Some of the key points detailed below include the following:

• It is unclear whether POS Discounts could be conditioned upon the formulary status of the product, or whether that would be prohibited as “buying formulary position.”
• The Proposed Rule appears to be drafted to provide for POS Discounts to be transmitted from manufacturers to pharmacies via wholesaler chargebacks, through a mechanism that does not currently exist. While POS Discounts might instead be transmitted through payment of rebates to PBMs, that likely would require changes to the text of the proposed safe harbor.
• The Proposed Rule is contradictory relative to whether the terms of the POS Discounts would need to be set forth in an agreement between the manufacturer and the plan or its PBM, or only in a notice sent from the manufacturer to the plan. It is also unclear about what requirements (if any) would need to be satisfied regarding how POS Discounts are calculated.
• The Proposed Rule does not clearly indicate how the POS Discounts would be applied, particularly relative to whether they would reduce the negotiated price agreed between the pharmacy and the plan or its PBM, or instead would reduce only the patient’s cost-sharing amount.
  • If the POS Discounts were applied to reduce the negotiated price, Part D plans could potentially capture the bulk of the value by changing their benefit designs to use fixed copays, instead of percentage coinsurance, to calculate beneficiary cost-sharing.
  • If POS Discounts were applied to reduce only the patient’s cost-sharing amount, manufacturers could potentially elect to unilaterally provide POS Discounts designed to operate in a manner similar to manufacturer copayment coupon programs, paying beneficiary cost-sharing without reducing the plan’s cost for the drug—a practice currently prohibited under Part D pursuant to longstanding guidance from the HHS Office of Inspector General (OIG).
• POS Discounts paid on drug utilization during the Part D coverage gap may need to be limited so that the combined POS Discount and mandatory 70 percent coverage gap discount do not exceed the product’s list price and/or its negotiated price.
• The Proposed Rule does not detail who would be required to bear the funding obligation arising from any period between the time a pharmacy provides a POS Discount to a patient and its receipt of the manufacturer’s payment of a rebate as reimbursement for same. This funding responsibility could potentially be borne by pharmacies, manufacturers, PBMs and/or plan sponsors—none of which is likely to want to bear that obligation.
• The Proposed Rule is silent with respect to how manufacturers would need to take POS Discounts into account for purposes of government price reporting under the Medicaid rebate program.

Text of new safe harbor for POS Discounts proposed by HHS

The text of the new safe harbor proposed by HHS is relatively short, so before digging into its various elements, we set it forth in full below:

(cc) Point-of-sale reductions in price for prescription pharmaceutical products. (1) As used in section 1128B of the Act, “remuneration” does not include a reduction in the price charged by a manufacturer for a prescription pharmaceutical product that is payable, in whole or in part, by a plan sponsor under Medicare Part D or a Medicaid Managed Care Organization, provided the manufacturer meets the following conditions with regard to that reduction in price:

(i) The reduced price must be set in advance with a plan sponsor under Medicare Part D, a Medicaid MCO, or the PBM acting under contract with either;

(ii) The sale does not involve a rebate unless the full value of the reduction in price is provided to the dispensing pharmacy through a chargeback or series of chargebacks, or is required by law; and

(iii) The reduction in price must be completely applied to the price of the prescription pharmaceutical product charged to the beneficiary at the point of sale.

(2)(i) For purposes of this paragraph (cc), the terms manufacturer, pharmacy benefit manager or PBM, prescription pharmaceutical product, rebate, and Medicaid managed care organization or Medicaid MCO have the meanings ascribed to them in paragraph (h) of this section.

(ii) For purposes of this paragraph (cc), a chargeback is a payment made directly or indirectly by a manufacturer to a dispensing pharmacy so that the total payment to the pharmacy for the prescription pharmaceutical product is at least equal to the price agreed upon in writing between the Plan Sponsor under Part D, the Medicaid MCO, or a PBM acting under contract with either, and the manufacturer of the prescription pharmaceutical product.

Could POS Discounts be conditioned upon the formulary status of the drug?

In the Proposed Rule, HHS states as follows:

In the Secretary’s view, moreover, the statutory exemption for discounts (42 U.S.C. 1320a–7b(b)(3)(A)) does not apply to most rebates paid by drug manufacturers to part D plans or to Medicaid managed care plans. To the extent those rebates are paid to or through PBMs to buy formulary position, such payments would not be protected by the discount statutory exemption.⁶

In another portion of the Proposed Rule, HHS similarly asserts:

The safe harbor acknowledges that a “rebate” may qualify as a discount. However, some payments, while labeled as “rebates,” may not have the effect of reducing the price of an item or service to a buyer.

The determination of whether a particular payment is a protected discount depends on the circumstances. Rebates paid by drug manufacturers to or through PBMs to buy formulary position are not reductions in price. In the Secretary’s view, such a payment would not qualify as “a discount or other reduction in price.” 42 U.S.C. 1320a–7b(b)(3)(A).⁷

These are striking statements, at odds with longstanding and current HHS policy acknowledging and encouraging Part D plans to use formulary position (e.g., formulary cost-sharing tier and the absence or existence of formulary requirements for prior authorization or step therapy before a drug will be covered) to negotiate higher rebates from manufacturers. For example, a manufacturer may pay a rebate at a given level if its product is placed on formulary on the preferred branded drug tier, without prior authorization or step therapy requirements for coverage; further, the manufacturer may pay a higher rebate if its product is one of no more than two competitive products to have that formulary status. Put simply, formulary position has long been a primary quid pro quo for which manufacturers pay rebates. If POS Discounts cannot be so conditioned, manufacturers may be reluctant or unwilling to agree to provide POS Discounts premised upon favorable formulary position, if the plan would still be entitled to receive those POS Discounts despite placing the product in an unfavorable formulary position. Consequently, the level of POS Discounts provided could be lower than the level of rebates provided currently.

