters suggested that impact estimates 
indicate that premiums for plans will increase, but the estimates do 
not account for how this will affect enrollment. One commenter noted 
that a study shows that a $100 increase in MA-PD premiums leads to 34 
percent increase in plan switching.
    Response: We appreciate commenters' feedback but would note that a 
change of $100 in monthly premiums is several orders of magnitude 
outside the range of potential impacts discussed in this rule. We would 
further note that since the inception of the Medicare Part D program, 
the base beneficiary premiums have ranged from $27 to $35, but the 
number of enrollees in Medicare Part D have increased every year.\70\
---------------------------------------------------------------------------

    \70\ CMS, 2020 Annual Report, Boards of Trustees
    Fed. Hospital Ins. & Fed. Supp. Medical Ins. Trust Funds, 
available at https://www.cms.gov/files/document/2020-medicare-trustees-report.pdf.
---------------------------------------------------------------------------

    Comment: One commenter noted that the estimates rely on the 
standard plan design (full deductible and 25 percent coinsurance) on 
all non-low-income beneficiaries in the initial coverage limit and 
coverage gap, when in reality, the majority of Part D plans use 
actuarial equivalents of the standard benefit that have smaller 
deductibles. This commenter suggested that estimates of beneficiary 
cost-savings are overstated because they assume 100 percent deductibles 
for all patients.
    Response: We disagree with the commenter. Use of the standard 
benefit design does not inherently build any bias into the estimates. 
All basic plans must provide coverage that is actuarially equivalent to 
the standard benefit so the net effects on the modeling are at most 
modest.
    Comment: One commenter stated that the estimates suggest that the 
transition to a chargeback system will result in $170.9 billion in 
extra Federal spending that will provide a net benefit to 
manufacturers.
    Response: We agree with the commenter that several of the estimates 
included in the proposed rule estimated transfers from the Federal 
government to manufacturers. OACT estimated that there will be $196.1 
billion in additional Federal spending that will partly reduce 
individuals' out-of-pocket spending and will partly result in 
additional manufacturer revenue. However, other actuarial estimates 
based on strategic industry responses to this final rule range from $99 
billion in reduced federal spending (Part D plan sponsors increased 
formulary controls and obtained additional price concessions) to $140 
billion in increased Federal spending (if manufacturers reduced price 
concessions in Part D to offset list price decreases in other markets).
    Comment: One commenter noted that the estimates do not account for 
transfers related to the administrative burden necessary for a 
transition to a wholesaler chargeback system.
    Response: We agree in part with the commenter that a wholesaler-led 
chargeback system is a possible outcome of this rule and note that 
CBO's estimate does account for changes in premiums related to 
administrative burden, and CBO's estimates are well within the range of 
estimates provided in the Proposed Rule. OACT did not make any explicit 
assumptions with respect to potential additional administrative 
expenses in administering the wholesaler chargeback system.

C. Affected Entities

    Comment: One commenter suggested that the Department underestimated 
the number of entities (specifically, PBMs and pharmaceutical 
wholesalers) affected by the rule, underestimated the categories of 
entities affected by various categories of impacts, and offered 
suggestions for improving discussion of the impact on pharmacies.
    Response: We agree that wholesalers are affected by this rule but 
lack concrete data to estimate the number of affected wholesalers. The 
commenter suggested ten wholesalers are affected. To ensure we do not 
undercount, we will estimate that approximately twenty wholesalers are 
affected by the rule. The commenter suggests 66 PBMs, rather than the 
60 estimated in the Proposed Rule, are affected by the rule. We are 
unable to verify the source underlying this information and retain the 
estimate that approximately 60 PBMs are affected by the rule. The 
commenter suggested small pharmacies largely use 20 pharmacy services 
administration organizations (PSAOs) to provide administrative 
services, such as negotiation, on their behalf. As a result, we have 
adjusted estimates to assume that costs affecting pharmacies occur at 
each pharmacy and drug store firm and each of 40 PSAOs to ensure we do 
not undercount. We have also revised the analysis to reflect that a 
broader pool of entities may be affected by impacts in all categories 
discussed below.
    This rule will affect the operations of entities that are involved 
in the distribution and reimbursement of prescription drugs to Medicare 
Part D prescription drug benefit enrollees. According to the U.S. 
Census \71\ and other sources,\72\ 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

