Tagged: health law

To Combat Problematic PBM Practices, Eliminate the Rebate Safe Harbor

May 21st, 2020 in Administrative Law, Federal Legislation

Pharmacy Benefit Managers (“PBMs”) are at the center of the discussion about the causes of high pharmaceutical prices and efforts to reduce the nations pharmaceutical spending. Currently over 80% of pharmaceuticals in the United States are purchased through PBMs. While PBMs were originally intended to reduce drug costs to consumers, they now face criticism for actually increasing drug prices. A 2016 study found $23billion of health care spending was directly attributable to PBMs. In order to reduce pharmaceutical spending in the United States, legislative efforts must aim to align the incentives of PBMs and their payer clients. One such effort would be to eliminate the rebate safe harbor.

PBMs are for-profit entities that broker deals in the pharmaceutical supply chain. PBMs are entitled to retain profits for the services they provide. However, the problematic practices of PBMs all have to do with the amount of profit they are able to retain. PBMs act as middlemen between payers, pharmaceutical manufacturers, and pharmaceutical retailers. PBMs use their payer client networks to create a large network that has more buying power in order to negotiate for lower prices from pharmaceutical manufacturers, usually in the form of rebates.

The rebate system is extremely controversial and receives a lot of criticism. It works like this: PBMs negotiate for lower drug prices for their health insurance payer clients by offering different types of placement on health plan formularies.  Manufacturers agree to give rebates to the health plan for use of the drug based on where the drug is listed on the health plan formulary. When the drug is paid for by the health plan, the manufacture gives a discount to the plan in the form of a rebate. The rebate passes through the PBM to get to the plan, and the PBM often retains a portion of the rebate as part of the contract (“Some research has found that major PBMs can retain around 38-40 percent of rebate dollars collected from drug manufacturers”).  The rebate that the PBMs negotiate is not a rebate that is given to the consumer directly at the pharmacy; the purported benefit of the rebate to the beneficiary is a decrease in premiums.

The central concern is that the reduction in price from the rebate is benefiting PBMs, drug manufactures and health plans, but not patients.  Health plan beneficiaries often have deductibles and co-insurance payments, and the price they pay is not based off of the discounted price the insurer gets, but rather the list price of the drug  (“many rebates do not flow through to consumers at the pharmacy counter as reductions in price. In these instances, beneficiaries experience out-of-pocket costs more closely related to the list price than the rebated amount during the deductible, coinsurance”). The rebate does not apply to the price that a beneficiary directly pays for a drug, it only applies when the health plan is covering the cost.

Niall Carson / PA Wire / PA Images

The rebate system is also harming patients by driving up the prices of drugs.  The system creates perverse incentives for PBMs, where they are incentivized to include drugs with higher list prices on formularies. This is because the portion of the rebate that PBM retains is based off of the amount of savings, meaning that a higher priced drug generates a higher rebate.  In addition to incentives placed on PBMs to select higher priced drugs, the system can also incentivize manufacturers to raise or keep list prices high.  Logically, if PBMs are selecting the higher priced drugs in order to get larger rebates, drugs with lower list prices will not be selected for preferred placement on formularies.  Lower list prices reduce the savings generated which results in removal from formulary. The nature of the rebate system means that rebates effectively function as kickbacks to PBMs.

PBMs are subject to a host of federal regulations due to the highly regulated nature of health care.  The industry is affected by federal regulations because PBMs contract with the federal government to administer drug benefits for Medicare Part D and because they submit claims to federally funded programs, Medicaid and Medicare, on behalf of their clients. The Federal Anti-Kickback Statute (“AKS”) “prohibits offering, paying, soliciting or receiving anything of value to induce or reward referrals or generate federal health care program business.” 42 U.S.C § 1320a-7b(b) (2012).  The AKS and subsequent regulations include voluntary safe harbors, which “describe various payment and business practices that, although they potentially implicate the federal anti-kickback statute, are not treated as offenses under the statute.” 42 C.F.R. §1001.952 (2018). The AKS has a mandatory discount safe harbor, meaning that the government will not prosecute for arrangements that fall within the discount safe harbor requirements. 42 U.S.C. § 1320a-7b(b) (2012). The discount safe harbor applies to PBMs because they use rebates to negotiate deals between drug manufactures and clients.  These rebates fall within the definition of kickbacks under AKS because the PBM retains, as revenue, a portion of the rebates that it negotiates for each drug, and the amount they are paid is based on how much that drug is purchased using the rebate. 

