Rebate safe harbor proposed rule – Impact limited to Medicare and Medicaid MCOs; Commercial Rx sales likely unaffected

Richard
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SEE END OF THIS REPORT FOR IMPORTANT DISCLOSURES

Richard Evans / Scott Hinds

203.901.1631 /.1632

revans@ / shinds@ssrllc.com

@SSRHealth

February 6, 2019

 

Rebate safe harbor proposed rule – Impact limited to Medicare and Medicaid MCOs; Commercial Rx sales likely unaffected

  • HHS’ proposed Anti-Kickback Statute (AKS) safe harbor rule is limited to Medicare and Medicaid MCOs, who account for about 36 percent of US Rx sales. Sales to the rest of the market (mainly to commercial plan sponsors) arguably are unaffected, unless commercial sponsors voluntarily adopt the rule’s provisions
  • Commercial plan sponsors could achieve much of the proposed rule’s aims in commercial markets by simply modifying their agreements with formulary managers, but this isn’t happening. The rate limit isn’t a lack of means, it’s a lack of motive
  • Because we believe commercial plan sponsors are unlikely to adopt the proposed rule’s provisions voluntarily, the rule’s potential impacts on list price are unlikely to materialize, and the rule’s effects on discounts, rebates, and fees paid among manufacturers, formulary managers, and plan sponsors is likely to be limited to the Medicare and Medicaid managed care Rx markets

On January 31, HHS released its proposed rule modifying the safe harbor provisions of the Anti-Kickback Statute (AKS). The aim of the proposal is perhaps best summarized by HHS’ own statement: “The intent of this rule is to eliminate rebates from manufacturers to PBMs, and replace them with discounts provided to beneficiaries at the point of sale.”[1] We believe this aim is reasonably likely to be achieved in the narrow context of Medicare and Medicaid managed care (where compliance with the rule would be required by law), but not in the broader commercial market (where compliance generally is optional[2]). Commercial plan sponsors presently have the means to achieve much of what the proposed federal rule seeks to achieve, but most commercial sponsors haven’t gone to the trouble – which implies a lack of motive. And, if commercial plan sponsors ultimately choose to pursue the aims of the proposed federal rule, we believe they would be more likely to do so in the context of their freely negotiated agreements with formulary managers, rather than choosing to adopt a federal framework over which they would ultimately have little control

Technically speaking …

The proposed rule eliminates the safe harbor that currently protects negotiated[3] rebates between drug manufacturers and either Medicare or Medicaid MCOs, and also eliminates the safe harbor that protects certain fees – specifically those defined as a percentage of drug price – paid by manufacturers to formulary managers (e.g. PBMs) that are administering Medicare or Medicaid plans. In place of these eliminated safe harbors, the proposed rule establishes a new safe harbor for discounts whose amounts are determined at the time of sale, and which are applied to prices paid by customers at the point of sale; and establishes a new safe harbor for fixed fee amounts paid by manufacturers to formulary managers for services provided

Practically speaking …

Under the current rule, drug manufacturers pay rebates to formulary managers after the fact, with rebate amounts being based on post-sale assessments of volume and market share[4]. Rebate amounts often are skimmed by formulary managers, with the balance passed on to plan sponsors. Plan sponsors typically use rebates to offset plan costs, i.e. to reduce premiums, rather than to reduce specific patients’ costs at the point of sale. And, manufacturers pay fees to formulary managers, which generally are calculated as a percentage of dollar sales

Under the proposed rule, manufacturers would set discounts from list price in advance of the sale, and discounts would be applied to patients’ benefit[5] at the point of sale, rather than being used exclusively to offset overall plan costs. Manufacturers’ fees to formulary managers could no longer be based on a percentage of dollar sales; and, the allowed fixed dollar fees would have to be tied to formulary managers’ costs of providing specific services to manufacturers

The proposed rule potentially mitigates, but does not eliminate, upward list price pressure

Most importantly, the proposed rule only deals with Medicare and Medicaid MCO drug spending (about 36 percent of total gross US Rx spend), and it’s a huge leap to assume that commercial plan sponsors (who control the balance of drug spend) will adopt the new rule. If the commercial sponsors don’t come over the rule should have little or no impact on list prices, since all the list pricing pressures theoretically addressed by the rule would still be in play in the remaining two-thirds of the market

Because formulary managers’ compensation (some share of rebates, plus fees based on a percent of sales) on a given drug generally is greater if the list price is higher, then all else equal formulary managers should prefer drugs with higher list prices, and/or drugs with more rapid list price growth. Correspondingly by breaking this link, formulary managers’ preference for higher list-priced products and/or products with faster growing list prices should diminish, or even go away entirely. And because higher list priced products would no longer automatically be more profitable to formulary managers, manufacturers wouldn’t need to raise list prices in an effort to ensure their products are as attractive as possible to formulary managers. For the record, we believe the rebate / list-price link is real, and that the proposed rule would mitigate a driver of list price inflation, if it were adopted across the entire market (i.e. by commercial plan sponsors)

Even if commercial plan sponsors do adopt the rule, its impact on list prices will be only partial. Manufacturers will always want to grow net prices, at the very least to keep pace with inflation, and it’s a lot more practical to do this by raising list prices (and keeping percentage discounts constant) than it is to do this by reducing discounts. And, higher list prices create a broader range across which manufacturers can fine-tune pricing to specific payors

