The Trump Administration’s latest effort to limit the power of pharmacy benefit managers (“PBMs”) is marred by economic uncertainty and looming legal scrutiny. The Office of Inspector General (“OIG”) within the Department of Health and Human Services (“HHS”) recently released a proposed rule (“proposed rule”) removing safe harbor protection under the Anti-Kickback Statute (“AKS”) for prescription drug rebates (“drug rebates) paid by a manufacturer to Medicare Part D plan sponsors and Medicaid managed care organizations (“MCOs”) or their PBMs. The rule also creates new safe harbor protections for point-of-sale reductions in price and certain PBM services fees. The long-awaited proposed rule follows months of anticipation after the Trump Administration released its May 2018 Blueprint to reduce prescription drug costs.
PBMs in Brief
PBMs, on behalf of health plans, employers, and other entities, negotiate and contract with drug manufacturers to obtain rebates on prescription drugs dispensed to health plan members. By aggregating their collective scale and purchasing power of all health plan or employer group clients, PBMs can negotiate better deals with the manufacturer than any one plan or group operating independently. Rebates are typically negotiated on brand-name drugs that compete with therapeutically-similar brands and generics. These retroactive rebates (after point-of-sale) are based on a multitude of factors, including a drug’s placement in a plan formulary designed by the PBM, and the PBM’s power to increase a manufacturer’s market share for specific drugs by inclusion on a formulary. A manufacturer may provide a greater rebate if its product is included in a “preferred” position on the PBM formulary.
A PBM and its health plan client contractually agree on the amount of manufacturer rebates obtained by the PBM that the PBM will “pass through” to the client. Oftentimes, the full amount of the rebate will be passed through to the client, while other times, the PBM may retain a portion in lieu of other administrative fees. The amount of the rebate that is passed through to the client can obviously result in cost-savings for the client that it would not otherwise have obtained if it had been forced to contract directly with the manufacturer. Likewise, rebates passed on to the health plan can also act to keep member premiums lower (since the cost to the plan for the drug is lower). On the other hand, rebates retained by the PBM can lead to lower administrative fees charged to the client by the PBM for its services.
The Trump Administration contends that the current rebate system incentivizes PBMs to cover higher-priced drugs on their formulary in order to receive the largest rebates. The government is also concerned that manufacturers reward larger rebates to PBMs to keep cheaper competitors off the formulary. Thus, the rebate arrangements ensure maintenance of high drug list prices, creating a barrier to lowering overall costs for the government (and taxpayers). PBMs, meanwhile, maintain that drug manufacturers control the list price, and that PBM’s bargaining power reduces premiums and out-of-pocket costs for beneficiaries.
Drug Rebates – How We Got Here
Antitrust litigation in the 1990s involving pharmacies, wholesalers, and big drug manufacturers resulted in the current retroactive drug rebate system. At that time, the majority of manufacturers offered upfront discounts on drugs for greater volume and formulary placement, or rebates not conditioned on volume. Essentially, pharmacies alleged that drug manufacturers and wholesalers conspired among themselves, in violation of federal antitrust laws, to deny pharmacies discounts off the list price of brand-name drugs that the manufacturers sold to preferred purchasers, such as MCOs. Ultimately, most parties settled, and to avoid antitrust scrutiny, any purchaser able to demonstrate an ability to affect market share would be entitled to manufacturer discounts.
As opposed to an upfront discount to a purchaser, the retroactive rebate allows a purchaser to establish an ability to control market share, and on that basis, receive a rebate from the manufacturer. PBMs, of course, possess such ability. These rebates are permissible under the regulatory discount safe harbor to the AKS, which prohibits payment of remuneration in exchange for referrals of patients covered under federal healthcare programs, such as Medicare and Medicaid. Exercising its agency authority, HHS created a discount safe harbor specifically to protect from AKS liability the prescription drug discounts or rebates that manufacturers pay to plan sponsors under Medicare Part D and Medicaid MCOs, whether negotiated by the plan or by a PBM, or paid through a PBM to the plan or Medicaid MCO.
