The rebate rule
The “Executive Order on Lowering Prices for Patients by Eliminating Kickbacks to Middlemen”2 seeks to resurrect the controversial rebate rule proposed by the Office of Inspector General (OIG) of the Department of Health and Human Services (HHS) in early 2019, which was withdrawn in July 2019 after submission of public comments.3
Specifically, in furtherance of “the policy of the United States that discounts offered on prescription drugs should be passed on to patients,” the executive order directs the Secretary of HHS to “complete the rulemaking process he commenced” seeking to:
- Exclude from safe harbor protection under the federal anti-kickback statute (AKS) “certain retrospective reductions in price [i.e., rebates] that are not applied at the point of sale or other remuneration that drug manufacturers provide to health plan sponsors, pharmacies, or [pharmacy benefit managers (PBMs)] in operating the Medicare Part D program”; and
- “[E]stablish new safe harbors that would permit health plan sponsors, pharmacies and PBMs to apply discounts at the patient’s point-of-sale in order to lower the patient’s out-of-pocket costs, and that would permit certain bona fide PBM service fees.”
Notably, the description of the rebate rule in the executive order varies somewhat with the rebate rule as actually proposed in 2019:
- The executive order refers only to Medicare Part D, whereas the proposed rule would have also applied to rebates provided to Medicaid managed care organizations or their PBMs (except those required by law). This is not particularly surprising, since cost-sharing for prescription drugs under Medicaid is nominal or zero, and consequently requiring pass-through of rebates to beneficiaries at the point-of-sale would have only a minor effect on patient costs, if any.
- The executive order refers to rebates to “health plan sponsors, pharmacies, or PBMs” (emphasis added), whereas the proposed changes to the discount safe harbor did not contain any specific reference to pharmacies, and OIG stated that it intended that safe harbor would continue to protect discounts provided to pharmacies. However, OIG also indicated that it was concerned about “loopholes” that could be used to funnel remuneration formerly paid as rebates to Part D plan sponsors or their PBMs, and the general language of the proposed rule potentially could have been read to apply to pharmacy discounts – issues on which OIG solicited comment. While it is possible that this might signal some restriction on certain types of pharmacy purchase discounts in a final or new proposed rule (e.g., for plan- or PBM-affiliated pharmacies), if and what that would be is not clear.
Significantly, the executive order also provides that, “[p]rior to taking such action, the [HHS] Secretary . . . shall 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.” This is particularly noteworthy because actuarial analyses performed on the proposed rule generally projected increases in beneficiary premiums and large increases in federal spending, which were widely reported as being the primary reason the proposed rule was withdrawn. These included the following:
- An analysis performed by the Office of the Actuary of the Centers for Medicare and Medicaid Services (CMS) estimated that federal spending under Part D would increase by $196 billion and beneficiary premiums would increase by $58 billion over a 10-year period.4
- An analysis performed by the Congressional Budget Office estimated that implementing the rule as proposed would lead to higher Part D premiums and increase federal spending by about $170 billion over 10 years.5
- A review by Milliman, which was commissioned by HHS and considered seven different scenarios based on varying assumptions about the key issues such as the extent to which rebates would be replaced by point-of-sale discounts (rather than the firm’s own projection of what would occur), estimated that federal spending could decrease by as much as $99.6 billion or increase by as much as $139.9 billion, while beneficiary premiums could increase by $4 billion to $44.9 billion.6
While it is not clear how the Secretary of HHS could provide the required “confirmation” in spite of these analyses, one possibility is that HHS provides a selected actuary assumptions about the effect of the rule, as it did with Milliman, and then cites the resulting rosy outcome. Even if this approach ultimately might not survive a challenge under the Administrative Procedures Act, it potentially could provide the opportunity for a positive talking point to be used in the Presidential campaign.
While the executive order’s direction to “complete the rulemaking process” suggests the Secretary of HHS will issue a final rule based on the proposed rule from last year, it is questionable exactly what a final rule would look like, and there is the possibility of a legal challenge on various grounds7:
- Unanswered questions. There were numerous unanswered questions about exactly what the proposed rule would have required and how it would have been implemented in practice, on which extensive comments were submitted by various types of entities. These included, among myriad others:
- What would the mechanism be for operationalizing the new point-of-sale discounts? OIG appeared to contemplate these would flow through wholesalers, not PBMs, but it was not clear exactly how that would work.