[[Page 76722]]

direct health and medical insurance carrier firms operating in the U.S. 
in 2015. In 2018, there were 44 PBMs listed in the Pharmacy Benefit 
Management Institute directory.\73\ 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. As described above, 
we estimate that the rule affects approximately 20 pharmaceutical 
wholesalers. Finally, a 2013 GAO study \74\ identifies 22 PSAOs, and 
notes there may be more in operation. We adjust this upward and 
estimate the rule affects 40 PSAOs. As noted previously, we assume that 
costs affecting pharmacies are incurred at each pharmacy and drug store 
firm and each PSAO.
---------------------------------------------------------------------------

    \71\ U.S. Census Bureau, Statistics of U.S. Businesses, 
available at https://www.census.gov/programs-surveys/susb.html.
    \72\ Qato, Zenk, Wilder, et al. PLoS One. 2017 Aug 16;12(8).
    \73\ https://www.pbmi.com/PBMI/Directory/Pharmacy_Benefit_Manager_Directory.aspx, last accessed July 13, 
2018.
    \74\ https://www.gao.gov/products/GAO-13-176.
---------------------------------------------------------------------------

    We note that this rule no longer amends the discount safe harbor to 
exclude rebates offered to Medicaid MCOs.
    Finally, the rule will affect Medicare prescription drug enrollees. 
CMS reports there were 44,491,003 enrollees with Part D prescription 
drug coverage in December 2018.\75\ 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 and the decision not to finalize inclusion of 
Medicaid MCOs in the amendment to the discount safe harbor.
---------------------------------------------------------------------------

    \75\ 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 rule using the May 2016 National Occupational Employment and 
Wage Estimates provided by the U.S. Bureau of Labor Statistics.\76\ 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 U.S. 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.
---------------------------------------------------------------------------

    \76\ https://www.bls.gov/oes/2016/may/oes_nat.htm.
    \77\ https://www.bls.gov/oes/2016/may/oes_nat.htm.

                        Table 1--Hourly Wages 77
------------------------------------------------------------------------
 
------------------------------------------------------------------------
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

    Comment: We received a number of comments on our assumptions 
associated with the costs of the Proposed Rule. Various commenters 
suggested the Department underestimated administrative burden generated 
by the Proposed Rule, and two commenters provided quantitative feedback 
on the burden estimates. In addition, a report discussing the Proposed 
Rule provides additional quantitative feedback on the cost 
estimates.\78\ Another commenter suggested information technology 
improvements would require thousands of hours of effort.
---------------------------------------------------------------------------

    \78\ See http://getmga.com/wp-content/uploads/2019/04/MGA-Report-on-Proposed-Rebate-Restriction-3.pdf.
---------------------------------------------------------------------------

    Response: The Department has substantially revised estimates of 
administrative burden in response to public comments. These changes 
take a number of pieces of information into consideration. First, a 
single commenter provided the most substantial quantitative feedback on 
the cost estimates in the Proposed Rule, with alternative estimates 
greatly exceeding those in the Proposed Rule. The commenter also 
sponsored the report discussed above; the comment and the report both 
suggest much more moderate changes to the cost analysis. This suggests 
a range of reasonable estimates. Second, this commenter represents a 
subset of entities affected by the rule. Other categories of entities 
expressed confidence that the rule can be implemented quickly, 
suggesting the rule is less burdensome for some entities than described 
in the most comprehensive quantitative comments, and reflecting the 
fact that the implementation may be more resource intensive for some 
entities than others. In addition to adjusting estimates in response to 
this feedback, we have provided ranges of impacts to reflect 
uncertainty regarding the rule's effects on administrative burden. 
Finally, we received feedback on the timing of impacts for Medicare 
enrollees who learn of and respond to the changes generated by this 
rule. However, the commenter did not provide any rationale to support 
this feedback, and as a result these estimates were not changed. More 
detail on specific changes can be found in the sections on affected 
entities above and the cost estimates below.
    In order to comply with the regulatory changes in this rule, 
affected businesses would first need to review the rule. The Department 
estimates that this would require an average of 5 to 15 hours, with a 
primary estimate of 10 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 $13.4 to $40.2 
million, with a primary estimate of $26.8 million, in the first year 
following publication of a final rule after adjusting for overhead and 
benefits.
    After reviewing the rule, businesses 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 50 to 150 hours, with a primary 
estimate of 100 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 years two through five, the 
Department estimates this would result in affected businesses spending 
an average of 5-15 hours, with a primary estimate of 10 hours, 
implementing policy changes, with 20 percent of time spent by lawyers 
and 80 percent of time spent by managers. As a result, using wage 
information provided in Table 1, the Department estimates costs of 
$133.9 to $401.7 million, with a primary estimate of $267.8 million, in 
the first year and $12.4 to $37.2 million, with a primary estimate of 
$24.8 million, in years two through five following publication of the 
final rule after adjusting for overhead and benefits.
    This rule imposes documentation and reporting requirements on PBMs 
for parties choosing to use the PBM services fee safe harbor. In 
particular, PBMs and pharmaceutical manufacturers must

