HHS Seeks Major Change in Part D, Medicaid Drug Purchasing

Kerry Dooley Young

February 01, 2019

The Trump administration on Thursday unveiled a plan to allow discounts on prescription medicines to flow more directly to patients in the Medicare Part D pharmacy program, while disrupting the flow of rebates that drugmakers now pay to so-called middlemen.

The US Department of Health and Human Services (HHS) Secretary Alex Azar intends use revisions to exceptions to federal antikickback law as a tool to lower total drug costs. The HHS proposal, released as a draft rule, calls for rearranging certain exceptions now allowed in federal kickback rules. Known as safe harbors in policy circles, these exceptions are meant to allow "relatively innocuous" business collaborations to proceed without threat of prosecution, the rule said.

Under the new HHS proposal, there would be a new carve-out from the federal kickback law for drug discounts offered directly to patients, as well as fixed-fee service arrangements between drugmakers and pharmacy benefit managers (PBMs), HHS said.

The proposal would then exclude from safe-harbor protection the rebates on drugs paid by manufacturers to PBMs, Part D plans, and Medicaid managed care organizations, HHS said.

There's long been criticism of the complex behind-the-scenes transactions of middlemen in US pharmaceutical sales, although PBMs defend their work as seeking to deliver better prices on medicines for consumers. The ambitious plan almost certainly would need support from Congress.

"A Shadowy System"

Azar began an immediate campaign for lawmakers' support. "Democrats and Republicans looking to lower prescription drug costs have criticized this opaque system for years, and they could pass our proposal into law immediately," Azar said in a Thursday press release.

On Friday, Azar appeared at the Bipartisan Policy Center, a Washington think tank, to make his case for the plan. A former executive with Eli Lilly, Azar boiled the complex dynamics of the pharmaceutical supply chain into simple terms in his speech.

Congress has allowed specific exemptions for federal antikickback statutes in order to protect "legitimate business arrangements from the threat of prosecution," he said.

"The drug industry has hidden behind these protections, building a shadowy system of kickbacks that long has drawn the ire of those concerned about prescription drug prices — both Democrats and Republicans," Azar said in the prepared text of the speech.

The HHS proposal would replace this with "transparent, upfront discounts, passed on directly to patients at the pharmacy counter," Azar said.

Still, even HHS concedes that some costs could rise for people enrolled in Medicare and for the government under the proposal. HHS included in the proposed rule an array of financial estimates, which were done by the Centers for Medicare and Medicaid Services' in-house actuaries and two outside consulting firms.

The estimated increases for 2020 Part D premiums ranged from $3.20 a month per enrollee to $5.64, HHS said in the proposed rule. These new costs then would be offset by newly shared savings from reallocation of drug rebates in many cases, according to HHS.

"Taken together, the actuarial analyses project reductions in total cost sharing will exceed total premium increases; however, impact on beneficiaries will vary greatly with some beneficiaries seeing savings while others experience increases in out-of-pocket spending," HHS said in the draft rule.

Mixed Reviews

Sen. Ron Wyden of Oregon, the ranking Democrat on the Senate Finance Committee, seemed in an initial statement to at least agree with HHS' choice of a target for its proposal.

"For years I've said the middlemen have no accountability and consumers don't see any savings at the pharmacy counter," Wyden said in a statement. "I'm going to go the next step and push to force drug companies to lower their list prices to fully account for the removal of rebates rather than pocket the difference as a windfall."

The initial response from other powerful Democrats was clearly skeptical. The leaders of the two House committees that oversee Medicaid and Medicare issued a joint statement, in which they emphasized estimates from the HHS proposal giving it a poor financial prognosis.

"The Trump administration's rebate proposal will increase government spending by nearly $200 billion and the majority of Medicare beneficiaries will see their premiums and total out-of-pocket costs increase if this proposal is finalized," said House Ways and Means Chairman Richard Neal (D-MA) and Energy and Commerce Chairman Frank Pallone Jr (D-NJ) in a joint statement.

"While we agree that the cost of prescription drugs must be addressed, we are concerned that this is not the right approach," they said.

The proposal drew immediate support from the drugmakers' lobbying group, while the trade group for PBMs objected.

Stephen J. Ubl, chief executive officer of the Pharmaceutical Research and Manufacturers of America, said that the HHS proposal would address the "misaligned incentives" that can make it more profitable for insurers and PBMs to favor drugs with higher list prices.

In the current system, patients often have copays for drugs that don't reflect the discounts given behind the scenes.

"We need to ensure that the $150 billion in negotiated rebates and discounts are used to lower costs for patients at the pharmacy," Ubl said in a statement.

The Pharmaceutical Care Management Association (PCMA) said it was concerned about the proposed elimination of the exception from antikickback rules affecting PBMs.

"PBMs keep coverage affordable by negotiating rebates with drugmakers, which are used to enhance benefits and reduce beneficiary cost sharing and premiums," said JC Scott, chief executive officer of PCMA, in a statement.

Alternative Path?

In assessing the outlook for the rebate proposal, HHS allowed that there might be no action taken in the end on its proposal. The department already is anticipating pushback from industry. In the draft rule, HHS said its proposed 2020 start date could be shifted to 2021 to allow the affected industry groups more time to prepare.

HHS also included in the proposal an alternative suggestion, one that it said would be unrelated to changes considered in the exemptions to kickback laws. Sponsors of drug plans could incorporate into the point-of-sale price a specific minimum percentage of average rebates expected for its therapeutic class, HHS said.


The initial response to the HHS proposal pays too little attention to its potential effects on Medicaid, said Edwin Park, a researcher at the Center for Children and Families at Georgetown University in Washington, DC.

Park told Medscape Medical News that most states rely on Medicaid managed care plans and PBMs to negotiate supplemental rebates on behalf of their enrollees. The proposed changes have the potential to increase Medicaid costs by $1.9 billion over a decade.

States will need to act to prevent higher drug costs if the proposal is to take effect, he said.

"Supplemental rebates between states and manufacturers will continue to be permitted, so states would need to act quickly to take over direct price negotiations on behalf of their beneficiaries in managed care," Park said.

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