- How would point-of-sale discounts be applied when patient cost-sharing is a fixed copay? Will all of the passed-through discount be applied to pay the patient’s copay (with an effect similar to that of a manufacturer coupon program – currently prohibited under Part D pursuant to OIG guidance)? Or will all of the value instead accrue to the plan (resulting in no pass-through to the patient)? Will there be some hybrid, middle-ground requirement?
- Would the GPO safe harbor remain available for PBM administrative fees? While OIG proposed a new safe harbor for PBM service fees, it did not state that fees paid to PBMs could no longer be protected under the group purchasing organization (GPO) safe harbor, as permitted by past OIG guidance – making the new rule potentially irrelevant.
The answers to these and numerous other questions have huge implications for the likely effect of the rule, and any economic analysis of the rule arguably should occur only after such points have been decided. Moreover, OIG could face challenges to a final rule on the basis that its contents were not fairly anticipated by the proposed rule.
- Is the proposed rule impermissible as contrary to the statutory AKS exception for discounts? The statutory exception allows “discounts or other reductions in price” that are “properly disclosed and appropriately reflected in the costs claimed” under a federal health care program. Rebates paid to Part D plan sponsors, which are reported to CMS and taken into account in calculating Part D subsidies, are arguably within this language. OIG stated, in the notorious footnote #1 to the proposed rule, that rebates paid “to buy formulary position” would not qualify as “reductions in price” under this provision; numerous commentators took issue with that position.
- Does the rebate rule run afoul of the Part D non-interference clause? The Part D non-interference clause provides, among other things, that the Secretary of HHS may not “interfere with the negotiations between drug manufacturers ... and PDP sponsors....” Some commentators have argued that, while proposed as a change to safe harbor regulations, the proposed rule would do exactly that. The apparent new limitation of the rule to Part D alone may give additional fuel to such arguments.
Of course, even if a final rule is subject to legal challenge on one or more bases, that does not mean it would not be issued – particularly if the point is to gain votes, and implementation would take place well after the election. From that perspective, it may be more likely that a final rule would have provisions that the Administration believes would sound appealing to voters – such as application of point-of-sale discounts to pay patient cost-sharing – despite their likely adverse impact on plan costs and federal expenditures.
Allowing importation of prescription drugs
The “Executive Order on Increasing Drug Importation to Lower Prices for American Patients”8 directs the Secretary of HHS to take the following actions, “as appropriate and consistent with applicable law,” to “expand safe access to lower-cost imported drugs”:
- Facilitate “grants to individuals of waivers of the prohibition of importation of prescription drugs, provided such importation poses no risk to public safety and results in lower costs, pursuant to section 804(j)(2) of the Federal Food, Drug, and Cosmetic Act (FDCA), 21 U.S.C. 384(j)(2).”
- Authorize “the re-importation of insulin products upon a finding by the Secretary that it is required for emergency medical care pursuant to [21 U.S.C. 381(d)].”
- Complete “the rulemaking process regarding the proposed rule to implement section 804(b) through (h) of the FDCA, 21 U.S.C. section 384(b) through (h), to allow importation of certain prescription drugs from Canada.”
Notably, the statutory section which forms the basis for the first and third of these actions becomes effective only if the Secretary of HHS certifies to Congress that its implementation will “pose no additional risk to the public’s health and safety” and “result in a significant reduction in the cost of covered products to the American consumer.”9
However, the Secretary of HHS has never certified as to these conditions, and in fact the Food and Drug Administration (FDA), in its proposed rule released in December 2019 relating to allowing importation from Canada under the provisions of section 804(b) through (h) of the FDCA, cites a lack of resources that would allow the Secretary to make such determinations.