Market share links to pricing remain intact under the proposed rule, so ‘rebate traps’ would still be an issue

Despite eliminating rebates, the proposed rule does not take market share out of the pricing equation. ‘Forward-looking’ discounts provided by manufacturers to formulary managers, at the time of sales, inevitably will take into account trailing volumes and market shares. Higher volume purchasers, and more importantly purchasers allocating higher category market shares to a specific brand, will get larger forward-looking discounts on that brand. Because this market share link survives the proposed rule change, it’s reasonable to believe that so-called ‘rebate traps’ also will survive – though we may have to find a new name for them. The term ‘rebate trap’ refers to a scenario in which a market share leader in a category offers a healthy rebate percentage to buyers where the brand has very high market share, but little or no rebate to buyers where the brand falls below a (relatively high) threshold market share. In categories where shifting from one brand to another takes time, buyers face the prospect of getting very low (or no) rebates on a product they still buy quite a lot of, as they work to shift from the current brand to an alternative. In many instances this makes shifting away from the original brand impossible and allows the original brand to maintain high prices with relatively little threat of displacement. Under the proposed rule, manufacturers will still link forward-looking discounts to trailing market share (or volume), thus preserving the fundamental dynamic of the rebate trap

Means, but no motive. Unless commercial plan sponsors want this, the scope is limited to Medicare / Medicaid

Legally speaking, the scope of the proposed rule is limited to Medicare and Medicaid MCOs, who account for about 36 percent[6] of gross US Rx spending. The proposed rule does not directly apply to agreements between manufacturers and commercial plans[7]. Thus, whether commercial plan sponsors ‘come over’ to the pricing terms in the proposed rule is a matter of choice (rather than of law) to be settled by commercial plan sponsors, their formulary managers, and manufacturers (in descending rank order of influence)

The proposed rule mitigates formulary managers’ preference for higher list price products, and forces discounts to be included in the calculation of patients’ out-of-pocket costs at the point of sale. If commercial plan sponsors are genuinely motivated to achieve these aims, they could largely do so now, simply by choosing (or demanding) specific contract features in their formulary management agreements. Plan sponsors can choose contracts with full rebate pass through, in which case they pay the formulary manager a higher fee rather than conceding a share of rebates. This should limit a formulary manager’s preference for drugs with higher list prices (and/or higher absolute dollar rebates), though formulary managers’ percent of sales fee agreements with manufacturers would remain as a source of higher list price bias, even in full pass through contracts. And, because formulary managers tend to design relatively standard formularies to be used across all contract types, the fact that formulary managers are still participating in rebates in a large percentage of contracts also is an enduring source of potential higher list price bias. Plan sponsors also currently have the option of applying rebates to point-of-sale pricing in a manner that reduces patients’ out-of-pocket costs, but most have chosen not to, at least in part because this tends to either raise premiums, and/or raise plan sponsors’ share of total costs

It bears emphasizing that adopting the federal approach would require commercial plan sponsors to sign onto a system over which they have little if any evolutionary control. And it can further be argued that commercial plan sponsors, at least very recently, have been winning the drug price game, with sales weighted average net prices having fallen 5.1 percent in real terms through 3Q18 (Exhibit 1). This begs a simple question: Why would private plan sponsors voluntarily adopt federal rules, over which they have no control, to change the outcome of a game they’re currently winning?

 

  1. https://s3.amazonaws.com/public-inspection.federalregister.gov/2019-01026.pdf, see page 67
  2. The proposed rule’s authors plainly aspire to influence pricing relationships in the entire market, beyond just Medicare and Medicaid MCOs. Nevertheless the rule does not preclude the continuation of commercial market pricing agreements in their current form(s), as long as those agreements are structured in a manner that does not create an inducement for drug purchases in federal programs. We believe such inducements are easily avoided, and so believe that the rule only impacts commercial market drug pricing if commercial market participants (especially plan sponsors) voluntarily choose to go along – which is unlikely
  3. The proposed rule does not impact rebates or other concessions defined by statute, nor would it impact supplemental rebates paid by manufacturers to states on Medicaid drug purchases
  4. Generally, the unit share of the drug in question relative to the total units for a basket of therapeutically interchangeable products
  5. The discounts would reduce the price of the prescription, which would in turn reduce patients’ out-of-pocket costs when out-of-pocket costs are determined as a percentage of the prescription cost, i.e. in instances where the patient is within the deductible (and paying 100 percent of prescription costs) or paying co-insurance. The discounts would not be a direct credit against patients’ out-of-pocket obligations
  6. National Health Expenditures Data; and, “Medicaid Prescription Drug Utilization and Expenditure Dynamics”, Association for Community Health Plans, November 2018
  7. The rule alludes to the potential for manufacturers’ dealings with commercial plans to impact federal programs when a single formulary manager is handling both commercial and federal accounts, but does not propose rules that would prevent a manufacturer from having a rebate-based arrangement with such a formulary manager for commercial accounts. The final rule almost certainly will eliminate the ability for formulary managers to earn rebates on ‘pooled’ sales that include commercial and federal amounts, and might impose requirements that formulary managers segregate federal and commercial operations (e.g. an internal ‘Chinese wall’)

 

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