The Proposed Rule states that paying rebates “to or through PBMs to buy formulary position” disqualifies those rebates, in the Secretary’s view, from protection under the statutory discount exception; however, it does not say whether POS Discounts can be conditioned upon formulary position. HHS does not explain exactly what it is about existing rebate arrangements that results in them being impermissible. For example, is the failure of Part D plan sponsors to pass rebates through to reduce the “negotiated price” used in calculating enrollee cost-sharing at the point of sale the key factor that makes such rebates “not reductions in price,” because then they do “not have the effect of reducing the price of an item or service to a buyer” (i.e., the beneficiary)? If that is the issue, then rebates conditioned upon formulary position should be permissible so long as there is such a pass-through—as the POS Discount seems to contemplate.⁸

The Department of Justice (DOJ), in litigation filings, has stated its own view that “[i]f a reduction in price is conditioned on more than a simple purchase, it not a mere ‘discount,’ but rather a form of remuneration whose legitimacy must be evaluated under the anti-kickback statute separate and apart from the statutory discount exception or regulatory discount safe harbor.”⁹ If HHS is adopting the DOJ position, then presumably a formulary condition would never be permissible under the statutory discount exception, on the basis that it conditions the rebate upon more than a “simple purchase”—i.e., upon the plan’s placement of the product on formulary in a given status.¹⁰ Such a position, however, would be inconsistent with CMS’s guidance to Part D and Medicare Advantage plans encouraging such practices.

Similarly, is the fact that formulary rebates are paid through PBMs the problem? Both HHS statements quoted above refer to rebates paid “to or through PBMs”; would rebates paid directly to a Part D plan sponsor be permissible?

Significantly, the proposed safe harbor for POS Discounts does not contain any language precluding manufacturers, plans or PBMs from conditioning the availability of POS Discounts upon a product having a given formulary status. Even so, that is also true of the statutory discount exception, yet HHS has still taken issue with rebates “to buy formulary position” under that statutory exception. Moreover, the Proposed Rule states as follows:

The proposed safe harbor’s requirements are intended to exclude from its protection conduct that mimics rebates but are referenced in other ways in the contracts between a manufacturer and a PBM, a plan sponsor under Medicare Part D, or a Medicaid MCO. For example, fees that are based on a percentage of a prescription pharmaceutical product’s list price could be a disguised kickback and would not be protected by this proposed safe harbor unless the requirements created by this rule are met. We are soliciting comments on this approach and whether, and if so, how the regulatory text should be modified to best reflect this intent.¹¹

The Proposed Rule fails to identify what “conduct” would be deemed to “mimic rebates,” particularly given that the proposed safe harbor allows for POS Discounts to be provided through rebates, so long as the full value of the reduction in price is provided to the dispensing pharmacy through a chargeback.¹² Even so, given HHS’s apparent hostility to rebates paid to PBMs to “buy formulary position,” HHS could potentially decide to modify the regulatory text to prohibit requirements that a given product be placed on formulary in exchange for POS Discounts, as a form of conduct that “mimics rebates.”

Moreover, it should be noted that a major theme of the Proposed Rule is that elimination of rebates will encourage manufacturers to reduce list prices. It is possible that HHS contemplates a new marketplace structure in which manufacturers compete for formulary position based not upon the rebates or POS Discounts they offer to secure formulary position, but instead based upon list prices relative to those of competitive products, combined with POS Discounts they make available which are not conditioned upon formulary status. That would clearly represent a massive change from the current rebate system, but the Proposed Rule does not make clear whether this is what HHS intends.

The bottom line: the Proposed Rule does not clearly indicate whether POS Discounts can be conditioned upon the formulary status of the product. If POS Discounts cannot be so conditioned, it is possible that manufacturers may not be willing to pay them, or would pay them only in reduced amounts.

Would the new POS Discounts have to be provided through wholesaler chargebacks, or could they be provided through PBMs?

Many stakeholders appear to assume that POS Discounts would be transmitted to pharmacies through PBMs, as a modification of existing manufacturer rebate agreements. That view makes logical sense, inasmuch as the PBMs generally administer both rebate agreements (which could become the new POS Discount agreements) and pharmacy payments, and as such they would have both the information and the flow of funds necessary to operationalize the new POS Discounts.

Nevertheless, we believe that the safe harbor as currently drafted appears to contemplate that the new POS Discounts would instead be provided through wholesalers, using a mechanism that does not currently exist. While HHS does not specify how the reductions in price provided by manufacturers would be transferred to pharmacies, several portions of the Proposed Rule lead us to believe that HHS may intend that wholesalers be the vehicle for their transmission. While POS Discounts conceivably could be provided through payment of rebates to PBMs, we believe that would most likely require changes to the safe harbor text.

First, as the above-quoted safe harbor text reflects, the safe harbor would protect “a reduction in the price charged by a manufacturer for a prescription pharmaceutical product that is payable, in whole or in part, by a plan sponsor under Medicare Part D or a Medicaid Managed Care Organization.” Notably, pharmaceutical manufacturers do not “charge” “prices” to Part D plan sponsors or Medicaid MCOs. Instead, manufacturers charge prices to the wholesalers to which they sell their drugs, or in some cases directly to pharmacies, in those limited cases where the manufacturer sells its product directly to a pharmacy. So, based upon this language alone, it appears that the new safe harbor may protect only the reduction in price provided by the manufacturer to the entity directly purchasing from it—either a wholesaler or pharmacy.

Second, we believe that a reading under which the POS Discount must be provided through wholesalers is reinforced by the second condition of the safe harbor, and its associated definition of “chargeback.” The second condition requires that “sale does not involve a rebate unless the full value of the reduction in price is provided to the dispensing pharmacy through a chargeback.” While it’s not entirely clear what “sale” this is referring to, it appears to mean the sale by the manufacturer to the wholesaler or the pharmacy—the entity to which the manufacturer is selling and charging prices.