[[Page 76723]]

have a written agreement signed by the parties 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. In addition, PBMs must 
disclose to the health plan and to the Secretary (upon request) their 
services rendered to each pharmaceutical manufacturer related to the 
PBM's arrangements to furnish pharmacy benefit management services to 
the health plan. In addition, PBMs also must disclose to the Secretary 
upon request the fees paid for such services. 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 25 to 75 times per 
year, with a primary estimate of 50 times each year. We estimate that 
these disclosures will require an average of 4 hours, with 50 percent 
of time spent by managers, 25 percent of time spent by attorneys, and 
25 percent of time spent by IT staff. As a result, using wage 
information provided in Table 1, the Department estimates costs of $0.7 
to $2.1 million, with a primary estimate of $1.4 million, in each year 
following publication of the final rule after adjusting for overhead 
and benefits.
    We expect that this rule will also lead businesses affected by the 
rule to update their IT systems for processing claims and payments. For 
these entities, the Department estimates that this will require an 
average of 40 to 120 hours, with a primary estimate of 80 hours, in the 
first year following publication of the final rule to make these 
changes. In years two through five, the Department estimates this this 
will require an average of 10 to 30 hours, with an average of 20 hours, 
in each of these years. We note that these estimates are in line with a 
comment suggesting thousands of hours are required for covered entities 
to make IT changes in response to this rule. Using wage information 
provided in Table 1, we estimate this will generate costs of $66.7 to 
$200.1 million, with a primary estimate of $133.4 million, in the first 
year following publication of the final rule, and $16.7 to $50.0 
million, with a primary estimate of $33.3 million, per year in years 
two through five following publication of the final rule after 
adjusting for overhead and benefits.
    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 percent 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.
    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

    Comment: A commenter suggested that the Proposed Rule does not 
clearly articulate the benefits of replacing rebates with up front 
price reductions, noting that it only qualitatively describes two 
possible benefits: Transparency, which the commenter did not find 
compelling, and adherence and outcomes, which the commenter suggested 
is not adequately explored. Multiple commenters suggested that the 
estimates do not account for Part D plan behavioral changes and do not 
account for offsetting savings in Medicare Parts A and B.
    Response: We have updated the analysis to reflect evidence on the 
rule's effects on behavioral changes and note that these estimates 
suggest the rule generates substantial benefits to the public.
    It is difficult to accurately quantify the benefits of this rule 
due to the complexity and uncertainty of stakeholder response. As such, 
the Department relied on qualitatively describing two potential 
benefits in the Proposed Rule.
    First 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 point-of-sale price reductions negotiated by PBMs would be 
reflected in the price paid by beneficiaries at the point of sale for 
those enrolled in health plans electing to use the 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,\79\ 
and copayment or coinsurance amounts can be a predictor of 
abandonment.\80\ 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 percent 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

[[Page 76724]]

group compared to the lower copayment group.\81\ The intent of this 
rule 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 beneficiaries pay more or less in out-of-pocket costs.
---------------------------------------------------------------------------

    \79\ 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.
    \80\ William H. Shrank, et al., The Epidemiology of 
Prescriptions Abandoned at the Pharmacy, 153 Annals Internal Med. 
633 (2010).
    \81\ 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. Feb. 2014.
---------------------------------------------------------------------------

    Furthermore, lower out-of-pocket costs may lead to fewer enrollees 
abandoning prescription drugs. This could result in beneficiaries 
filling more prescriptions, 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 rule would reduce abandonment across all drug markets or the 
resulting health benefits of higher adherence of prescription 
drugs.\82\
---------------------------------------------------------------------------

    \82\ Given data available at this time, it is not possible to 
calculate any particular impact from the COVID-19 public health 
emergency on these effects. However we note that the Medicare 
Current Beneficiary Survey (MCBS) COVID-19 Summer 2020 Supplement 
and preliminary 2019 MCBS data'', available at https://www.cms.gov/files/document/medicare-current-beneficiary-survey-covid-19-data-snapshot.pdf, indicates that only 8% of Medicare beneficiaries 
surveyed between June 10, 2020 and July 15, 2020 had forgone 
prescription drugs or medications during the COVID-19 public health 
emergency. We would expect such a figure to decrease by the time 
this rule is implemented in 2022. These points, considered alongside 
the expected increase in prescriptions from plans' relaxation of 
`refill too soon' edits, suggest there is no particular reason to 
believe the effects of this rule will be materially different as a 
result of the COVID-19 public health emergency.
---------------------------------------------------------------------------

    In addition, the reduction in abandonment could benefit pharmacies 
by reducing costs related to storage and tracking of abandoned 
prescriptions.

