HHS’s New Proposal to Remove Safe Harbor Protection for PBM Rebates Analyzed

By Dean Celia, Contributing Writer

In the February 2018 issue of First Report Managed Care, we updated you on various federal and state initiatives being put in play to address rising prescription drug prices. On January 31, the US Department of Health and Human Services unveiled yet another measure, proposing a rule that would impact pharmacy benefit manager (PBM) rebates. In an effort to dive deeper into the potential changes, we returned to our panel to get their top-notch analysis.  

First, a summary of the proposed rule:

• The proposal updates the discount safe harbor “to explicitly exclude reductions in price offered by drug manufacturers to PBMs, [Medicare] Part D, and Medicaid managed care plans from the safe harbor’s definition of a ‘discount.’”
• It creates a new safe harbor that allows price reductions only if they “are reflected in the price charged to the patient at the pharmacy counter.”

In the February article, we asked our panel to prioritize various initiatives in play. Where does this new measure fall in the view of our experts?

Some of our experts don't see the new measure as immediately critical, compared with other initiatives such as those designed to stimulate approval and drive use of generic drugs, but agree that PBMs will feel the impact.

“This just shifts the protected harbors from PBMs to patients,” Larry Hsu, MD, medical director of the Hawaii Medical Service Association in Honolulu, HI, added. “While it appears to be more transparent, it does not address the fundamental high cost of drugs. The discounts and rebates continue. The high prices continue. But now, the harbor is on the patient’s side.”

Arthur Shinn, PharmD, president of Managed Pharmacy Consultants in Lake Worth, FL, agreed. “They are not taking money out of the system. They are just reallocating money, so I don’t see how this is going to reduce drug prices. It will reduce rebates going back to health plans and self-insured employers [which they use] to offset premium and copay increases.”

Dr Shinn expressed surprise that “a very competent HHS” proposed the rule in this way. “That makes me think this is a political play.” He added that he believes PBMs have gotten the message, and pointed to CVS Health’s plan to implement a guaranteed net cost pricing model as an example of letting the market work on its own.

Charles Karnack, PharmD, BCNSP, assistant professor of clinical pharmacy at Duquesne University in Pittsburgh, PA said that, regardless, it is a pathway to transparency. “If patients can actually see the drug price reductions, it may have the biggest impact politically.”

Others foresee change ahead for the PBM and pharmaceutical industries. “It would be a seismic shift in how manufacturers do business,” said Daniel Sontupe, executive vice president and director market access & payer marketing at The Bloc Value Builders in New York.

“It would create an opportunity to once again compete on value of product and services and not on who is willing to pay the most.” Still, Mr Sontupe said he sees Dr Hsu’s point, and the potential danger of creating a kind of shell game. “What will the payers create to pull back some of that rebate into their system?” Because of this, he thinks the rule change should be accompanied by legislation that creates alignment and drives better outcomes and net cost reductions.

All of that is unlikely, noted F. Randy Vogenberg, PhD, RPh, principal at the Institute for Integrated Healthcare in Greenville, SC. “There is lack of deep consensus in Congress around what specifically to do legislatively.”

An “Unsettling Change”

What if the rule forges ahead and becomes a regulation? “This is a truly unsettling change in business practice that was developed back in the 1970s,” offered Norm Smith, a Philadelphia-based principle payer market research consultant. “PBMs would have to have a new business model, and PBMs’ ability to deliver valuable services to manufacturers [will become] highly questionable.”

Most of our experts believe that HHS’s planned effective date of January 1, 2020 is unrealistic. Dr Shinn’s unvarnished opinion, “It’s wishful thinking and a pipe dream.” Others agreed, but offered caveats.

“Some change is possible, with or without legislation or regulation, [as the] commercial market shifts to an aligned approach to pass-through rebate savings,” said Dr Vogenberg.

Mr Sontupe added, “January 1 is realistic to remove rebates from the system. However, it is not realistic to believe that [the pharmaceutical and PBM] industries will be prepared for how they will actually implement the change.” Rebates could slowly disappear, but with no corollary cost reductions for quite some time.

Dr Karnack continued on Dr Shinn’s observation that politics is playing a role. “There may be an attempt to implement it during the next presidential campaign”—to win votes by delivering on the promise of increased transparency.

Mr Smith sees a long muddy, road ahead, but added that pharmaceutical companies may ultimately come out smelling like a rose. “Implementing this would take multiple years. But as long as net pricing is maintained, this could benefit pharma. Who creates value for patients? Not the PBMs.”