Trump Administration revives rebate safe harbor rule in late effort to reform drug pricing

On November 20, 2020, the U.S. Department of Health and Human Services (HHS) Office of Inspector General (OIG) finalized its previously abandoned 2019 proposal to exclude certain rebates paid by drug manufacturers from the discount safe harbor to the federal anti-kickback statute (AKS). The final rule, entitled “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” [hereinafter “OIG Rebate Rule”], is the first update to the AKS discount safe harbor since the establishment of the Medicare Part D program.

The OIG Rebate Rule implements part of the Trump Administration’s American Patients First blueprint for lowering prescription drug prices and patient out-of-pocket costs, as well as President Trump’s July 24, 2020 Executive Order, “Lowering Prices for Patients by Eliminating Kickbacks to Middleman,” which directed the HHS Secretary to complete the rulemaking process that was commenced with the proposed rule, but shelved in July 2019 due to concerns about the potential for increased costs. According to OIG, the purpose of the rule is “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.”

While the outgoing administration believes the OIG Rebate Rule will fundamentally alter how drugs are priced and paid for in the U.S., the anti-kickback statute is, at best, a blunt instrument for implementing drug pricing reform, and so it remains to be seen how significant the rule will prove to be, assuming it's retained by the incoming administration. [1]

Three new AKS safe harbor provisions

The OIG Rebate Rule finalizes the changes to the AKS safe harbors that were proposed in February 2019, with only a few modest adjustments. (Our summary of the 2019 proposed rule is available here, and notable changes from the proposed rule are discussed in the following section.) There are three components of the final OIG Rebate Rule:

  1. Elimination of discount safe harbor protection for Part D rebates (42 § CFR 1001.952(h))

The rule revises the AKS discount safe harbor to expressly exclude manufacturer rebates paid to Medicare Part D plans, either directly or through a pharmacy benefits manager (PBM). The rationale for this change is outlined in a HHS fact sheet accompanying the final rule, which criticizes the current “rebate-driven system” for prescription drugs for rewarding “ever-increasing list prices” (on which rebates typically are based), enriching PBMs, and driving up patient out-of-pocket costs (which also are usually calculated on the basis of list price). By eliminating safe harbor protection for Part D rebates, the administration hopes to remove them as a barrier to lowering drug costs. Notably, to give manufacturers, plans, and PBMs sufficient time to restructure their existing rebate arrangements, this aspect of the rule is not effective until January 1, 2022.

OIG did not finalize its proposal to also exclude rebates offered to Medicaid managed care organizations (MCOs) from the discount safe harbor. The final rule acknowledges that beneficiaries of Medicaid MCOs typically have nominal copayments for prescription drugs, so that eliminating discount safe harbor protection for Medicaid MCO rebates would have minimal, if any, effect on the out-of-pocket amounts paid by Medicaid beneficiaries. OIG also did not expand the exclusion to other federal health care programs, such as the Department of Veterans Affairs (VA), the Department of Defense, the Indian Health Service, or Medicare Part B fee-for-service, noting that the amendment to the discount safe harbor “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.” In addition, the final rule does not change existing discount safe harbor protections for drug discounts offered to other entities, such as wholesalers, hospitals, physicians, and pharmacies.

  1. New safe harbor for point-of-sale price reductions (42 § CFR § 1001.952(cc))

To take the place of rebates, the final rule creates a new safe harbor protecting drug discounts that: (a) are set in advance, in writing with a Part D plan or Medicaid MCO; (b) do not involve rebates (although “point-of-sale chargebacks” may be used to provide the full value of the price reduction to pharmacies); and (c) are completely reflected in the price of the drug at the time the pharmacy dispenses it to the beneficiary.[2] OIG offers a few important clarifications regarding the scope of the new point-of-sale price reductions safe harbor.