F. Transfers

    The provisions of this 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 the 
misalignment of incentives caused by concurrently increasing list 
prices and rebates. A significant, though difficult to quantify, 
potential transfer resulting from this rule 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.
Medicare Part D
    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 and a decline in net prices could result in a 
decrease in premiums. If manufacturers did not reduce their list 
prices, beneficiary and Federal spending on premiums might increase and 
beneficiary cost-sharing might not decrease.
    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 be 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.
    Under the Part D program, plan sponsors pay network pharmacies a 
negotiated rate 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 almost always 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 reduce 
beneficiary out-of-pocket spending for Part D covered drugs. If list 
prices did not decrease or point-of-sale chargebacks were not reflected 
in the prices paid at the point of sale, 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 OACT's work 
commissioned specifically for this rulemaking \83\ and two commissioned 
actuarial analyses independent of OACT.\84\ OACT ``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. We 
have not asked these organizations to revise the estimates they 
prepared before release of the Proposed Rule.
---------------------------------------------------------------------------

    \83\ CMS Office of the Actuary, Proposed Safe Harbor Regulation 
(Aug. 30, 2018). The OACT analysis is posted as supplementary 
material in the docket for this rule at regulations.gov.
    \84\ Wakely Consulting Group, Estimates of the Impact on 
Beneficiaries, CMS, and Drug Manufacturers in CY2020 of Eliminating 
Rebates for Reduced List Prices at Point-of-Sale for the Part D 
Program (Aug. 30, 2018); Milliman, Inc., ``Impact of Potential 
Changes to the Treatment of Manufacturer Rebates'' (Jan. 31, 2019). 
The Wakely and Milliman analyses were posted as supplementary 
material in the docket for this rule at regulations.gov. Certain 
discussions of the Milliman analysis, including some citations and 
figures, in the Proposed Rule contained unintentional errors that we 
have corrected throughout this section of the final rule. These 
corrections do not materially change the RIA.
---------------------------------------------------------------------------

    There are significant differences in the assumptions the respective 
actuaries used to estimate stakeholder behavior. OACT predicts that 
while some current rebates will be retained by manufacturers, future 
price increases will be smaller and fewer. Per OACT'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, OACT 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

[[Page 76725]]

decrease by $679.7 billion and coverage gap discount payments would 
decrease by $20.6 billion over the same period.\85\ Federal spending 
would increase by $34.8 billion, and beneficiary spending would 
decrease by $14.5 billion.\86\
---------------------------------------------------------------------------

    \86\ Milliman, Inc., Impact of Potential Changes to the 
Treatment of Manufacturer Rebates (Jan. 31, 2019). See 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.\87\
---------------------------------------------------------------------------

    \87\ 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. The Milliman and Wakely 
analyses assumed that all existing manufacturer rebates would be passed 
along as either list price reductions or discounted prices at the point 
of sale.
    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 2 and 4 
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 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 
rule at regulations.gov.
Effect on Beneficiary Spending
    This rule will likely impact beneficiary spending on the Part D 
program. 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 that would have occurred in 2020 was $1.0 to $1.6 billion. 
The projected decrease in beneficiary spending on premiums and cost 
sharing that would have occurred from 2020 to 2029 ranges from a 
decrease of $59.5 billion to an increase of $12.3 billion. Individuals 
who qualify for the 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 
percent 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 outpatient 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.
    OACT, Wakely and five of the six Milliman scenarios considered by 
the Department suggest total beneficiary cost-sharing would decrease 
and that the decrease in total beneficiary cost-sharing would offset 
any 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 reductions, or PBMs and plan 
sponsors changed formularies or obtained additional price concessions. 
However, the analyses that estimated higher premiums found that 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, what 
behavioral responses manufacturers and plans adopt in response to the 
rule, 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. Table 2 describes 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.)