The first of these actions relates to the portion of section 804 stating that the secretary of HHS “may grant to individuals, by regulation or on a case-by-case basis, a waiver of the prohibition of importation of a prescription drug or device or class of prescription drugs or devices, under such conditions as the Secretary determines to be appropriate.” This provision also requires the secretary to publish guidance that “accurately describes circumstances in which the Secretary will consistently grant waivers on a case-by-case basis.”
FDA has issued guidance under its Personal Importation Policy in a Frequently Asked Questions document (the FAQs) and Chapter 9-2 of its Regulatory Procedures Manual (the Manual), setting forth FDA’s enforcement priorities related to personal importation of unapproved drugs and providing guidance to FDA staff on exercising enforcement discretion. For example, the FAQs and Manual state that FDA personnel may allow shipments if the “quantity and purpose are clearly for personal use and the product does not present an unreasonable risk to the user.” While the FAQs and Manual appear to be based upon FDA’s exercise of enforcement discretion rather than authority granted under Section 804(j)(2), the policy outlined in these documents tracks the case-by-case waivers provision in Section 804(j)(2). Specifically, these documents describe the circumstances in which FDA will consistently grant waivers on a case-by-case basis, “so that individuals may know with the greatest practicable degree of certainty whether a particular importation for personal use will be permitted.” For this reason, the purpose of this first action of the executive order remains unclear. We note that, to our knowledge, FDA has never issued waivers under section 804(j)(2) or guidance on when it would grant such waivers – presumably because it has never made the certification required for section 804 to become effective.
The second action is pursuant to a statutory provision that allows the Secretary to authorize re-importation of a drug that normally cannot be imported back into the United States by any party other than the manufacturer, if it is required for emergency medical care. This portion of the executive order suggests that the Secretary might determine that the emergency medical care requirement is present for specified insulin products, so as to permit re-importation by entities other than their manufacturers.
The third action relates to a rule that FDA proposed in December, 2019, and recently listed as targeted for issuance as a final rule by December 2020, to create a mechanism for importation of drugs from Canada under section 804(b) through (h). Because the required certification to Congress regarding safety and significant cost reduction required under section 804 has never been submitted, the proposed rule instead took the approach of allowing time-limited Section 804 Importation Programs (SIPs) authorized by FDA and managed by states or other non-federal governmental entities and by their co-sponsors, which could include pharmacists, wholesalers, or other state or non-federal governmental entities (collectively, SIP Sponsors).
SIP Sponsors would submit SIP Proposals, which must include information on the foreign (Canadian) seller and the U.S. importer, along with reasons that the importation would not cause increased risk to patient health and safety and would result in substantial cost savings. It also includes proposed demonstration projects, under which parties would demonstrate how they might comply with the additional FDA requirements such as track and trace, labeling, and registration. FDA could approve or deny a SIP Proposal in its discretion.
Foreign sellers of eligible prescription drugs under SIP Programs would also be required to, among other things, be licensed or registered by Health Canada and FDA. The proposed rule also includes customs importation requirements and processes, as well as post-importation requirements, including with respect to adverse event reporting, recalls, and product testing. Importantly, only drugs acquired directly from a manufacturer by the foreign seller could be imported under this rule, and certain drugs are excluded from eligibility based on statutory requirements or risk posed to patients.
The Administration’s importation proposals have been strongly criticized on the basis that they cannot be implemented consistent with the requirements of section 804 or separate FDA track-and-trace (drug pedigree) requirements. Further, Canadian officials have indicated that they may not cooperate with these efforts, since they are concerned manufacturers may curtail supply of products to Canada to preclude diversion to the United States.
Similar to the other executive orders, there are many open questions relating to the specifics of a final rule or other actions which may result, potential legal challenges, and the prospect of real-world implementation. Here as well, however, a final rule or other actions that sound good to voters might be issued or taken, regardless of whether or when they will actually take effect.
Pass-through of 340B prices by FQHCs
The “Executive Order on Access to Affordable Life-saving Medications,”10 relating to insulin and injectable epinephrine, states that these are life-saving drugs, for which some patients face high costs. It notes that FQHCs11 receive discounted pricing on these drugs through the 340B program, with many of the products being subject to “penny pricing” under which FQHCs may purchase them at one cent ($0.01) per unit of measure. It further states that FQHCs do not always pass through these low prices to low-income Americans at the point of sale.
