Are Drug Rebates Going Away?

Ross Margulies, JD, MPH

Whether healthcare executives like it or not, rebates as currently administered may soon be a thing of the past.

This is according to Ross Margulies, JD, MPH, an attorney at the law firm Foley Hoag LLP, in his March 27, 2019 presentation “The Current Status of Safe Harbor Protection for Rebates: Is the End Near?,” at the Academy of Managed Care and Specialty Pharmacy Annual Meeting 2019 in San Diego.

“The current practice of retrospective rebating-in which manufactures, plans, and PBMs negotiate discounts in exchange for formulary placement, market share, and volume commitments-is widespread and the predominant method by which payers negotiate discounts off of the list price of a drug,” said Margulies.

“This trend is only increasing. In recent years, rebates as a percentage of total gross drug spending have increased. On the one hand, rebates are largely credited with keeping net drug prices relatively stable. On the other hand, the Trump administration has identified the current rebating system as potentially problematic due to the impacts of rebates on manufacturer prices and beneficiary cost sharing.”  

In February, the HHS’ Office of Inspector General (HHS-OIG) issued a Proposed Rule that, if adopted, would upend the current prescription drug rebate system. The proposed HHS-OIG rule is probably the “biggest potential change to the current drug supply chain since the creation of the Part D program in 2003,” according to Margulies.

“Rebates have been the predominant method of discounting since at least the mid-1990s, if not before,” he said.

If finalized, healthcare executives will be faced with significant new hurdles, including contract renegotiations, new formulary management strategies, and significant updates to claims processing systems.

Related article: PBM Performance-Based Pharmacy Networks Aim to Cut Costs

“According to HHS-OIG, the current rebate system is a significant cause of high drug prices,” said Margulies. “The major focus of the Proposed Rule is disrupting the existing manufacturer rebate system under which drug manufacturers negotiate rebates with plan sponsors-and their contracted PBMS-in exchange for formulary placement, development of a pharmacy network, and favorable coverage policies. The Proposed Rule, if adopted, would result in an elimination or restriction of rebates in favor of upfront discounts or fixed prices for brand drugs.”

A discount safe harbor currently protects most rebate arrangements under the federal Anti-Kickback Statute (AKS). The federal AKS makes it a crime to pay or receive anything of value as an incentive or an inducement to use a healthcare service that is reimbursable by a federal healthcare program, according to Margulies.

“However, if HHS-OIG finalizes its rule as proposed, it would eliminate this protection and subject these arrangements to significant legal risk,” Margulies said. “A rebate paid to encourage a Part D plan or a Medicaid managed care plan to favor a particular drug would be, on its face, a violation of the AKS-with evidence of the requisite intent. However, a regulatory ‘safe harbor’-called the “discount safe harbor”-currently protects most rebating arrangements. It is this safe harbor the HHS-OIG proposed to amend.”  

“The time is now to begin thinking about how to address the significant challenges that will flow from a world without rebates-including what future manufacturer negotiations looks like,” Margulies said.

Margulies expects HHS-OIG may ultimately finalize the rule. “Managed care executives will need to learn to operate and grow in a new world without rebates, which will certainly involve some major growing pains,” he said.