[[Page 76726]]



                                Table 2--Beneficiary Impacts, per Beneficiary per Month, Estimated for CY 2020 to CY 2029
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                   Milliman, scenario   Milliman, scenario   Milliman, scenario   Milliman, scenario
                                     OACT                  1                    2                    3                    4                 Wakely
--------------------------------------------------------------------------------------------------------------------------------------------------------
Modeled Assumptions........   15 percent   100          100          More than    20 percent   100
                              of current Part D    percent of current   percent of current   100 percent of       of current Part D    percent of
                              rebates retained     Part D rebates are   rebates are          rebates are          rebates are          current
                              by manufacturer.     converted into       converted into       converted into       retained by          manufacturer
                              75 percent   list price           list price           list price           manufacturers        rebates are
                              of remaining         concessions          concessions.         concessions (same    (same agnosticism    converted into
                              amount applied to    (agnostic on list    Part D       agnosticism on how   on how applied).     reductions in
                              per-sponsor/PBM      price reductions     plans exert          applied).            80 percent   drug costs at the
                              negotiated           versus up front      greater formulary    Part D       of current Part D    point of sale.
                              discounts.           discounts).          control.             plans exert          rebates are          No
                              25 percent                                             greater formulary    converted to price   beneficiary or
                              of remainder                                                   control.             concessions (list    plan behavioral
                              applied as                                                                          price or             changes are
                              reduction to list                                                                   discounts).          assumed.
                              price.
                              No
                              beneficiary or
                              plan behavioral
                              changes are
                              assumed.
Premium \88\...............  +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%................  -10% \89\..........  -11%...............  +2%................  N/A.
--------------------------------------------------------------------------------------------------------------------------------------------------------

Premiums
---------------------------------------------------------------------------

    \88\ Since 2010, Medicare has published guidance defining de 
minimis variation in Medicare Part D plan bids. The de minimis 
amount was $2 for the 2020 plan year. Milliman scenarios 2 and 3 
estimate a de minimis level of variation from existing premium 
estimates.
    \89\ Corrected from the Proposed Rule.
---------------------------------------------------------------------------

    As explained in the Proposed Rule, all analyses that assumed no 
behavioral changes that would reduce net prices below current net 
prices would have seen Part D premiums increase in 2020 and beyond. The 
estimated increase in 2020 Part D premiums ranged from $3.20 per 
beneficiary per month to $5.64 per beneficiary per month (PBPM).
    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 percent to 4 percent over 
the ten-year period, a de minimis level of variation, rather than 6 
percent to 21 percent without such 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 that would have occurred in 
2020 was estimated to be -$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 
reductions in price. 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 OACT estimated the annual changes in benefit 
parameters as a result of the proposed rule; this analysis has not been 
updated to reflect the change in effective date for reasons discussed 
above. See Table 3 below.

                                   Table 3--Part D Standard Benefit Design Parameters With and Without This 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 \90\...................           9,296           9,874          10,470          11,126  .......          15,515
Under 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 76727]]

    Under OACT'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.
---------------------------------------------------------------------------

    \90\ 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.
---------------------------------------------------------------------------

    Medicare beneficiaries with lower levels of drug spending were 
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 spending levels to more closely match net spending 
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.
    OACT also found 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 the second 
year 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 percent of the benefit. The break-even point would be $3.20 
per beneficiary 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 percent 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 percent 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 percent 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 percent.
    Taken together, the actuarial analyses project reductions in total 
cost-sharing would 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.
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. As explained in the Proposed Rule, the projected 
increase in 2020 Federal spending ranged from $2.8 billion to $13.5 
billion. The projected increase in Federal spending from 2020 to 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 to 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.
    Table 4 describes the impacts on Federal spending predicted by each 
analysis and assumption at the proposed rule stage.

                                       Table 4--Government Spending Impacts, as Estimated for CY 2020 Through 2029
                                                                       [$Billions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                   Milliman, scenario   Milliman, scenario   Milliman, scenario   Milliman, scenario
                                     OACT                  1                    2                    3                    4                 Wakely
--------------------------------------------------------------------------------------------------------------------------------------------------------
Modeled Assumptions........   15 percent   100          100          More than    20 percent   100
                              of current Part D    percent of current   percent of current   100 percent of       of current Part D    percent of
                              rebates retained     Part D rebates are   rebates are          rebates are          rebates are          current Part D
                              by manufacturer.     converted into       converted into       converted into       retained by          rebates converted
                              75 percent   list price           list price           list price           manufacturers        to up front
                              of remaining         concessions          concessions.         concessions (same    (same agnosticism    discounts.
                              amount applied to    (agnostic on list    Part D       agnosticism on how   on how applied).     No
                              per-sponsor/PBM      price reductions     plans exert          applied).            80 percent   beneficiary or
                              negotiated           versus up front      greater formulary    Part D       of current Part D    plan behavioral
                              discounts.           discounts).          control.             plans exert          rebates are          changes are
                              25 percent                                             greater formulary    converted to price   assumed.
                              of remainder                                                   control.             concessions (list
                              applied as                                                                          price or
                              reduction to list                                                                   discounts).
                              price.
                              No
                              beneficiary or
                              plan behavioral
                              changes are
                              assumed.