The definition of “chargeback” requires that there be “a payment made directly or indirectly by a manufacturer to a dispensing pharmacy....” While pharmaceutical manufacturers generally sell branded pharmaceutical products to wholesalers at list price (commonly defined as wholesale acquisition cost, or WAC), and wholesalers also generally sell those products to pharmacies and other purchasers (such as hospitals) at or near WAC, manufacturers can make discounted prices available to pharmacies on their purchases made from a wholesaler, through arrangements commonly referred to as “chargebacks” in the industry. Specifically, the manufacturer authorizes the wholesaler to sell a given product to a given pharmacy at a specified “contract price” below WAC, with the manufacturer compensating the wholesaler for the difference between WAC and the contract price (i.e., for the discount) through a payment in that amount to the wholesaler, or (more commonly) through a credit in that amount against amounts the wholesaler otherwise owes the manufacturer for the drugs the wholesaler purchased from the manufacturer.

A credit provided by a manufacturer to a wholesaler would fit cleanly into the safe harbor description of “a reduction in the price charged by a manufacturer for a prescription pharmaceutical product.” Further, while HHS has drafted the definition of “chargeback” broadly enough to allow for use of middlemen other than wholesalers, arguably the use of that term reflects an intent that the payment will flow through wholesalers.

Third, one of HHS’s statements soliciting comment also appears to indicate that HHS contemplates that chargebacks will be provided through wholesalers:

We also seek comment on the ability of wholesalers to facilitate chargebacks to pharmacies in a timely fashion, replacing PBMs [sic] rebates with manufacturer discounts routed through wholesalers, and other concerns related to disrupting the relationship between pharmacies and PBMs.¹³

Oddly, this statement is not included in the portion of the preamble describing the provisions of the Proposed Rule, but is instead buried in the middle of the regulatory impact statement. Regardless of the placement, however, it appears to clearly contemplate that there would be “manufacturer discounts routed through wholesalers,” instead of rebates routed through PBMs.

There is good reason for HHS to ask about wholesalers’ ability to make all of this work. Wholesalers currently use chargebacks to make manufacturer discounts available to pharmacies on all of their purchases of a given product, at the time the pharmacy purchases the product from the wholesaler, at a contract price specified by the manufacturer for that pharmacy. Those discounts belong to the pharmacy itself, and need not be passed on to patients. That is very different from reimbursing pharmacies—through a payment or issuance of credit—for a POS Discount that the pharmacy has provided (or will provide) to the patient at the point of sale. Such POS Discounts would vary on a prescription-by-prescription basis, based upon the terms of the rebate/POS Discount the manufacturer has agreed to provide to the patient’s Part D or Medicaid managed care plan (directly or through a PBM). To our knowledge, wholesalers, manufacturers and pharmacies have no system currently in place pursuant to which manufacturers could transmit to wholesalers, and wholesalers in turn could transmit to dispensing pharmacies, such POS Discounts.

This is not to say that one cannot imagine how such a mechanism might work. For example, pharmacies could conceivably transmit claims data for the drugs they dispense to wholesalers, and wholesalers could in turn transmit that data to manufacturers. Manufacturers could then conceivably use that claims data to calculate the POS Discounts they owe to each pharmacy, under the manufacturer’s applicable agreement (if any) with the Part D or Medicaid managed care plan or its PBM, and provide those amounts to the relevant wholesaler, which would in turn provide them to the dispensing pharmacy. However, that would not be enough: the manufacturer would also have to communicate to the wholesaler, and the wholesaler to the pharmacy, the amount of the POS Discount the manufacturer has agreed to fund, before the pharmacy dispenses the prescription, so that the pharmacy would know the amount of the POS Discount to provide at the point of sale. This would be an extremely daunting task, given the many hundreds of plans, with varying POS Discounts, that would have to be communicated, and programmed into relevant computer systems.¹⁴

A potential further indication of what HHS intends might be found in the terms of the separate new safe harbor that HHS has proposed for certain service fees paid by manufacturers to PBMs. Under the current rebate system, PBMs process pharmacy claims and submit a portion of the resulting claims data to manufacturers, which manufacturers then use to calculate the amount of rebates owed under the terms of the manufacturer’s rebate agreement with each such PBM, and pay to the PBM. The new safe harbor would allow manufacturers to pay service fees to PBMs “for services the PBM provides to the pharmaceutical manufacturer related to the pharmacy benefit management services that the PBM furnishes to one or more health plans,” subject to satisfaction of the safe harbor conditions.¹⁵ HHS states, “[w]ith respect to services that relate in some way to the PBM’s arrangements with health plans, we have in mind, by way of example, services rendered to manufacturers that depend in some way on or use data gathered by PBMs from their health plan customers (whether claims or other types of data).”¹⁶

Consequently, HHS may intend for PBMs to play a service role in implementing the new POS Discounts. To the extent the PBM enters into a contract with the manufacturer specifying the terms of the POS Discount, the PBM would have the information on the amount of the POS Discount, which it could transmit to the dispensing pharmacy in its adjudication of the pharmacy’s claim, permitting the pharmacy to apply that amount when it dispenses the drug at the point of sale. The PBM could then transmit the claims data reflecting application of the POS Discount to the manufacturer, which the manufacturer would use to reimburse pharmacies for the POS Discounts they have provided, through wholesaler-processed chargebacks.

Indeed, as a practical matter, it seems difficult or impossible to implement POS Discounts without the integral involvement of PBMs. However, if manufacturer payment of “chargebacks” is to occur through payments of rebates to PBMs, instead of through chargebacks processed by wholesalers, we believe the safe harbor text should be modified to replace the references to reductions in the prices “charged” by a manufacturer, as well as the “sale” language. One possibility would be to define a term such as “POS Discounts,” such that the safe harbor expressly permits those to be provided through any mechanism. This change could have consequences beyond a mere drafting fix, however, to the extent that it results in PBMs continuing to play a larger role than HHS envisions.

Would POS Discounts have to be specified in an agreement between the manufacturer and the plan or its PBM, and what requirements would apply to how POS Discounts are calculated, under such an agreement or otherwise? 

The proposed safe harbor text states that “[t]he reduced price must be set in advance with a plan sponsor under Medicare Part D, a Medicaid MCO, or the PBM acting under contract with either”. That appears to require that (i) there must be a contract between the manufacturer and the plan or its PBM, and (ii) that contract must specify a “reduced price”, and not just a “reduction in price”, as referenced in the lead-in language of section (1). While the “reduction in price” is straightforward—i.e., the amount of the POS Discount ultimately provided to the dispensing pharmacy—what “reduced price” is meant here?