  • Discounts tied to formulary placement are permitted. OIG clarifies in the final rule that price reductions contingent on formulary placement can be protected under the new safe harbor for point-of-sale price reductions, despite suggestions to the contrary in the proposed rule. This is an important development, as it was difficult to see how price negotiations between manufacturers and plans could work without the ability to tie discounts to formulary coverage. In addition, OIG further backtracked from statements in the proposed rule indicating that current rebate arrangements contingent on formulary placement were not protected by the discount safe harbor, and confirms such arrangements would be protected “if all safe harbor conditions are met.”

  • Bundled pricing arrangements are permitted. OIG clarified that unlike the discount safe harbor, under the new point-of-sale safe harbor, discounts could be made contingent on bundled sales arrangements —that is, manufacturers will be able to make a discount on one drug contingent on formulary placement of another drug. Such arrangements still would need to be analyzed for compliance with the antitrust laws, however. OIG cautions 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 notes that some types of bundling arrangements (e.g., an arrangement that might be contingent on the 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.

  • No protection for value-based arrangements. Commenters on the proposed rule had noted that value-based arrangements would not fit neatly into the new safe harbor for point-of-sale price reductions because they typically rely on gathering outcomes data and making payments after-the-fact. Although OIG expresses support for value-based arrangements that have the potential to improve quality and lower overall costs, it declines to preserve protection for such arrangements with Part D plans under the discount safe harbor, but instead suggests they could qualify under other safe harbors, such as the personal services or warranties safe harbors.

Commenters questioned whether the new safe harbor will actually incentivize point-of-sale reductions in price, which commenters stated have been offered by PBMs for some time in the commercial market without widespread adoption. Beyond the uncertainty of whether industry stakeholders will adopt point-of-sale reduction in price, the OIG Rebate Rule also left open many questions about how these reductions in price will be administered. OIG indicated that it had coordinated with CMS, but did not substantively respond to comments raising practical questions about the chargeback administration process.

  1. New safe harbor for PBM service fees (42 § CFR 1001.952(dd))

The rule also creates a new safe harbor for payments by a manufacturer to a PBM for services rendered to the manufacturer that are “related to” the pharmacy benefit management services that the PBM furnishes to health plans, as long as: (a) there is a written agreement specifying the services and compensation; (b) the services performed under the agreement do not involve the counseling or promotion of an unlawful business arrangement or activity; (c) the compensation paid to the PBM is consistent with fair market value, is a fixed payment not based on a percentage of sales, and does not take into account the volume or value of any referrals or federal health program business generated between the parties; and (d) the PBM discloses to each health plan with which it contracts at least annually any services the PBM performs for manufacturers and the services and associated fees to the HHS Secretary upon request.

  • Safe harbor applies only to fees for “legitimate” services. OIG acknowledges concerns raised by commenters about the use of this safe harbor to convert costs and lost revenue to service fees. Accordingly, the final rule revises the proposed regulatory text to clarify that the safe harbor applies only to “legitimate” services and “does not protect arrangements between manufacturers and PBMs for services that are not necessary, are worthless, or are duplicative.” As an example, OIG suggests that this safe harbor could protect manufacturer payments for PBM services that depend on or use data gathered by PBMs from their health plan customers, such as providing data to help manufacturers prevent duplicate discounts on 340B claims. In contrast, the new safe harbor would not protect manufacturer payments for what OIG apparently considers to be the “core functions” that PBMs provide to health plans themselves, such as contracting with a network of pharmacies, negotiating rebate arrangements, or developing and managing formularies.

  • PBMs still may rely on the group purchasing organization (GPO) safe harbor. In what may be the most notable clarification in the final rule, OIG states that the new safe harbor for PBM service fees does not prevent a PBM from continuing to rely on the GPO safe harbor (42 CFR § 1001.952(j)) to protect the administrative fees historically received from drug manufacturers, provided all the conditions of the GPO safe harbor are met. We expect at least some PBMs will seize on this point to recast themselves as GPOs and still claim administrative fees as a percentage of drug revenues, rather than rely on the new PBM service fee safe harbor.