[[Page 76728]]

 
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 percent of expected costs. Medicare program payments for direct 
subsidies would have increased by an estimated $14.5 to $20.1 billion 
(128 percent to 154 percent) in 2020 and $174.7 to $258.7 billion (119 
percent to 199 percent) from 2020 to 2029. The increase in program 
payments 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.
    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 to 2029 could have increased 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 
4 for magnitude and percent changes.
Reinsurance Spending
    Transforming rebates into upfront reductions in price may result in 
fewer beneficiaries reaching catastrophic coverage. This would benefit 
the government because the government bears the majority of the cost 
(80 percent) for beneficiaries who reach catastrophic levels of drug 
spending. As such, all analyses suggested Medicare payments for 
reinsurance would have decreased by an estimated $3.0 to $7.9 billion 
(6 percent to 17 percent) in 2020 and 3 percent to 18 percent from 2020 
to 2029. In the catastrophic coverage phase, Medicare makes payments to 
Part D plans for 80 percent of gross drug costs incurred once the 
beneficiary reaches the out-of-pocket threshold. As discussed above, 
the effect of this 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 to 2029 could have decreased 
by $139.1 billion if Part D plan sponsors increased formulary controls, 
decreased by $163.2 billion if Part D plan sponsors increased formulary 
controls and obtained additional price concessions, and decreased 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 LIS enrollees would on net have decreased by 
an estimated $0.9 to $5.5 billion in 2020 and $42.3 to $116.6 billion 
from 2020 to 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 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 were estimated to be $57.7 to 
$118.5 billion over ten years.
    Analyses that contemplated behavior changes predicted Federal 
spending on low income cost-sharing subsidies from 2020 to 2029 could 
have decreased by $118 billion if Part D plan sponsors increased 
formulary controls, decreased by $119 billion if Part D plan sponsors 
increased formulary controls and obtained additional price concessions, 
and decreased by $71 billion if manufacturers reduced price concessions 
in Part D to offset list price decreases in other markets.
Other Stakeholder Impacts
    Based on the provisions of this rulemaking, the actuarial estimates 
we received estimated that drug manufacturers would have seen 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. Milliman's Scenario 1 analysis also 
estimated an increase in government costs of $34.8 billion over ten 
years, with beneficiary costs decreasing by $14.5 billion.\91\ 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 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.
---------------------------------------------------------------------------

    \91\ Milliman, Inc., Impact of Potential Changes to the 
Treatment of Manufacturer Rebates, (Jan. 31, 2019). Appendix A1, 
Scenario 1A, page 1.
---------------------------------------------------------------------------

    Comment: A commenter suggested that the Proposed Rule did not

[[Page 76729]]

adequately account for entities in the pharmaceutical supply chain, 
Federal purchases, the 340B program, or the uninsured. The commenter 
also suggested that the Proposed Rule did not account for existing 
discount programs such as GoodRx when estimating savings for the 
uninsured.
    Response: The impact on the uninsured is implicitly included in our 
Household estimates. We did not explicitly model the effects for those 
in the pharmaceutical supply chain, Federal direct purchases, or the 
340B program.
    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 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.
Summary of Part D Impacts
    This rule will 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 rule estimated that the amount saved by reducing 
cost-sharing exceeds the cost of any increase in premiums for 
beneficiaries overall. However, more beneficiaries would pay more for 
premiums, if premiums rise, 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 rule in the absence of information about strategic behavior 
changes by manufacturers and Part D plan sponsors in response to this 
rule. In scenarios without behavioral changes, enrolled beneficiaries 
might have seen premiums increase in 2020 (had the rule become 
effective then) by $3.15 PBPM to $5.64 PBPM (8 percent to 19 percent) 
but average cost-sharing under their benefits would have declined by 
$4.85 PBPM to $8.01 PBPM (10 percent to 14 percent).\92\ However, the 
revised effective date of January 1, 2022 for the amendment to Sec.  
1001.952(h)(5) of the discount safe harbor will provide manufacturers 
and plans with additional time to conduct negotiations and adjust any 
business practices as necessary based on the amended safe harbor. 
Premium and cost-sharing estimates were calculated on a different basis 
by each firm. OACT 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.
---------------------------------------------------------------------------