While these rebates are technically a violation of AKS, they do not currently put PBMs at risk for prosecution under the statute because the rebates are a form of discount, and, consequently, the discount safe harbor applies. In order to be protected by the safe harbor, PBM arrangements for rebates with manufacturers and clients must strictly comply with the requirements or else the PBM is in violation of AKS. 42 U.S.C. § 1320a-7b(b)(3)(A) (2012); 42 C.F.R. § 1001.952(h) (2018). This safe harbor, as presently understood, applies to prescription drug rebates paid by drug manufacturers to PBMs, Medicare Part D, and Medicaid managed care organizations, and thus protects the rebates from violation of the Anti-Kickback Statute.

On February 6, 2019, the HHS Office of the Inspector General (“OIG”) published a proposed rule to eliminate the AKS safe harbor applicable to PBMs. The proposed rule would have revised the discount safe harbor “to explicitly exclude from the definition of a discount eligible from safe harbor protection certain reductions in price or other remuneration from a manufacturer of prescription pharmaceutical products to plan sponsors under Medicare Part D, Medicaid managed care organizations … or pharmacy benefit managers under contract with them.” This would have meant that the rebates from manufactures to PBMs would constitute kickbacks and put the PBMs at risk for AKS violation. The basis for the proposed rule was that the safe harbor is operating to decrease transparency and increase costs to consumers, instead of increasing transparency and lowering costs to consumers.

The proposed rule would have removed the incentive that PBMs have to negotiate for rebates on their own behalf instead of on behalf of the plans and their beneficiaries.  Under the terms of the proposed rule, safe harbor protection would have still applied to discounts that the patient receives at point of sale. This protects the consumer interest by ensuring that they receive the discount directly, and allows PBMs to still use discounts as a negotiating tool for their clients. The proposed rule would have also granted safe harbor protection to PBM service fees, which would allow PBMs to continue to profit, at fair market value, from the services they provide.

The response to the proposed rule was, naturally, divided. Proponents of the proposed rule argued it would fulfill its intended purpose and lower the list prices of drugs to price that PBMs are currently negotiating for after rebates, and also lead to increased use of lower cost generics.  That result is supported by analyses prepared by Milliman for HHS, which estimate that implementation of the proposed rule would lead to up to a ninety-eight billion dollar reduction in spending by federal programs over ten years.  However, the PBM industry argued the rebates do not have the negative effects that HHS claim, and that  there are no “viable alternatives to rebates, in light of drug manufacturers’ inability to offer up-front discounts under current antitrust case law.”  Industry push-back also contended that the prohibition on rebates would lead to increased premiums because the use of rebates allows plans to lower premiums. Unfortunately, the Trump Administration sided with the industry perspective and reversed course and withdrew the proposed rule.

Eliminating the rebate discount safe harbor would have had a significant impact toward eliminating a major conflict of interest inherent in the PBM model. If the administration is not willing to put federal programs and beneficiaries ahead of industry, then Congress must enact legislation that achieves the result necessary to reign in excessive and unnecessary pharmaceutical drug spending.

Rebecca Mashni graduated from Boston University School of Law in May 2020.

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How State Medicaid Reimbursements are Limiting Hepatitis C Coverage and Solutions

July 31st, 2017 in Legislative Operations

Hepatitis C has rapidly become a major public health problem, and accessibility to new and affordable treatments has been highly sought after.  Hepatitis C virus (HCV) can be transmitted by blood transfusions or contaminated needles; although no symptoms are present at the outset, chronic Hepatitis C infection can give rise to liver complications such as cirrhosis or liver cancer. As the leading infectious killer in the U.S., HCV chronically infects 2.7 million to 3.5 million people in the U.S. Since first coming onto the U.S. market in in 2013, Sovaldi has been one of the few, if only, medications to successfully treat Hepatitis C at a cure rate of over 90% after 12 weeks of treatment, with few side effects. Sovaldi holds considerable exclusivity due to its novelty. As such, Sovaldi costs $1,000 per pill, leading to a costly $84,000 for a 12-week treatment regimen.  In contrast, Sovaldi costs less than $1 per pill.20GILEAD-master315

Sovaldi pricing has received nationwide attention; to the point of rare bi-partisan partnership taking action.  On July 11, 2014, Senate Finance Committee Ranking Member Ron Wyden (D-Oregon) and senior Committee Member Chuck Grassley (R-Iowa) requested information on Gilead Sciences’ pricing tactics that have negatively affected public payers’ access to Sovaldi. The lawmakers deemed the investigation pertinent since the medication raises “serious questions about the extent to which the market for this drug is operating efficiently and rationally,” and Sovaldi’s price “appears to be higher than expected given the costs of development and production and the steep discounts offered in other countries.” After an 18-month investigation and hearing, Congress released an extensive report on December 1, 2015, detailing Gilead Sciences’ pricing, marketing, and development mechanisms on Sovaldi and Harvoni.