Meanwhile, the broad AKS statutory discount exception (enacted by Congress more than a decade before HHS promulgated the discount safe harbor in 1991) could also potentially shield these rebates from AKS liability. Congress enacted the discount exception for “a discount or other reduction in price obtained by a provider of services or other entity under [Medicare or Medicaid] if the reduction in price is properly disclosed and appropriately reflected in the costs claimed or charges made by the provider or entity under [Medicare or Medicaid].” The proposed rule, though, boldly asserts that payments from a manufacturer to a PBM to buy formulary position do not qualify for this exception.
The Proposed Rule
Drug price reductions from manufacturers to plan sponsors under Medicare D and Medicaid MCOs or their PBMs, i.e., drug rebates, would no longer be protected from AKS liability under either the regulatory discount safe harbor or statutory discount exception to the AKS. HHS declares that rebates paid by drug manufacturers to or through PBMs to buy formulary position are not reductions in price and do not qualify under the AKS statutory discount exception. Such declaration eviscerates HHS’ longstanding encouragement and holding that drug rebates reduce costs of the Medicare Part D program and are permissible non-abusive arrangements. The proposed rule also amends the definition of “discount” in the discount safe harbor to exclude a “reduction price or other remuneration” from a manufacturer to a Medicare Part D plan sponsor, a Medicaid MCO, or a PBM acting under contract with either.
Meanwhile, the proposed rule would create a new safe harbor for discounts offered by manufacturers to Part D and Medicaid managed care patients at point of sale, under the following conditions: (i) price reduction is set in advance with the purchaser (i.e., plan sponsor under Medicare Part D, the Medicaid MCO, or the PBM); (ii) price reduction does not involve a rebate unless the full value of the price reduction is provided to the dispensing pharmacy through a chargeback (i.e., payment from the manufacturer to the pharmacy that is at least equal to the price in place between manufacturer and purchaser); and (iii) price reduction is completely passed through to consumers at the point of sale.
Lastly, the proposed rule would create another safe harbor for fixed fee service arrangements between manufacturers and PBMs. HHS, though, cautions that PBM service fees tied to a drug’s list price, based on sales volume, or exceeding fair market value “could be a disguised kickback” and not protected by the proposed safe harbor.
OIG Overreach – Does HHS Exceed Its Legal Authority in Eliminating AKS Protection for Drug Rebates?
It is questionable whether HHS has legal authority to eliminate rebate protection in light of Congress’ intent and enactment of the broad AKS statutory discount exception. HHS maintains that drug rebates were only protected under the discount safe harbor, and thus, HHS can eliminate rebates from that safe harbor pursuant to its administrative authority. Accordingly, stakeholder challenges to HHS authority, lodged either during the comments phase of rulemaking or in response to enforcement action, would posit: 1) While Congress authorized HHS to promulgate various safe harbors to the AKS to permit specific non-abusive arrangements, removal of drug rebates from the discount safe harbor contradicts the statutory discount exception, thus invalidating any final rule; and 2) HHS’ proclamation that drug rebates no longer qualify under the statutory discount exception does not make it so, as rebates can qualify for protection under either the discount safe harbor or the discount exception, and courts will examine each provision separately.
To the first argument, HHS is free to amend safe harbors to further Congress’ intent that such regulations be evolving rules reflecting changing business practices and technologies in the industry. However, HHS’ removal of drug rebates from the discount safe harbor effectively defines drug rebates as impermissible arrangements. Such a conclusion conflicts with the statutory discount exception, enacted by Congress, and therefore, may render a final rule invalid and unenforceable. Indeed, the Administrative Procedure Act authorizes courts to set aside agency actions that are “not in accordance with the law,” or “in excess of statutory jurisdiction, authority, or limitations, or short of statutory right.” 5 U.S.C. § 706(2)(A), (C); see also Oregon v. Ashcroft, 368 F.3d 1118, 1129 (9th Cir. 2004) (holding that agency determinations that squarely conflict with governing statutes are not entitled to deference and must be set aside). In other words, if a court deems drug rebates are the kind Congress intended to include in the statutory discount exception, only Congress, not HHS, can eliminate protection for rebates from AKS liability.