    \92\ Wakely Consulting Group, Estimate of the Impact on 
Beneficiaries, CMS, and Drug Manufacturers in CY2020 of Eliminating 
Rebates for Reduced List Prices at Point-of Sale for the Part D 
Program (Aug. 30, 2018); Milliman, Inc., Impact of Potential Changes 
to the Treatment of Manufacturer Rebates'' (Jan. 31, 2019) Scenario 
1.
---------------------------------------------------------------------------

    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 3 percent to 14 percent in the 
2020 estimates.
    If manufacturer and plan behavior caused net prices to decrease in 
response to this rule, enrolled beneficiaries might have seen premiums 
increase 12 percent ($2.70 to $2.77 PBPM) in the first year with a very 
accelerated implementation timeline, and average cost sharing under 
their benefits may have declined by 12 percent to 13 percent ($5.22 to 
$5.44 PBPM) in 2020. Total government payments to plans would have 
increased 1 percent to 3 percent, as the net result of increased 
payments for direct subsidies (144 percent to 149 percent) and low-
income premium subsidies (12 percent to 14 percent) and decreased 
payments for low income cost-sharing (-18 percent to -20 percent) and 
reinsurance (-16 percent to -17 percent).
    If manufacturer and plan behavior caused Part D net prices to 
increase in response to this rule, enrolled beneficiaries would have 
seen published premiums increase 22 percent ($5.11) and average cost-
sharing under their benefits might have declined by 9 percent to 14 
percent (-$5.22 to -$8.01). Government payments to plans for direct 
subsidies and subsidies for low income enrollees' premiums and cost-
sharing would have increased and reinsurance payments would have 
decreased.
Medicaid and State Impacts
    OACT estimated that the rule would result in estimated aggregate 
savings of $4.0 billion for states over ten years, as follows.\93\ The 
impact of the rule on Medicaid prescription drug rebates, MCO premiums, 
and prescription drug prices could have resulted 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. OACT also 
estimated that state governments would have saved $4.3 billion between 
2020 and 2029 through lower prescription drug prices for state 
employees. These estimates are at the national level; Medicaid costs, 
state employee savings, and the net of the two may vary among states.
---------------------------------------------------------------------------

    \93\ CMS Office of the Actuary. ``Proposed Safe Harbor 
Regulation.'' August 30, 2018. The OACT analysis was posted as 
supplementary material in the docket for this rule at 
regulations.gov in February 2019. The estimated impacts on MCO 
premiums in the OACT analysis do not apply to the Final Rule because 
we are not finalizing the proposal to remove the existing safe 
harbor for Medicaid MCOs. Most of the estimated Medicaid costs in 
the OACT analysis, however, are associated with the impacts on 
rebates and drug prices rather than the impacts on MCO premiums from 
the removal of MCO from the existing safe harbor.
---------------------------------------------------------------------------

G. Accounting Statement

----------------------------------------------------------------------------------------------------------------
                                          Present value over 5 years by       Annualized value over 5 years by
                                        discount rate  (millions of 2016      discount rate  (millions of 2016
                                                    dollars)                              dollars)
                                     ---------------------------------------------------------------------------
                                          3 Percent          7 Percent          3 Percent          7 Percent
----------------------------------------------------------------------------------------------------------------
BENEFITS:
    Non-quantified Benefits.....................................................................................
    Improved information for consumers regarding the characteristics of their health insurance plans............
----------------------------------------------------------------------------------------------------------------

[[Page 76730]]

 
COSTS:
    Quantified Costs................              1,591              1,448                347                353
----------------------------------------------------------------------------------------------------------------


------------------------------------------------------------------------
                                                           Transfers
                                                        ($billions)  10
                       Category                            years (as
                                                       estimated for  CY
                                                           2020-2029)
------------------------------------------------------------------------
Decreased Medicare beneficiary spending..............     -25.2 to -59.5
Decreased employee premium and OOP spending..........              -11.7
Decreased beneficiary premium and cost-sharing            -14.5 to -25.2
 spending............................................
Changes in Federal spending..........................     -99.6 to 196.1
Decreased State spending (OACT only).................               -4.0
Decreased manufacturer coverage gap discount payments         17 to 39.8
------------------------------------------------------------------------

H. Regulatory Alternatives

    One 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.
    This final rule adopts a delayed effective date for the amendments 
to Sec.  1001.952(h)(5) of the discount safe harbor consistent with an 
alternate described in the proposed rule.
    Another 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 proposed rule proposing Contract 
Year 2019 Part C & D policy and technical changes,\94\ 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.
---------------------------------------------------------------------------