Notably, in the Trump Administration “Drug Pricing Blueprint” released last May, which attacked rebates based upon a percentage of WAC (as does the Proposed Rule), one of the many questions on which HHS solicited comment was as follows:

Should Medicare Part D prohibit the use of rebates in contracts between Part D plan sponsors and drug manufacturers, and require these contracts to be based only on a fixed price for a drug over the contract term?¹⁷

 While it’s not clear exactly what this meant, one possibility is that HHS was referring to a type of rebate formula sometimes referred to as “fixed net price” rebates. Under fixed net price rebates, the rebate contract specifies a given price for the product (below the product’s WAC at the time), and the amount of the rebate is the difference between that price and the product’s WAC at the time the product is dispensed to the beneficiary. Consequently, the rebate will go up, dollar for dollar, if the WAC is increased. So, is this portion of the safe harbor referring to the “price” in a fixed net price rebate contract, and consequently must POS Discounts be calculated based upon the difference between that price and the product’s WAC at the time of dispense?

HHS does not tell us.  Instead, in describing this requirement, HHS acts as though the text refers to the “reduction in price.” Further, it appears to indicate that there actually is no requirement for the manufacturer to enter into any agreement, and instead it may simply disclose to the plan the reduction in price, potentially offered by the manufacturer unilaterally. The Proposed Rule states:

First, the reduction in price would have to be set in advance with the plan sponsor under Medicare Part D, a Medicaid MCO, or a PBM. We propose that “set in advance” would mean that the terms of the reduction in price would be fixed and disclosed in writing to the plan sponsor under Medicare Part D or the Medicaid MCO by the time of the initial purchase.¹⁸

While this explanation appears to walk away from both the “reduced price” and agreement requirements, these issues re-surface when we turn to the question of how the reduction in price is applied at the point-of-sale (discussed below). Specifically, the definition of “chargeback” refers to a payment to the pharmacy “so that the total payment to the pharmacy for the prescription pharmaceutical product is at least equal to the price agreed upon in writing” between the manufacturer and the plan or its PBM. Since the applicable requirement relates to a “price agreed upon in writing,” implicitly there must be both a price, and an agreement.

Since the definition of “chargeback” also refers to a price, does HHS describe what it means in the context of that definition? Unfortunately, it does not—a stunning omission on a critical issue. Instead, the preamble discussion of the definition of “chargeback” simply recites the proposed safe harbor text, and then states, “[w]e solicit comments on this definition.”¹⁹

If HHS intends for the safe harbor to require that POS Discounts be calculated in accordance with a fixed net-price agreement, neither the proposed safe harbor text nor the preamble discussion provides any detail about the requirements for such fixed net-price contracts. For example, would there be a required minimum term during which the fixed net price would apply, or is that entirely dependent upon negotiation between the parties? Could the fixed net price be subject to adjustment based upon certain events, such as a plan’s addition of a new prior authorization restriction on its coverage of the drug? Would the agreement have to allow for a rebate/POS Discount on prescription utilization for which the manufacturer is already providing a separate rebate, such as drugs the manufacturer is required to sell at a discounted price under the Federal 340B program? HHS provides no guidance.

Moreover, it should be noted that the price specified in a fixed net price rebate agreement is used only to determine the amount of the rebate payable (i.e., the reduction in price), and is not itself a price paid by the plan and/or the beneficiary. To the contrary, the price paid by the plan and the beneficiary (and consequently the total amount payable to the pharmacy) is specified in the agreement between the pharmacy and the plan or its PBM (as reduced by the amount of any rebate received from the manufacturer). As such, it does not really make sense to refer to a price in a fixed net-price rebate contract in a formula relating to the “total payment to the pharmacy.”

Consequently, the Proposed Rule does not make clear whether the calculation of the POS Discounts must be set forth in an agreement between the manufacturer and the plan or its PBM, or what requirements (if any) must be satisfied relative to the manner in which such POS Discounts must be calculated. Potentially, there are no requirements for the calculation of POS Discounts, and they could be calculated as a percentage of WAC—despite HHS’s stated belief that such formulas produce undesirable effects. Moreover, POS Discounts potentially could be unilaterally determined by the manufacturer, and they could be variable in amount for a given patient (e.g., based upon the patient’s cost-sharing obligation for the drug in the given phase of the Part D benefit).

How would POS Discounts be applied at the point of sale?

The Proposed Rule contains two sets of requirements relating to application of the POS Discount at the point of sale. First, subsection (1)(ii) (discussed above) provides that if the “sale” involves a rebate, the “full value of the reduction in price is provided to the dispensing pharmacy through a chargeback or series of chargebacks,” where a chargeback is a “payment made directly or indirectly by a manufacturer to a dispensing pharmacy so that the total payment to the pharmacy for the prescription pharmaceutical product is at least equal to the price agreed upon in writing between” the plan or its PBM and the manufacturer. Apart from repeating the safe harbor text in the preamble, the only clarification that HHS provides about this definition is that “the total payment to the pharmacy” means “cost-sharing from the beneficiary, payment from the Part D plan or Medicaid MCO, and any chargeback,”

Confusingly, this requirement references a price agreed between the manufacturer and the plan/PBM, when the “total payment to the pharmacy” is determined pursuant to the agreement between the pharmacy and the plan/PBM—in Medicare Part D terminology, the “negotiated price.” Accordingly, one would think that this should say the POS Discount is applied so as to constitute a reduction in the negotiated price, with any coinsurance owed by the patient determined based upon that reduced negotiated price. Significantly, the economic analyses which HHS had performed for the Proposed Rule assumed that POS Discounts would be applied to reduce Part D negotiated prices.²⁰

Second, subsection (1)(iii) requires that “the reduction in price must be completely applied to the price of the prescription pharmaceutical product charged to the beneficiary at the point of sale.”  While this seems straightforward, it is not clear what is meant by “the price...charged to the beneficiary.”  Does this mean only the portion of the drug price paid by the beneficiary—i.e., the beneficiary’s cost-sharing amount—or the entire price paid by the beneficiary and the plan combined?  Assuming it means the latter, is that “price” the price negotiated between the dispensing pharmacy and the plan or its PBM?

