Reed Smith Client Alerts

On July 24, 2020, President Trump signed four executive orders relating to drug pricing. These relate to the following four areas:

  1. Finalizing the “rebate rule” proposed by the Administration in 2019.
  2. Allowing importation of prescription drugs.
  3. Requiring that 340B program discounts on insulin and injectable insulin be passed through to certain patients by Federally Qualified Health Centers (FQHCs).
  4. “[E]nsur[ing] that the Medicare program and seniors pay no more for the most costly Medicare Part B drugs than any economically comparable OECD country”1 – apparently a “most favored nations” (MFN) revised version of the international pricing index (IPI) model previously floated by the Administration in 2018.

Major questions remain about each of these proposals, all of which contemplate further action by the Administration. This client alert provides background information relevant to each of the executive orders and highlights some of the most prominent of these issues.

As many commentators have observed, these executive orders may be motivated by a desire to be seen as taking action on drug pricing to gain votes for the President in the upcoming election. We take that into account as we assess what steps might follow based on these executive orders.

Authors: Robert J. Hill Joseph W. Metro Kevin M. Madagan Andrew Y. Lu Sung W. Park Janine R. Tougas

Pharmacist filling prescription in pharmacy drugstore

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by the Office of Inspector General (OIG) of the Department of Health and Human Services (HHS) in early 2019, which was withdrawn in July 2019 after submission of public comments.3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