To the second argument, by eliminating drug rebates from the discount safe harbor, HHS seemingly anticipates stakeholders seeking protection for rebates under the statutory discount exception. The proposed rule attempts to stifle those claims by stating rebates do not fall under the statutory exception. Further, HHS redefines “discount” in the safe harbor to exclude rebates from manufacturers to plan sponsors or PBMs. However, HHS’ definition of “discount” in the safe harbor does not necessarily alter the definition of “discount” in the statutory exception. Indeed, at least one court, in an issue of first impression, examined the interpretation and application of the statutory discount exception. There, the Shaw court found that interpreting an arrangement under the discount safe harbor is separate and apart from an interpretation under the statutory discount exception. Further, while courts may look to the agency’s implementation of the agency’s own discount safe harbor, “[t]his does not mean that what the OIG says in its promulgated regulations about discounts is controlling on how the word ‘discount’ is to be interpreted and applied in the statutory ‘discount exception.’” Interpretation of the statutory discount exception “will not be limited by the definitions imposed by the safe-harbor provisions.” Thus, stakeholders may have a viable claim that the statutory discount exception does in fact protect drug rebates from AKS liability, irrespective of HHS’ “discount” definition with respect to the discount safe harbor.
Any stakeholder challenge would come on the heels of HHS’ recent defeat in U.S. District Court for the District of Columbia, which found HHS exceeded its legal authority, acting outside the scope of its statutory mandate, by substantially reducing the amount Medicare pays for 340B-acquired medications. Specifically, the court found HHS did more than just make “adjustments” to Part B reimbursement rates, as authorized by Congress. Rather, HHS’ nearly thirty percent reduction in reimbursement for 340B drugs “fundamentally altered the statutory scheme established by Congress.”
The Uncertain Impact
If finalized, the proposed rule would disrupt current arrangements among manufacturers, PBMs, and pharmacies. Arrangements would need to comply with HHS’ new, unsettled safe harbors, or PBMs could be vulnerable to AKS scrutiny and enforcement actions. While a final rule would only affect federal healthcare programs, HHS Secretary Alex Azar anticipated that commercial plans would follow suit and encouraged states to ban rebates for private plans consistent with the proposed rule. Additionally, the effective date of Jan. 1, 2020 pressures plans and PBMs to reconsider contracts for the calendar year 2020 for Part D, and, if necessary, consider alternative arrangements and point-of-sale discounts to comply with the rule.
Ultimately, there is no guarantee that implementation of a final rule and eliminating protection for drug rebates would reduce drug prices, which is the goal of any action by the Administration. Manufacturers are still in charge of list drug prices. HHS fails to cite in the proposed rule any incentive for manufacturers to lower list prices, particularly if manufacturers can replace current rebates with another discount directly with plan sponsors, even if those discounts must be reflected at the point of sale. Notably, HHS utilized the CMS actuary and two independent actuarial firms to determine the economic impact of the proposed rule. Actuarial scenarios with eliminated rebates under the proposed rule varied widely, some resulting in consumer savings, while others increased beneficiary and federal spending premiums and cost sharing to the tune of approximately $140 billion. As with any proposed rule, stakeholder response will be imperative. The deadline for submitting comments is April 8, 2019.
Given the far-reaching effects of any potential action arising out of the Trump Administration’s Blueprint, Husch Blackwell attorneys continue to monitor trends, proposals, and rules impacting all levels of the drug supply chain, including PBMs. For more information on the implication of HHS’ proposed rule eliminating AKS protection for drug rebates, please contact a member of the Husch Blackwell Health Law Team.
 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).
 U.S. Dep’t of Health & Human Servs., American Patients First: The Trump Administration Blueprint to Lower Drug Prices and Reduce Out-of-Pocket Costs (May 2018), https://www.hhs.gov/sites/default/files/AmericanPatientsFirst.pdf.