Application of the POS Discount to reduce the negotiated price may not be consistent with a requirement that the “full value of the reduction in price is provided to the dispensing pharmacy.” Specifically, if a Part D plan benefit design provides for beneficiaries to pay a fixed copay, application of the POS Discount to the negotiated price could result in the Part D plan capturing the bulk of the value of the POS Discount. For example, if the negotiated price of a drug is $110 and the patient has a copay of $25, absent any POS Discount the patient will pay $25 and the plan or its PBM will pay the pharmacy the balance, or $85. If there is a POS Discount of $20 which is applied to reduce the negotiated price, the new negotiated price will be $90, the patient will still owe $25, and the plan/PBM’s payment to the pharmacy will be reduced to $65. Consequently, even if the POS Discount is paid to the pharmacy, if it is applied to reduce the negotiated price its “value” is effectively provided to the plan/PBM, which will reduce the amount that it would otherwise pay to the pharmacy by the same amount.²¹ On the other hand, the alternative construction of requiring the POS Discount to be applied to the patient copay of $25 would seem to satisfy the requirement that the “full value” of the POS Discount be provided to the pharmacy, since in that case the pharmacy would have to receive the $20 POS Discount in order to receive the $110 negotiated price, because the patient would only be paying $5. Remarkably, the Proposed Rule contains no language describing how POS Discounts would be applied to fixed copays.

The Proposed Rule includes a preamble statement touching upon the issue of whether the POS Discount is applied to reduce the negotiated price or the patient cost-sharing amount. However, it does not actually answer that question. The Proposed Rule states:

For example, if the discounted rate is set in advance, at the time of dispensing the pharmacy would have the necessary information to appropriately charge a beneficiary who owes coinsurance, even if the manufacturer ultimately tenders the dispensing pharmacy a payment through a chargeback to reflect this negotiated price with the payor.

This may imply that coinsurance would be determined after reducing the negotiated price by the amount of the POS Discount, such that the benefit of the POS Discount would be shared between the beneficiary and the plan. However, HHS does not actually say that; instead, it left open the possibility that the coinsurance amount could be determined prior to application of the POS Discount, and “the pharmacy would have the necessary information to appropriately charge a beneficiary who owes coinsurance” because the entire POS Discount would be applied to the coinsurance amount otherwise owed by the patient. Further, the reference to reflecting “this negotiated price with the payor” seems to refer to the “price” in the manufacturer contract with the plan/PBM, not the negotiated price in the pharmacy contract with the plan/PBM, since the chargeback the manufacturer “ultimately tenders” would be based upon the former contract, not the later.

HHS also states as follows:

We solicit comment on potential revisions to clarify how the safe harbor would apply during periods of 100 percent beneficiary cost sharing.²²

Ironically, this is one issue that does not need to be addressed—when a patient is in their deductible phase and therefore has 100 percent cost sharing, the patient cost-sharing amount is equal to the negotiated price, and therefore it does not matter whether the POS Discount is applied to the negotiated price or the cost-sharing amount—they are the same thing. E.g., if the negotiated price is $110, the patient cost-sharing amount is $110, and the patient owes $90 whether the $20 POS Discount is applied to the negotiated price or the cost-sharing obligation.

On the other hand, a more relevant issue is situations in which a patient has zero cost-sharing—e.g., Medicare-Medicaid dual eligibles in nursing homes have no cost-sharing obligations in any phase of the Part D benefit, and other low-income subsidy beneficiaries have significantly reduced cost-sharing. Similarly, beneficiaries under Medicaid managed care plans often have zero cost-sharing. If the POS Discount is applied to the patient cost-sharing amount, does that mean that the POS Discount is automatically reduced to never be more than the patient cost-sharing amount?

More generally, if POS Discounts were applied to reduce the patient cost-sharing amount on a dollar-for-dollar basis, then the POS Discounts would operate in a manner similar to a manufacturer copayment coupon program, with all of the value accruing to the beneficiary, and essentially none to the plan. OIG guidance issued in 2005, prior to the 2006 commencement of the Part D program, effectively stated that manufacturer payment of such cost-sharing would constitute an inducement prohibited under the AKS, and as such, copayment coupon programs have effectively been prohibited under Part D.²³ While this would constitute a stunning reversal of that OIG approach, a safe harbor clearly can permit conduct that would otherwise violate the AKS.

Turning back to the “chargeback” definition requirement that the POS Discount be applied so that “the total payment to the pharmacy for the prescription pharmaceutical product is at least equal to the price agreed upon in writing between” the plan/PBM and the manufacturer, what would that mean relative to the application of the POS Discount if HHS intends that this “price” would be the fixed price in a fixed net-price rebate contract? Assume that a drug has a current WAC of $100, the “fixed price” is $80, and the current rebate/POS Discount is therefore $20; further, assume that the negotiated price agreed between the pharmacy and the plan/PBM is $110. In that case, the “chargeback” definition would then require that total payment to the pharmacy must be at least $80, and it would be satisfied because the total payment is $110. However, such a requirement has little effect, at least as applied to branded drugs. The “total payment to the pharmacy” (consisting of the payments from the patient, the plan and the POS Discount) will necessarily equal the negotiated price agreed with the plan/PBM (here, $110), so all that really means is that the negotiated price must be greater than the fixed price in the fixed net-price rebate contract. Moreover, that will be true whether the $20 POS Discount is applied to reduce the negotiated price, or it is applied to reduce the patient copay—in either case, the pharmacy will still receive $110, in total. Since the price in the fixed net-price rebate contract will be less than WAC, and the negotiated price will almost always be more than WAC (so that the pharmacy has a positive margin on the drug), that test will almost certainly be satisfied. (This could, however, conceivably create problems as applied to generic and multi-source branded products, which are frequently sold and reimbursed at prices much less than their WAC.) Consequently, it is not really clear what HHS intended this requirement to accomplish.