    \94\ 82 FR 56336, 56419-28 (Nov. 28, 2017).
---------------------------------------------------------------------------

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 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. At the 
proposed rule stage, the Department calculated the costs of the changes 
per affected business between 2020 and 2024. The estimated average 
costs of the rule per business according to this estimate peaked in 
2020 at approximately $18,900 and are approximately $2,800 in 
subsequent years. The Department notes that relatively large entities 
are likely to experience proportionally higher costs and that costs 
will occur at a later point in time than if the rule had been finalized 
with a 2020 effective date. The U.S. Small Business Administration 
establishes size standards that define a small entity. For entities 
with standards based on revenue, they ranged from $17.5 million to 
$38.5 million in 2017. Since the estimated average costs of the rule 
are a small fraction of these thresholds, the Department anticipates 
that the rule would not have a significant economic impact on a 
substantial number of small entities.

VI. 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 
manufacturers 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.

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.

    Accordingly, 42 CFR part 1001 is amended as set forth below:

PART 1001--PROGRAM INTEGRITY--MEDICARE AND STATE HEALTH CARE 
PROGRAMS

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:

[[Page 76731]]

0
a. Effective January 1, 2022, by revising paragraphs (h)(5)(vi) and 
(vii) and adding paragraph (h)(5)(viii); and
0
b. Effective January 29, 2021, by adding paragraphs (h)(6) through (9), 
(cc), and (dd).
    The revisions and additions 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 in connection 
with the sale or purchase of a prescription pharmaceutical product from 
a manufacturer to a plan sponsor under Medicare Part D either directly 
to the plan sponsor under Medicare Part D, or indirectly through a 
pharmacy benefit manager acting under contract with a plan sponsor 
under Medicare Part D, 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 benefit 
management on behalf of a health plan that manages prescription drug 
coverage.
    (9) For purposes of this paragraph (h), a prescription 
pharmaceutical product means either a drug or biological product as 
those terms are described in Social Security Act section 1927(k)(2)(A), 
(B), and (C).
* * * * *
    (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 price from a 
manufacturer to a plan sponsor under Medicare Part D or a Medicaid 
Managed Care Organization 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 following 
conditions are met with regard to that reduction in price:
    (i) The manufacturer and the plan sponsor under Medicare Part D, a 
Medicaid MCO, or the PBM acting under contract with either, set the 
reduction in price in advance, in writing, by the time of the first 
purchase of the product at that reduced price by the plan sponsor or 
Medicaid MCO on behalf of an enrollee;
    (ii) The reduction in price does not involve a rebate unless the 
full value of the reduction in price is provided to the dispensing 
pharmacy by the manufacturer, directly or indirectly, through a point-
of-sale chargeback or series of point-of-sale chargebacks, or is 
required by law; and
    (iii) The reduction in price must be completely reflected in the 
price of the prescription pharmaceutical product at the time the 
pharmacy dispenses it to the beneficiary.
    (2)(i) For purposes of this paragraph (cc), the terms manufacturer, 
pharmacy benefit manager or PBM, prescription pharmaceutical product, 
and rebate have the meanings ascribed to them in paragraph (h) of this 
section.
    (ii) For purposes of this paragraph (cc), a point-of-sale 
chargeback is a payment by a manufacturer made directly or indirectly 
(through a PBM or other entity) to a dispensing pharmacy equal to the 
reduction in 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.
    (iii) For purposes of this paragraph (cc), the term Medicaid 
Managed Care Organization or Medicaid MCO carries the meaning ascribed 
to it in section 1903(m) of the Social Security Act.
    (dd) PBM service fees. (1) 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:
    (i) The PBM has a written agreement with the pharmaceutical 
manufacturer, signed by the parties, 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.
    (ii) The services performed under the agreement do not involve the 
counseling or promotion of a business arrangement or other activity 
that violates any State or Federal law.
    (iii) The compensation paid to the PBM is:
    (A) Is consistent with fair market value in an arm's-length 
transaction;
    (B) Is a fixed payment, not based on a percentage of sales; and
    (C) Is not 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.
    (iv) The PBM discloses in writing to each health plan with which it 
contracts at least annually the services rendered to each 
pharmaceutical manufacturer related to the PBM's arrangements to 
furnish pharmacy benefit management services to the health plan, 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 and the 
fees paid for such services.
    (2) 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: November 16, 2020.
Christi A. Grimm,
Principal Deputy Inspector General.
    Dated: November 17, 2020.
Alex M. Azar II,
Secretary.
[FR Doc. 2020-25841 Filed 11-20-20; 4:15 pm]
BILLING CODE 4152-01-P