Consequently, the executive order provides that “[i]t is the policy of the United States to enable Americans without access to affordable insulin and injectable epinephrine through commercial insurance or Federal programs, such as Medicare and Medicaid, to purchase these pharmaceuticals from an FQHC at a price that aligns with the cost at which the FQHC acquired the medicine.” The key substantive requirements of the executive order are as follows:
“To the extent permitted by law, the Secretary of Health and Human Services shall take action to ensure future grants available under section 330(e) of the Public Health Service Act, as amended, 42 U.S.C. 254b(e), are conditioned upon FQHCs’ having established practices to make insulin and injectable epinephrine available at the discounted price paid by the FQHC grantee or sub-grantee under the 340B Prescription Drug Program (plus a minimal administration fee) to individuals with low incomes, as determined by the Secretary, who:
(a) have a high cost sharing requirement for either insulin or injectable epinephrine;
(b) have a high unmet deductible; or
(c) have no health care insurance.”
Noteworthy points about this executive order include the following:
- It will require further action by the Secretary, potentially through a rulemaking or modifications of grant terms.
- The Secretary will have to define who qualifies for this program as “low-income,” as well as what is “a high cost sharing requirement,” a “high unmet deductible,” “no health care insurance” and “a minimal administration fee.”
- 340B prices are only available for drugs dispensed to individuals who are “patients” of a 340B covered entity, and HHS Health Resources and Services Administration guidance states that individuals do not become patients simply because they have had a prescription filled by a covered entity. Consequently, people who are not currently patients of FQHCs will be able to access this program only if they can locate an FQHC for which they are in the designated population served and receive qualifying health care services from that FQHC.12
- There could be a legal challenge regarding the Secretary’s authority to condition grants to FQHCs upon pass-through of 340B prices.
- The precise mechanism of discount pass-through in the context of insured patients is unclear, given that commercial insurance policies may restrict the waiver or reduction of copays. While it is possible that 340B drugs could be dispensed without submission of claims to insurance, that may also be precluded by payer agreements and/or result in patients’ payments not counting toward deductibles or out-of-pocket limits.
Assuming a proposed rule to implement this executive order is released prior to the election to provide a campaign talking point, it likely would not be subject to legal challenge unless and until a final rule is issued.
Part B drug MFN
While President Trump signed an executive order relating to an MFN for “the most costly Medicare Part B drugs,” the Administration has not released the text of that executive order. President Trump stated as follows at the signing event:
“The drug company executives will be at the White House on Tuesday, and they have some ideas how to significantly reduce drug prices. … I don’t know if they can possibly do something to substitute for what’s called “favored nations.” Favored nations – that means we get the lowest price anywhere in the world. …
“If these talks are successful, we may not need to implement the fourth executive order, which is a very tough order for them. … So we’ll see what they have to say on Tuesday. Maybe they have an idea that’s good, but it’s got to be very substantial. … If they are not, the order will be implemented if we don’t do a deal or agree to something.
“The order – number four, “favored nations” – a big order. … But the fourth order, we’re going to hold that until August 24th, hoping that the pharmaceutical companies will come up with something that will substantially reduce drug prices. And the clock starts right now. So it’s August 24th at 12:00, after which the order on favored nations will go into effect.”
Subsequent reporting has indicated that the meeting the President said would occur on Tuesday (July 28) did not take place, and apparently had never been scheduled.13
Because the executive order on Part B MFN has not been released, we cannot evaluate its provisions in any detail. However, in October 2018 CMS released and received comments on an advance notice of proposed rulemaking (ANPRM) to reduce Medicare Part B drug expenditures based on reference to an international pricing index, or IPI.14
Further, a proposed rule for IPI has been under review at the Office of Management and Budget (OMB) for several months.15 It is unknown whether or to what extent the MFN proposal would work the same as the IPI model described in the ANPRM.