Unfortunately, the Proposed Rule does not explain HHS’ intent with respect to any of these issues. Overall, we believe that the proposed safe harbor is unclear regarding how the POS Discount would be applied, particularly as to whether they are to be applied to reduce the negotiated price or to reduce the patient’s cost-sharing amount. If they were required to be applied to reduce the negotiated price, Part D plans could potentially capture the bulk of the value by changing their benefit designs to use fixed copays, instead of coinsurance. If POS Discounts were instead applied to reduce the patient’s cost-sharing amount, manufacturers could potentially elect to unilaterally provide POS Discounts designed to operate in a manner similar to manufacturer copayment coupon programs, paying beneficiary cost-sharing without reducing the plan’s cost for the drug—a practice currently prohibited under Part D pursuant to longstanding OIG guidance.²⁴

How would POS Discounts coordinate with existing Part D manufacturer coverage gap discounts?

Under the Medicare coverage gap discount program, manufacturers are required to provide a coverage gap discount, equal to 70 percent of the negotiated price agreed between the pharmacy and the plan or its PBM, on product utilization dispensed during the Part D “coverage gap.” Assuming that POS Discounts are applied to reduce negotiated prices, situations could arise in which the combined POS Discount and coverage gap discount would exceed the product’s WAC and/or negotiated price.

Consider the following hypothetical:

WAC = $100

Negotiated Price = $110

Coverage gap discount = $77 (70 percent of $110)

Patient cost sharing prior to POS Discount = $27.50 (25 percent of $110)

Part D plan liability prior to POS Discount = $5.50 ($110 - $77 – $27.50)

POS Discount = $50

The combined coverage gap discount and POS Discount equals $127, which is greater than the negotiated price of $110. When applied to the negotiated price as reduced by the $77 coverage gap discount ($33), it pays all of the patient cost-sharing and plan liability, with $17 left over. What happens to that $17? Because of that excess, the $50 POS Discount cannot be “completely applied to the price of the prescription pharmaceutical product charged to the beneficiary at the point of sale,” since it is more than the negotiated price of the product at the point of sale, after application of the coverage gap discount. Implicitly, it would appear that POS Discounts must be limited to no more than the net negotiated price after application of the coverage gap discount. While that would be $33 in this hypothetical, the amount would vary from pharmacy to pharmacy, based upon the negotiated price between the given pharmacy and the patient’s Part D plan or its PBM.

Moreover, in the foregoing hypothetical, the combined coverage gap discount and POS Discount would also exceed the WAC that the manufacturer receives for the product ($127 > $100). Since that is the case, would the portion of the combined discount in excess of WAC ($27) constitute a “reduction in price”? Or, must the total POS Discount and coverage gap discount be limited to an amount which would not exceed WAC?

The Proposed Rule provides no guidance on these issues, other than to state that HHS “intends for this new safe harbor to protect reductions in price for prescription pharmaceutical products without regard to what phase of the benefit the beneficiary is in.”²⁵

Who would bear the funding obligation arising from the period between pharmacies’ provision of POS Discounts and their receipt of manufacturers’ payments of rebates to fund same? 

As noted above, the proposed safe harbor would require POS Discounts to be applied at the point of sale. To the extent POS Discounts are applied to beneficiary cost sharing, pharmacies will not receive those funds from beneficiaries and, unless funds are provided to the pharmacy in advance, pharmacies would bear the cost and cash flow requirements due to any period between the dispensing of the drug and reimbursement for that POS Discount. In the case of a POS Discount that reduces the negotiated price, the PBM may potentially reduce the amount it would otherwise pay the pharmacy by the amount of the POS Discount (or, at least, by the portion of such amount payable by the payor), which would again saddle the pharmacy with those funding costs and responsibilities until the POS Discount is reimbursed.

Alternatively, the PBM could pay the pharmacy the full amount that the pharmacy would otherwise be entitled to receive (including any reduction in beneficiary cost-sharing), and either fund the resulting cash flow requirements itself or require the manufacturer or its contracted plans to do so. It would make the most sense for the PBM to do so if it is playing the “middleman” role between the manufacturer, the plan and the pharmacy—i.e., if it is administering the “chargebacks” under the safe harbor. That said, as noted above, HHS appears to contemplate that wholesalers would play that role.

Notably, pharmacies technically would have no legal obligation to accept and apply POS Discounts—the Proposed Rule would only create a safe harbor for manufacturer reductions in price under the AKS, not an affirmative obligation for other entities to enable manufacturers to satisfy those obligations. Therefore, pharmacies potentially could refuse to participate unless some other entity in the supply chain bears the cash flow obligation.

HHS does not address this issue in the Proposed Rule. If it were to do so, we believe it is most likely that it would require manufacturers to assume the obligations that would otherwise fall to the pharmacies, inasmuch as the Proposed Rule is otherwise drafted to set forth requirements that manufacturers must satisfy. For example, manufacturers could be required to pre-pay POS Discounts based upon some type of estimate, with a subsequent reconciliation.

How would POS Discounts be treated for purposes of manufacturers’ price reporting obligations under the Medicaid rebate program? 

As reflected in the foregoing discussion, there is substantial ambiguity regarding the mechanism (or mechanisms) that might be used to implement POS Discounts. In each case, though, the administration of such arrangements would touch multiple parties in the distribution channel:

• Manufacturers would negotiate prices with plans or PBMs;
• POS Discounts may be administered through PBMs or wholesalers;
• POS Discounts would be required to reduce prices to pharmacies; and
• POS Discounts would be intended to reduce amounts that patients must pay in cost sharing.

The Proposed Rule states that it would not change the rules governing manufacturer pricing calculations under the Medicaid rebate program. However, HHS does not address in the Proposed Rule how POS Discounts would be treated for purposes of calculations under the program. Under the rebate program, manufacturers must report average manufacturer price (AMP) and best price (BP) data to CMS, which are used to calculate manufacturer Medicaid rebate liabilities as well as discounted prices that must be offered to “covered entities” under Section 340B of the Public Health Service Act.