 84 F.R. at 2341.
 Express Scripts, one of the nation’s largest PBMs, released a 2018 drug trend report reflecting $45 billion in client savings due, in part, to drug rebates. Express Scripts Drug Trend Report, http://lab.express-scripts.com/lab/drug-trend-report. Moreover, Express Scripts rejects the government’s argument and favors lower list prices from manufacturers over higher rebates. See Express Scripts Letter to Secretary Azar, Re: RIN 0991–ZA49; HHS Blueprint to Lower Drug Prices and Reduce Out-of-Pocket Costs (July 16, 2018), available at lab.express-scripts.com/about/~/media/fb9e3eee000449a1a6dcacb227726781.ashx.
 See In re Brand Name Prescription Drugs Antitrust Litig., 123 F.3d 599, 602–03 (7th Cir. 1997).
 See In re Brand Name Prescription Drugs Antitrust Litig., No. 94 C 897, 1997 WL 337251, at *1 (N.D. Ill. June 17, 1997)
 42 C.F.R. § 1001.952(h); 42. U.S.C. § 1320a-7b(b)(3)(A).
 42 U.S.C. § 1320a-7b(b)(3)
 84 F.R. at 2340
 HHS Office of Inspector General, Higher Rebates for Brand-Name Drugs Result in Lower Costs for Medicaid Compared to Medicare Part D (August 2011), https://oig.hhs.gov/oei/reports/oei-03-10-00320.pdf
 84 F.R. at 2363
 Id. at 2349.
 “The bill would specifically exclude the practice of discounting or other reductions in price from the range of financial transactions to be considered illegal under [M]edicare and [M]edicaid, but only if such discounts are properly disclosed and reflected in the cost for which reimbursement could be claimed. The committee included this provision to ensure that the practice of discounting the normal course of business transactions would not be deemed illegal. In fact, the committee would encourage providers to seek discounts as a good business practice which results in savings to [M]edicare and [M]edicaid program costs.” H.R. Rep. No. 95-393(II), 95th Cong., 1st Sess., 53 (1977).
 President Trump’s Plan to Reduce Prescription Drug Costs for Patients: Hearing Before the S. Health Comm., 115th Cong. (June 12, 2018) (testimony of Alex Azar, HHS Secretary), available at https://www.c-span.org/video/?446791-1/secretary-azar-testifies-prescription-drug-pricing-plan (Secretary Azar, responding to Sen. Lamar Alexander’s (R-TN) question whether HHS has authority to eliminate rebates or that Congress needs to act, “We do believe we have the regulatory authority. Rebates are allowed under an exception to the Anti-kickback statute. That’s an exception that we believe by regulation we could modify but of course if Congress were to take action that would obviously shore up our authority.”).
 64 Fed. Reg. 63518, 63528 (Nov. 19, 1999) (restated at 84 F.R. at 2346) (OIG maintains that “the regulatory safe harbor both incorporates and enlarges upon the statutory exception”).
 United States v. Shaw, 106 F.Supp.2d 103 (D. Mass. 2000).
 See also Klaczak v. Consol. Med. Transp., 458 F. Supp. 2d 622, 686 (N.D. Ill. 2006) (noting as separate provisions the discount safe harbor and statutory discount exception; “[t]he various Medicare ‘safe harbors’ define a subset of clearly legal conduct, but that does not mean that anything outside of the ‘safe harbors’ violates the AKS.”)
 Shaw, 106 F.Supp.2d at 113.
 Stakeholders could also challenge HHS’s authority to eliminate drug rebates under the Medicare Part D noninterference clause, which expressly prohibits HHS from interfering with negotiations between manufacturers and sponsors. See 42 U.S.C. § 1395w-111(i); see also 79 Fed. Reg. 29844, 29873-74 (May 23, 2014).
 Am. Hosp. Ass’n v. Azar, 348 F. Supp. 3d 62, 2018 WL 6807219 at *10, *12 (D.D.C. 2018).
 Id. at *12.
 84 F.R. at 2356.