Other key points

The OIG Rebate Rule does not fully take effect until January 1, 2022, leaving open the possibility of reconsideration by the Biden Administration; initial press reports indicate the incoming administration may have some of the same concerns about potential downstream effects on Medicare premiums that caused the Trump Administration to hit pause on the rule last year.

  • Impact on commercial market. OIG acknowledges that Congressional action is needed to extend the rule’s elimination of rebates to private health plans. Because the anti-kickback statute’s scope is limited to arrangements with federal health care programs, and not to private health plans in the employer-sponsored and individually purchased insurance markets, the OIG Rebate Rule is unlikely to have a significant impact on the private insurance market in the near term. In an attempt to encourage the elimination of rebates for private health plans, OIG reiterates its long-standing concerns about “swapping” arrangements (i.e., arrangements in which rebates to commercial plans are used as an inducement for federal program business by, for example, conditioning a private plan rebate on a product's favorable formulary placement across all plans, including Part D plans), which can constitute a potential violation of the anti-kickback statute.

  • Secretary Azar asserts the rule will not increase costs. When the rebate rule was initially proposed in February 2019, it was controversial and was put on hold by the Trump Administration because actuarial analyses accompanying the rule projected that manufacturer point-of-sale discounts would not fully match the amount of PBM rebates, which would result in an increase in net drug costs and Part D premiums. Given this concern, the President's July 24, 2020 Executive Order reviving the rebate rule directed the HHS Secretary to confirm that it would not increase federal spending, Medicare beneficiary premiums, or patients' total out-of-pocket costs. In a statement accompanying the final rule, Secretary Azar provided the requisite confirmation by pointing to the more favorable of the previous actuarial analyses and his own “two decades of deep experience in pharmaceutical pricing, payment, and reimbursement,” including his time as a senior executive at Eli Lilly, to assert that plans “will go to great lengths to avoid increasing Part D beneficiary premiums and placing themselves at a competitive disadvantage.”

  • Legal challenges are possible. Commenters raised a number of legal questions regarding the proposals, which included, among other things, procedural objections regarding whether the proposals were explained with sufficient detail to provide meaningful opportunity to comment, conflicts between the proposals and existing federal laws (particularly in relation to the administration of the Medicare Part D program), inconsistency with prior HHS guidance, and questions regarding the Secretary’s authority to implement certain aspects of the rule. In addition, while the Trump Administration asserts that the proposed rule was not withdrawn, certain public statements from the administration suggest otherwise, which arguably may have required OIG to provide an additional public comment period, rather than proceeding to a final rule.

If you have questions about the OIG Rebate Rule and its impact on your business, please contact any of the authors of this alert or the Hogan Lovells lawyer with whom you regularly work.


Authored by Ron Wisor, Melissa Bianchi, Eliza Andonova, Thomas Beimers, Helen Trilling, David Thiess, Maria Malas, and Mahmud Brifkani


[1] The OIG Rebate Rule was issued on the same day as two other final rules intended to accelerate the transition to value-based care (Value-Based Rules), which finalize changes to the AKS and to the physician self-referral (Stark) law, including important changes to the warranty and personal services safe harbors. We will be following separately with alerts on the AKS and Stark Value-Based Rules.

[2] Note that OIG does not appear to contemplate that the required reduction in price to the beneficiary would apply where a beneficiary is charged a copayment, but instead only where the beneficiary’s cost-sharing is in the form of coinsurance or is in the deductible phase.

Ronald Wisor
Washington, D.C.
Melissa Bianchi
Washington, D.C.
Eliza Andonova
Washington, D.C.
Thomas Beimers
Washington, D.C.
Helen Trilling
Senior Counsel
Washington, D.C.
Mahmud Brifkani
Senior Associate
Washington, D.C.


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