CMS regulations generally provide that AMP is calculated as the average net price from the manufacturer for drugs sold directly or through wholesalers to retail community pharmacies.²⁶ Thus, sales to retail pharmacies, directly or through wholesalers, must generally be taken into account in the AMP calculation. The regulations further provide, however, that manufacturers must exclude from the AMP calculation prices to PBMs and plans, direct sales to patients, and various amounts that are passed through to patients (e.g., “manufacturer coupons to a consumer...to the extent that the full value of the coupon is passed on to the consumer”).²⁷

The BP is the lowest price available to any purchaser, unless the transaction or purchaser is excluded from the BP determination under the regulations.²⁸ Again, however, the BP regulations exclude any prices charged which are negotiated with a Part D plan, PBM rebates “except where such rebates, discounts, or other financial transactions are designed to adjust prices at the retail or provider level,” direct sales to patients, and essentially the same amounts passed through to patients that are excluded from AMP (including manufacturer coupons for which the full value is passed through to the consumer).²⁹

Pursuant to the regulations it is unclear, given the potential variety of mechanisms described above, whether a POS Discount would be considered a PBM or Part D plan transaction (since it would be negotiated with them), a pharmacy transaction (since it would be passed through to them), or a patient transaction (since patients would realize the benefit of the POS Discounts), or perhaps even whether the POS Discount would somehow need to be allocated among these parties. Depending upon the answer, AMPs could be reduced (which may reduce manufacturer rebate liabilities but would have an unpredictable effect on 340B prices).³⁰ Likewise, while it seems most likely to us that POS Discounts in connection with Part D contracts would remain exempt from BP determinations, it is at least conceivable that they could be viewed as PBM rebates “designed to adjust prices at the retail or provider level.” Again, if the latter were the case, manufacturer rebates could increase, and 340B prices could drop, based on lower BPs.

The regulations do not answer these questions, and it may be unlikely that they will be addressed in any final rule, since the regulatory agency with authority over these issues is CMS, rather than OIG.

Conclusion

There are many unanswered questions regarding how HHS intends the new safe harbor for POS Discounts to operate. The answers to these questions are critical in determining the specific requirements that must be satisfied to qualify for safe harbor protection, the future obligations of various industry participants in providing POS Discounts, the operational requirements and associated systems changes that will be needed, and the resulting financial impact on manufacturers, wholesalers, PBMs, pharmacies, plans, beneficiaries and the Federal government, among others.

Significantly, the Proposed Rule is being promoted as one mechanism for achieving the Trump Administration’s political goal of reducing drug prices. For example, HHS Secretary Azar has recently sent a tweet containing the following:³¹

This proposal has the potential to usher in the most significant change in how Americans’ drugs are priced at the pharmacy counter, ever, and ease the burden of the sticker shock that millions of Americans experience every month for the drugs they need.

— Secretary Alex Azar (@SecAzar) February 20, 2019

Moreover, the proposed effective date of January 1, 2020 presumably reflects a desire to implement the intended changes prior to the next presidential election. Consequently, the approach of HHS in addressing these issues may be heavily influenced by considerations of potential reactions by voters, rather than by a considered analysis of longstanding and nuanced fraud and abuse principles.

The Proposed Rule has multiple ambiguities and inconsistencies that, if not appropriately addressed in a final rule, could threaten participants in the critical drug delivery system with major legal risks, including potential felony charges under the anti-kickback statute. Further, a clear understanding of the intended operation of the proposed new safe harbor is critical to evaluation of the policy rationale and likely economic consequences of the Proposed Rule’s adoption. Hopefully these and other significant issues relating to the Proposed Rule will be thoughtfully addressed, rather than answered with political talking points.