Among other conclusions explaining the price variation, the report determined that Gilead did not easily provide access to states’ Medicaid programs.  Medicaid programs spent $1.3 billion on Sovaldi, before rebates, in 2014 alone, yet less than 2.4 percent of Medicaid-eligible patients with HCV received treatment.  In fact, many states have resorted to restricting access to covering a limited number of Medicaid patients.  Some states, such as New Mexico, limit Medicaid coverage to the sickest patients, or those who have pre-existing liver damage.  These states require healthcare providers to “perform risky liver biopsies on patients to prove how sick they are, or wait until patients have late-stage liver disease before they can be eligible for coverage.”

A recent study examined how consistently state Medicaid programs abided by recommendations made by the American Association for the Study of Liver Disease and the Infectious Diseases Society of America on treating, managing, and preventing HCV. Out of the 42 states (including the District of Columbia) that had publicly available Medicaid reimbursement criteria, 74% restricted access to Solvaldi to those with advanced fibrosis or cirrhosis, which occurs at stage F4 of the disease. Furthermore, a majority of states limit Medicaid reimbursements to patients who have abstained from drug and alcohol use for a certain period of time, even those who have undergone opioid substitution therapy. From these findings, the study concluded that current state Medicaid reimbursements may violate federal Medicaid law, which provides that state Medicaid programs plans must include drugs manufactured by pharmaceutical companies that have negotiated rebate plans with the Secretary of Health and Human Services, except for those under the restrictive lists of drugs.

Some states have rearranged their Medicaid program policies by forming a pool with other states and purchasing alternative treatments exclusively in an effort to force coverage away from Solvaldi.  As of January 2015, Missouri and 24 other states successfully reached a negotiation with AbbVie to secure an extra 20 to 30 percent rebate system for their Medicaid patients.  However, these negotiations place restrictions on Medicaid enrollees, who are required to stay sober for 90 days before beginning the Viekira Pak treatment.  Although Missouri anticipates to save $4.2 billion from these rebates, the lag time of over six months for calculating rebates into the state budget means it will be too soon to determine the overall cost savings on Medicaid spending. The Missouri state department also plans to provide Solvaldi to an estimated 15 to 20% of HCV patients who cannot be effectively treated by Viekira Pak, which implies that the medication cannot clinically treat all people infected by HCV.  Exclusive Medicaid negotiations with alternative treatments could lead to unintended leftover costs from providing for patients whom Viekira Pak is not a valuable option.

Recent litigation on the state level has addressed issues of Medicaid coverage of Sovaldi.  In B.E. v. Teeter, Washington Medicaid enrollees, who were HCV patients that did not receive DAA medication, brought a class action suit against the Washington State Health Care Authority (“WHCA”), under claims of violating the Medicaid Act for categorically excluding them from “medically necessary” drugs. The federal district court sided with the plaintiffs’ argument, granting their motion for preliminary injunction, given that the plaintiffs had satisfied all the factors necessary to warrant such a remedy. In doing so, the court determined that the plaintiffs’ evidence “will likely establish that the WHCA is failing to follow its own definition of medical necessity by refusing to provide DAAs to monoinfected enrollees with a F0-F2 score and offering only “monitoring” in lieu of this breakthrough treatment.”

This decision significantly marked the first time that a federal court deemed restrictions to Hepatitis C state Medicaid programs as illegal, and thus could provide a precedent for other states to follow suit. Consumers from California and, again Washington, have also recently filed suits against private insurance companies, such as Anthem Blue Cross and Group Health Cooperative.  Since these lawsuits have involved gathering a class of injured plaintiffs, however, issues of class certification under Rule 23(a) and 23(b)(2) will need to be resolved, as they were in B.E. v. Teeter. As such, law suits filed on behalf of a consumer class may not be the most efficient resolution, since time constraints and litigation costs could prolong the desired remedy, if the court chooses to grant it.

Massachusetts employs a fee-for-service program for distributing Solvaldi. As such, the state has relatively unrestricted access to Sovaldi compared to other states; yet, only an estimated 1,075 members have been approved for treatment regimens among the 7,658 members living with HCV. In an unprecedented move, on January 2016, Massachusetts Attorney General Maura Healey issued a letter warning to sue Gilead Sciences for potentially violating unfair trade practice under section 2 of chapter 93A of the Mass. Gen. Laws.  However, the lawsuit may not contain the merits required to bring an action under consumer protection law. The AG eventually spent months negotiating with Gilead Sciences and recently, on June 30, 2016, reached a new drug rebate program to provide unrestricted coverage to MassHealth patients in need of Hepatitis C treatment.  Since the MassHealth rebate program was recently implemented on last August 1st, the effectiveness of the pricing solution will need to be monitored further to determine whether Medicaid coverage of Solvaldi is expanded to offer more treatments to those in need.


1498837364Monica Chou anticipates graduating from Boston University School of Law in May 2018 and plans to practice health law.

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