For Part D programs, including employer group waiver programs (EGWPs), the final rule is applicable as of January 1, 2022, although the new administration could consider postponing the effective date. However, any substantive change to the rule would likely have to be made through a formal rulemaking process with notice and comment. It is possible that Congress could take action to overturn the final rule, but it is unclear whether it would do so.

The final rule is likely to face legal challenge by the pharmacy benefit management industry.

If the final rule is implemented in its current form, sponsors of health plans that cover retirees will need to review and possibly revise certain contracts.

What the final rule does

The final rule is based on the concept that removing rebates will promote a more transparent and rational pharmaceutical market that may reduce drug prices through competition. HHS states that under this final rule, Medicare beneficiaries would be able to share — at the pharmacy counter — in the discounts that plans and PBMs negotiate with manufacturers.

There are three parts to the final rule:

1. Amending the discount safe harbor to the federal Anti-Kickback Statute to remove protections for rebates and other price reductions in connection with the sale or purchase of prescription drugs from manufacturers to Part D plans, Medicaid managed care organizations or PBMs acting under contract with such plans
2. Creating a new safe harbor to protect point-of-sale price reductions offered by manufacturers on prescription drugs payable under Part D or Medicaid managed care organizations
3. Creating a second new safe harbor to protect certain fixed fees paid by drug manufacturers to PBMs for services rendered to the manufacturers

History of development of the final rule

This rule was initially proposed in 2019. (We summarized the proposal in a February 6, 2019 compliance insight.)

A 2018 analysis of the proposed rule by the CMS Office of the Actuary found that federal spending would increase by $196 billion over a 10-year period, and that although average beneficiary costs would decrease, the majority of beneficiaries would see an increase in their total out-of-pocket and premium costs. CMS found that the minority of beneficiaries who utilize drugs with significant manufacturer rebates would experience a substantial decrease in costs. In addition, the Congressional Budget Office estimated in 2019 that the proposal would increase federal spending by $177 billion over a 10-year period.

In an Executive Order issued on July 24, 2020, President Trump directed HHS to finalize the proposed rule, and to confirm that it would not increase federal spending or beneficiary premiums. When the final rule was released, HHS Secretary Alex Azar also released a statement confirming that, in his opinion, the Final Rule is not projected to increase federal spending, Medicare beneficiary premiums or patients’ total out-of-pocket costs.

How the final rule works

Under the first new safe harbor, pharmaceutical manufacturers may provide point-of-sale discounts to patients provided that the price reduction meets the following criteria:

1. The manufacturer and the Medicare Part D plan sponsor or the PBM acting under contract with plan sponsor must set the price reduction in advance in writing.
2. The price reduction cannot involve a rebate unless the full value of the reduction in price is provided to the dispensing pharmacy by the manufacturer, directly or indirectly, through a point-of-sale chargeback. A point-of-sale chargeback is a payment by the manufacturer made directly or indirectly (through a PBM or other entity) to a dispensing pharmacy equal to the reduction in price agreed upon in writing between the Part D plan sponsor or a PBM acting under contract with the plan sponsor and the manufacturer.
3. The price reduction must be completely reflected in the price of the prescription drug at the time the pharmacy dispenses it to the patient.

The second safe harbor permits payment to PBMs for services provided to manufacturers. To be protected under this new safe harbor, the services provided by PBMs to manufacturers must be set out in a written agreement; the compensation must be consistent with fair market value at a fixed rate and cannot be based on volume; and the PBM must make annual written disclosures to each health plan with which it contracts regarding the services rendered to each pharmaceutical manufacturer. A non-exhaustive list of PBM services provided in the final rule includes network contracting, establishing payment levels for network pharmacies, developing and managing formularies and other services.

The direct implications

As noted above, plan sponsors that cover retirees will need to review their contracts with Medicare Part D plans, Medicare Advantage plans and PBMs. Contracts that refer to rebates will need to be revised. Segal can help plan sponsors convert the value of current rebate guarantee payments to new point-of-sale brand drug minimum discount guarantees.

These plan sponsors also must evaluate their benefit design, including drug copayments and coinsurance, in light of potential new pricing arrangements that reflect the elimination of rebates on Part D drugs. Plan sponsors may see different impacts based on medication utilization, and may see significant revisions to Part D formularies. In addition, plan sponsors may see higher premiums and new fixed fees for services performed by PBMs for manufacturers.

Possible broader implications

Although the proposal does not apply to either group health plans or commercial insurers, HHS Secretary Azar has noted that Congress has the power to prohibit rebates for these plans. Moreover, as manufacturers and PBMs adjust to the new Medicare reality, Segal expects a range of responses in the prescription drug market that will require vigilant monitoring by employers and plan sponsors to prevent increased costs.

The incoming Biden administration is expected to review certain regulations, including those issued during the period between the election and January 20, 2021. As we learn more about this review, we will be able to give a more accurate prediction as to whether the final rule will be implemented in its current form.