1. The Proposed Rule was published in the Federal Register at 84 Fed.Reg. 2340 (Feb. 6, 2019); all page references to the Proposed Rule herein are to that document.
2. “This proposed rule seeks to eliminate rebates so that manufacturers will have an incentive to lower list prices and PBMs will have more incentive to negotiate greater discounts from manufacturers. ...Notably, the Department intends for this proposal to result in manufacturers lowering their list prices, and replacing rebates with discounts.” Proposed Rule at 2352.
3. The Proposed Rule would amend the definition of “discount” under the discount safe harbor, 42 C.F.R. § 1001.952(h), to exclude from that term (and consequently from protection under that safe harbor) a “reduction in price or other remuneration from a manufacturer in connection with the sale or purchase of a prescription pharmaceutical product to a plan sponsor under Medicare Part D, a Medicaid Managed Care Organization as defined in section 1903(m) of the Act, or to a pharmacy benefit manager acting under contract with a plan sponsor under Medicare Part D, or Medicaid Managed Care Organization, unless it is a price reduction or rebate that is required by law.” Proposed Rule at 2363. While there are a number of issues relating to the discount safe harbor amendments, we do not believe there is any question that they would remove protection under that safe harbor for the prescription drug rebates to which the new safe harbor for POS Discounts would apply.
4. This Client Alert is not intended to address issues relating to the Proposed Rule other than those relating to the intended operation of the proposed new safe harbor for POS Discounts. For example, we do not address other issues relating to the proposed amendments to the discount safe harbor or the proposed new safe harbor for service fees paid by manufacturers to PBMs, nor do we address questions relating to HHS’s authority to issue the Proposed Rule or to reinterpret the statutory discount exception. Some of these issues are highlighted in our previous Washington Watch update.
5. For example, the Office of the Actuary of the Centers for Medicare & Medicaid Services (CMS) calculated that Federal Medicare Part D expenditures over a 10-year period would increase by $196 billion if 85 percent of the rebates manufacturers currently provide were converted into POS Discounts and/or reductions in list price, with the remaining 15 percent retained by manufacturers. CMS Office of the Actuary memorandum dated August 30, 2018 re “Proposed Safe Harbor Regulation,” at 5, available at regulations.gov/document.
6. Proposed Rule at 2343 (italics/boldface emphasis supplied). The statutory discount exception referenced by HHS provides that the Federal anti-kickback statute, 42 U.S.C. § 1320a-7b(b) (the AKS), shall not apply to “a discount or other reduction in price obtained by a provider of services or other entity under a Federal health care program if the reduction in price is properly disclosed and appropriately reflected in the costs claimed or charges made by the provider or entity under a Federal health care program.”
7. Proposed Rule at 2340, footnote 1 (italics/boldface emphasis supplied). 
8. Similarly, if simply passing through rebates to the negotiated price solves the problem, then manufacturers, PBMs, Part D plan sponsors and Medicaid MCOs could potentially continue to contract for formulary rebates under the protection of the statutory discount exception, so long as the parties all agree there will be a 100 percent pass-through. In that case, there may be no need to make use of the new safe harbor for POS Discounts.
9. United States’ Statement of Interest Regarding Plaintiff’s Motion for Reconsideration of the Court’s Dismissal of CCS, U.S. ex rel. Herman et al. v. Coloplast Corp., et al., C.A. No. 11-12131-RWZ (D. Mass, filed Aug. 8, 2016).
10. We note that the Department of Justice’s position in Coloplast has drawn strong criticism as being unsupported by the actual language of the statute, including from the Pharmaceutical Research and Manufacturers Association in an amicus brief filed in that case. Brief of Amicus Curiae Pharmaceutical Research and Manufacturers Association of America in Support of Defendant CCS Medical Supplies, Inc.’s Motion to Reconsider the Court’s August 24, 2016 Order or to Certify the Matter for Interlocutory Appeal, U.S. ex rel. Herman et al. v. Coloplast Corp., et al., C.A. No. 11-12131-RWZ (D. Mass, filed Sept. 23, 2016).
11. Proposed Rule at 2349.
12. See subsection (1)(ii) of the proposed safe harbor, quoted above and discussed below. We note that HHS’s statement about percentage “fees” potentially constituting a “disguised kickback” and not being protected “unless the requirements created by this rule are met” seems not to say anything, since any conduct outside of the safe harbor requirements is presumably subject to scrutiny under the AKS. Moreover, as discussed below, the proposed safe harbor for POS Discounts does not clearly preclude calculating POS Discounts based upon a percentage of the drug’s list price.
13. Proposed Rule at 2361.
14. We note that such new arrangements would need to be reviewed for potential privacy issues, including their permissibility under HIPAA.
15. Proposed Rule at 2363.
16. Proposed Rule at 2349.
17. “HHS Blueprint to Lower Drug Prices and Reduce Out-of-Pocket Costs,” 83 Fed.Reg. 22692, 22698 (May 16, 2018).
18. Proposed Rule at 2349.
19. Id. As noted above, the Proposed Rule states that “fees that are based on a percentage of a prescription pharmaceutical product’s list price could be a disguised kickback and would not be protected by this proposed safe harbor unless the requirements created by this rule are met.” While that certainly suggests that percentage of WAC POS Discounts are not permitted, the “unless” appears to indicate that they could be, without any explanation of when that would be permitted. Query whether the “price agreed in writing” could be deemed to include a “price” defined as the product’s WAC at the time of dispense less a given percentage—in which case, neither reference to “price” in the proposed safe harbor would preclude percentage of WAC POS Discounts? The test set forth in the definition of “chargeback” is further discussed in the next section.
20. See CMS Office of the Actuary memorandum dated August 30, 2018 re “Proposed Safe Harbor Regulation,” available at regulations.gov/document, at 3-6 (analysis assumes “that approximately 81 percent of the manufacturer rebates would be reflected in negotiated prices of brand drugs” as “chargeback discounts for Part D”, with 21.25 percent (25 percent of 85 percent) of rebates separately reflected as reductions in list price), and Milliman Client Report, dated January 31, 2019, “Impact of Potential Changes to the Treatment of Manufacturer Rebates,” available at regulations.gov/document, at 7-8 (base case scenario “[a]ssumes manufacturer rebates are replaced with POS price concessions resulting in the same total cost net of rebates”) and 10 (“[m]embers with copayments may not see cost-sharing savings if the value of the copayment remains the same and does not exceed the new POS cost of the medication, though the value of the copayment may in fact change due to actuarial equivalence requirements in Part D”).
21. As noted in the Milliman report referenced in the previous note, a patient paying a fixed copayment would have lower cost-sharing if application of the POS Discount to the negotiated price resulted in the negotiated price (as so reduced) being less than the copayment amount, in which case the beneficiary would pay the reduced negotiated price instead of the (higher) copayment—i.e., the beneficiary would benefit to the extent of the difference between the reduced negotiated price and the copayment amount. Further, as also referenced in the Milliman report, beneficiaries paying copayments potentially could indirectly benefit from application of POS Discounts to negotiated prices to the extent the Part D plan must reduce the copayment amount applicable to all of the drugs on a given formulary tier to satisfy Part D actuarial equivalence requirements. Accordingly, both of those factors may result in the Part D plan not capturing all of the value of the POS Discount.
22. Proposed Rule at 2348.
23. OIG Special Advisory Bulletin on Patient Assistance Programs for Medicare Part D Enrollees, 70 Fed.Reg. 70623 (Nov. 22, 2005). See also OIG Special Advisory Bulletin: Pharmaceutical Manufacturer Copayment Coupons (Sept. 2014), available at oig.hhs.gov/. 
24. Additionally, as noted above, the actuarial estimates contained in the Proposed Rule would presumably be incorrect, inasmuch as they assumed POS Discounts would be applied to reduce negotiated prices, and therefore to reduce Part D plan sponsors’ net drug costs.
25. Proposed Rule at 2348.
26. 42 C.F.R. § 447.504(a).
27. Id. § 447.504(c)(6), (13), (18), (22)-(23), (25), (27)-(29).
28. Id. § 447.505(a).
29. Id. § 447.505(c)(6), (8)-(11), (17), (19).
30. In fact, the Proposed Rule notes that the Milliman impact analysis included an “extended example” that suggested that the loss in Medicaid rebate could exceed the potential savings from lower list prices. Proposed Rule at 2351.
31. twitter.com/SecAzar/.

Client Alert 2019-051