What is Changing with Rx Rebates? HHS Issues Proposed Rule Changes

On January 31, 2019, the Department of Health and Human Services (HHS) released a notice of proposed rulemaking as part of ongoing administration drug pricing reform efforts. The Proposed Rule would modify a regulatory provision that had previously protected certain pharmaceutical manufacturer rebates from criminal prosecution and financial penalties under the federal Anti-Kickback Statute.

The Proposed Rule is a follow up from “American Patients First: The Trump Administration Blueprint to Lower Drug Prices and Reduce Out-of-Pocket Costs” released in May 2018. Although the current proposal applies to government-sponsored plans, HHS Secretary Alex Azar called for extending the proposal into the commercial drug market including Medicare and some parts of Medicaid.

The Proposal is not final and will be subject to a 60-day period for public comment.

What Is HHS Proposing?

Secretary Azar is pressing both Congress and regulators “to finalize rules that we have put out as proposals so far this year.”[1] HHS is proposing the outright elimination of rebates paid for by pharmaceutical manufacturer to pharmacy benefit managers (PBMs). They would like the proposal passed through Congress immediately by eliminating Safe Harbor rules currently in place for those rebates paid by manufacturers. HHS expects that the value of the current rebates being provided would instead be altered to discounts off the list price of the medication. By no longer providing rebates, the price of the medications would be discounted at the point-of-sale providing greater transparency and theoretically reducing the potential member out-of-pocket costs.

What Is Being Published Inaccurately About this Proposal?

Two major flaws are being politically marketed by this proposal.

  1. On Bloomberg News, Secretary Azar said that all of the $29 billion currently being reimbursed through Medicare Part D disguised as rebates and kickbacks would be returned to members as out-of-pocket savings at the point of sale. In reality, members would only receive a small portion of the $29 billion because most Part D Prescription Plans are designed to have the member pay only a portion of the total cost of the medication through a copay or coinsurance. Therefore, a majority of the shift in cost will go to the plan, but now it will be through a lower up-front charge and not through a future rebate payment.
  2. In addition to having a limited impact on plan members out-of-pocket spend, the overall policy has a limited impact on most medications. Rebates only affect brand-name medications and today 90% of retail prescriptions being filled are generic medications.[2] That means that fewer than 1 out of 10 medications filled by seniors today would have a change in price. In fact, in July of 2018 HHS proposed over $6 billion in savings by moving a greater portion of those brand-name medications being filled to generics.

Will This Affect Commercial Clients?

Secretary Azar and HHS do want to further expand the proposal to include commercial plans. According to Secretary Azar, they suspect the proposed changes would sweep across the entire industry because commercial policies typically follow Medicare ruling over time and because there are rules in 30 states that require commercial plans to follow similar policies.

Over the last 18 months, pharmacy benefit managers have already started proposing plans to curb the payment of rebates to plan sponsors by passing along greater discounts on brand medications and eliminating rebates. These plans have had very limited market success because PBMs were already sharing a significant portion or all of the rebates they received to plan sponsors.

What Loopholes Might Exist Following Final Regulation?

Two major hurdles stand in the way of the HHS.

  1. Most experts do not believe the HHS has the authority to make changes without the authority of Congress. Without action by Congress, the proposed rules would likely face lengthy legal battles before being implemented permanently.
  2. In addition to rebates, pharmaceutical manufacturers pass along manufacturer administration fees in addition to rebate payments to PBMs. Currently, there is not a law in place to curb these payments to PBMs and they represent up to 25% of the total rebate dollars. Manufacturers could circumvent the proposed changes by eliminating the rebates paid and significantly increasing the administrative fees provided to PBMs. This would potentially allow for even less transparency for both payors and members.

How Do Commercial Plans Benefit?

HHS is moving towards greater transparency for both plan sponsors and plan members. By providing greater transparency, plan sponsors benefit in one very clear way: allowing greater competition by drug companies based on the price of the drug. The complex arrangement and variation of PBM contracts intentionally make it very difficult to clearly understand the price a PBM or pharmacy chain is paying for the cost of an individual prescription. By cutting out one of the variables in the cost of brand medications, you are allowing further public scrutiny and market competition for the price of brand medications.

The expectation is that states will review the final regulations and begin issuing guidance in the coming weeks and months. We’ll continue to report any developments. If you have any questions, please contact your Advisor.


Original notice by National Financial Partners, FirstPerson’s national affiliate.

[1] Bloomberg Politics. “Trump’s Drug Pricing Explained By HHS Secretary Azar,” YouTube, Alex Azar and David Westin, 2019.
[2] IQVIA Institute. “Medicine Use and Spending in the U.S., 2017-2022,” 2018.