Despite the lack of any concrete details about the contemplated MFN, we note as follows:
- The IPI ANPRM contemplated that Part B reimbursement would be reduced over five years based on the average price across the 14 IPI countries, rather than by matching the lowest price of any of them, for the drugs to which the model would apply. Further, by the end of the IPI model, Part B reimbursement for model drugs (collectively) would still be 26 percent more than the average pricing for the countries in the IPI. Consequently, use of an MFN would likely result in much larger reductions in reimbursement for Part B drugs than the IPI ANPRM.
- Both the IPI ANPRM and the proposed rule under consideration at OMB contemplate implementation as a payment and service delivery model being tested pursuant to section 1115A of the Social Security Act, and that would likely also be the authority used for an MFN. Depending on the scope and details of an MFN model (e.g., whether it contains affirmative requirements for manufacturers or others, rather than just “waivers” of statutory requirements), there could be legal challenges on the basis that HHS has exceeded its authority under section 1115A.
- We presume that, like the contemplated IPI model, an MFN model would require a proposed rule and comment period before it could be implemented. Because a proposed rule has never been issued for the IPI, the Secretary of HHS likely could not issue a final rule – in contrast to the rebate and drug importation rules – prior to the election.
- There were numerous questions regarding the operation of the contemplated IPI which would need to be addressed in an MFN model. For example, the ANPRM contemplated that IPI vendors contracted with CMS would purchase drugs from manufacturers, ship them to providers for administration to patients, and receive drug reimbursement from CMS, thereby replacing today’s “buy and bill” system under which providers buy Part B drugs and are reimbursed for them. Among other issues, CMS did not indicate what would happen if manufacturers were to refuse to sell drugs to the IPI vendors at prices equal to or less than the IPI-based reimbursement CMS would pay.
- The IPI was criticized as simply adopting foreign countries’ price controls for purposes of U.S. reimbursement policy – a charge which may also be true for a Part B MFN.
An MFN proposed rule could be issued prior to the election, providing a basis for a campaign talking point. If it is issued, interested parties would have an opportunity to submit comments.
Conclusion
There are significant questions regarding the substance and legality of most of the actions contemplated by the President’s executive orders. That said, this Administration has not been shy about attempting to take actions that were later struck down by the courts – including, in the drug pricing context, its final rule to require television advertisements to display drugs’ list prices.16 Overall, we will need to wait to see the specific actions that the Administration takes based upon the recent executive orders, as well as the associated rationale.
- Language is quoted from the Department of Health and Human Services press release, “Trump Administration Announces Historic Action to Lower Drug Prices for Americans,” available at hhs.gov.
- Available at whitehouse.gov/.
- “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,” 84 Fed. Reg. 2340 (Feb. 6, 2019).
- Available at regulations.gov/.
- Available at cbo.gov/.
- Available at regulations.gov/.
- For discussion of additional issues raised by the proposed rule, please see our previous client alert, “Stakeholders struggle to decipher HHS proposed safe harbor for point-of-sale discounts”.
- Available at whitehouse.gov/.
- Section 804(l) of the FDCA, 21 U.S.C. 384(l).
- Available at whitehouse.gov/.
- In general, FQHCs are entities that provide certain primary health care services to a medically underserved population (such as the homeless, agricultural workers, residents of public housing, and veterans) and receive grants (or are eligible to receive grants) under section 330 of the Public Health Service Act (PHS Act).
- The HHS press release referenced in note 1 above states that there are “28 million patients who visit FQHCs every year, over six million of whom are uninsured.”
- “Biopharma, the White House And Getting Drug Pricing ‘Off The Table’,” Pink Sheet, July 28, 2020, available at pink.pharmaintelligence.informa.com/.
- “Medicare Program; International Pricing Index Model for Medicare Part B Drugs”, 83 Fed. Reg. 54546 (Oct. 30, 2018), available at govinfo.gov/. We evaluated the ANPRM in our client alert available at reedsmith.com.
- See reginfo.gov/.
- This rule was struck down in Merck & Co. v. HHS, 385 F. Supp. 3d 81, 98 (D.D.C. 2019), aff'd, 962 F.3d 531 (D.C. Cir. 2020).
Client Alert 2020-470
