HHS Issues Final Rule on Drug Company Rebates

Drug makers encouraged to provide discounts directly to consumers

Stephen Miller, CEBS By Stephen Miller, CEBS December 1, 2020
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Man discussing price of drug with pharmacist.

On Nov. 20, the Department of Health and Human Services (HHS) issued a final rule intended to encourage drug manufacturers to pass prescription medication rebates to consumers at the pharmacy counter instead of to pharmacy benefit managers (PBMs) that act as intermediaries between health plans and pharmacies.

The rule is scheduled to take effect in January 2022. While it applies to privately administered Medicare Part D prescription drug plans, that market is so large that pricing policy changes by pharmaceutical firms could spill over to the Affordable Care Act marketplace and to employer-sponsored health plans, drug industry analysts said after the proposed rule was issued.

In 2020, 46.5 million Medicare beneficiaries were enrolled in Medicare Part D plans, including 1.3 million beneficiaries estimated to have drug coverage through employer-sponsored retiree plans where the employer receives a subsidy from the federal government, according to the nonprofit Kaiser Family Foundation. The new rule will have a direct effect on these plans, if its implementation isn't blocked by legal challenges by the PBM industry.

When contracting with PBMs, large employers have begun negotiating that drug company rebates be passed along to consumers as discounts at the point of sale. The new rule could add momentum to these efforts.

Along with the final rebate rule, HHS announced a drug payment model through the Centers for Medicare & Medicaid Services that aims to lower Medicare Part B payments for certain drugs to the lowest price for similar countries.

The Rebate Debate

As third-party administrators of prescription drug programs, PBMs develop and maintain the formularies that list drugs covered by the plan and the amount of coverage provided (often specified by tiers for generic, formulary-brand, nonformulary-brand and specialty drugs), contract with pharmacies, negotiate discounts and rebates with drug manufacturers, and process and pay prescription drug claims.

Advocates of greater price transparency for prescription drugs have argued that drug makers pay higher rebates to PBMs for expensive medications, giving PBMs an incentive to include higher-cost medications on plan formularies when less-expensive alternatives are available.

To counter this incentive to favor higher-cost drugs, the new rule will:

  • Exclude the prescription drug rebates that manufacturers pay to PBMs working with Medicare Part D plans from safe harbor protection against legal actions under the federal Anti-Kickback Statute. The statute prohibits payments in exchange for services under a federal health care program.
  • Create a new safe harbor for prescription drug discounts offered directly to patients under these programs.

According to an HHS fact sheet posted Nov. 20, "point-of-sale discounts will lower out-of-pocket costs for patients using drugs with high prices and high rebates, particularly during the deductible or coinsurance phases of their benefits."

"Rebates have consistently increased as PBMs have become more and more sophisticated and as [their] negotiations with pharmaceutical companies have intensified," HHS Secretary Alex Azar said in a released statement. "The rule will make beneficiary medications more affordable and lead to lower cost sharing for patients as chargebacks will decrease the costs they ultimately pay at the pharmacy counter by up to 30 percent of the drug's list price."

The final rule was criticized by some policy analysts. According to Bloomberg News health reporter Jacquie Lee, "The final rebate rule favors pharmaceutical companies whose leaders say ditching current rebates will let them lower drug prices. There's no guarantee that would happen, however."

In the view of Rachel Sachs, an associate professor of law at Washington University, "HHS is correct that, for too many patients, the problem of high drug prices is one that urgently needs to be solved. But patients deserve better than this rushed lame-duck process," which could be subject to legal challenge, she wrote on the Health Affairs blog.

Related SHRM Articles:

Does ERISA Pre-Empt State Laws on Prescription Drug Costs?, SHRM Online, October 2020

President Signs Executive Orders Aimed at Lowering Drug Prices, SHRM Online, July 2020

HHS Proposes Targeting PBM Rebates for Prescription Drugs, SHRM Online, February 2019

Negotiating Price Transparency with PBMs Pays Off, SHRM Online, January 2017


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