Increasing patient savings and reducing government spending are laudable goals. But neither the CBO nor Precision experts Jeremy Schafer, Jacki Chou, and Harry G. Schiavi believe the proposed HHS rule will work. In this Spotlight on Market Access article, they join other industry leaders in discussing the potential repercussions of the rule.

CBO Says Proposed Rule to Kill Rebates Will Increase Spending by $177 Billion
by Angela Maas
AIS Health

When HHS unveiled a proposed rule earlier this year aimed at eliminating drug rebates in Medicare Part D and Medicaid managed care, the proposal was met with mixed responses (SMA 2/18/19, p. 1). Pharma companies hailed the move, while PBMs spoke out against it, saying it would result in higher drug costs, as well as increased premiums for beneficiaries. If implemented, it potentially could result in a significant change not only to Part D and Medicaid but also to commercial payers. But a recently released score from the Congressional Budget Office (CBO) is calling into question whether the administration will choose to move forward with the proposal in its current form.

The proposal (84 Fed Reg 2340, Feb. 6, 2019) would do away with the safe harbor protection in the anti-kickback statute for rebates negotiated between manufacturers and PBMs. It also would add two safe harbors: one protecting some point-of-sale price reductions, allowing those savings to be provided directly to beneficiaries when they are filling a prescription, and a second protecting service fees provided by manufacturers to PBMs. The proposed rule calls for the changes to take effect Jan. 1, 2020.

The comment period ended April 8.

The proposal states that there is a need for regulation because rebates both contribute to rising invoice prices for drugs and incentivize PBMs to favor more expensive drugs with higher rebates on their formularies. Manufacturer rebates within Medicare have grown from about 10% of gross drug costs in 2008 to about 20% in 2016. By 2027, HHS projects they will hit 28%. In remarks at the Bipartisan Policy Center Feb. 1, HHS Secretary Alex Azar claimed that in 2017, rebates within Part D totaled more than $29 billion.

The proposal includes scenarios from actuarial studies performed by the Office of the Actuary, Wakely Consulting Group and Milliman, which drew different conclusions about the rule’s effect on issues like premiums, out-of-pocket costs and government spending. Now the CBO has weighed in.

In its report, released May 2, the agency projects that if the rule is implemented as proposed, it will increase federal spending by approximately $177 billion from 2020 to 2029. Of that total, spending on Medicare Part D premiums would increase by about $170 billion. Without rebates to keep premiums low, beneficiaries would face higher premiums.

“I think the notion that this is only for Medicare is not realistic.”

“The increase in premiums was expected by many, but the growth in federal spending was somewhat surprising given that lower upfront prices would generally benefit the end payer, which in this case is the federal government,” says Jeremy Schafer, Pharm.D., senior vice president, director, access experience team at Precision for Value. “It seems changing the safe harbor may not accomplish patient savings or reduced government spending as hoped for by the administration.”

The CBO, which spoke with “stakeholders and outside experts,” also says it anticipates that “manufacturers would withhold about 15 percent of the amounts they currently rebate to PBMs in Part D and would negotiate discounts approximately equal to the remaining 85 percent. CBO expects that rather than lowering list prices, manufacturers would offer the negotiated discounts in the form of chargebacks,” which are shared with beneficiaries via a manufacturer payment to a pharmacy. However, it also concludes that “no current system could both meet the proposed rule’s standards and facilitate chargebacks. Implementing a system that could meet both of those objectives would require additional time.”

Challenges Exist With 2020 Start

If “rebates could no longer be paid to PBMs in Medicare Part D,” but “systems are not available to support retail pharmacy chargebacks,…this would be an untenable situation,” says Elan Rubinstein, Pharm.D., principal at EB Rubinstein Associates, making it “reasonable to delay” the implementation date.

1. Lawrence Kocot, national leader for KPMG’s Center for Healthcare Regulatory Insight, tells AIS Health that this implementation date “will be challenging on a number of fronts. Until a final rule is published, plans, manufacturers, PBMs, pharmacies and others can’t engage in revisions of contracts that will be necessary to implement the final rule. Moreover, according to NCPDP [i.e., the National Council for Prescription Drug Programs], only one possible approach to facilitate a HIPAA-compliant transaction under the new safe harbor will be available for implementation by 1/1/20, and that would mean that discounts are not transparent, except to the PBM.

“For a variety of reasons, given the magnitude of change that will be required following the publication of a final rule, a more extended timeline for implementation would be more prudent in order for all stakeholders to be prepared to operate under this new safe harbor regime,” he continues. “The AKS [i.e., Anti-
Kickback Statute] is a criminal statute, so stakeholders will be assuming heightened risks by operating out of compliance with the requirements of the new rule if and when it is finalized.”

Lisa Kennedy, Ph.D., chief economist at Epiphany, a company that performs health economics, reimbursement and market access studies, tells AIS Health she believes the rule will go into effect in 2020 because “Azar has consistently been pretty vehement about implementing the plan.” She points out that “HHS announced on April 5 that for transitional purposes, there will be an optional pilot for two years that will help develop the systems required. This will allow plans to better prepare their bids in three years.”

CMS Demo Would Help Plans Prepare

Through this demonstration, CMS would modify the Part D risk corridors so that “the government would bear or retain 95% of the deviation between the target amount…and the actual incurred costs…beyond the first 0.5%,” according to a bulletin from CMS Administrator Seema Verma. She also said plan sponsors should submit their Part D calendar-year 2020 bids “in a form and manner that is consistent with the Anti-
Kickback Statute law and regulations in effect as of the bid submission deadline,” which is June 3.

The CBO says it does not expect a final rule before mid-June.

Some industry experts, though, have questioned aspects of the CBO report. On the issue of chargebacks, Kocot points out that while the CBO cites the Office of the Actuary’s estimate of drugmakers’ eliminating about 15% of current rebates, the Actuary “did not rely as exclusively on market share rebates for the manufacturer withhold as the CBO seems to have indicated. Rather, the CMS Actuary explained that ‘because many of the current rebate arrangements are contingent on measures such as market share that would not be possible in the chargeback system, there is less assurance that the chargeback would provide the return on investment required by manufacturers. Secondly, as rebates have evolved over many years in the current system, manufacturers have increased rebate levels to compete for certain drugs that vary across payers. The change to the chargeback system would create an opportunity to lower the level of rebates currently provided.’ In summary, the CMS Actuary seemed to suggest that there would be a ‘conversion loss’ due to a number of factors, rather than a direct subtraction based simply on market share movement losses.”

The CBO also contends that the commercial market would be impacted by the rule “only if prescription drug manufacturers changed their list prices,” which it says it does not expect them to do. Rubinstein, however, tells AIS Health he disagrees with this prediction: “CBO states that changes in list prices are unlikely, which doesn’t address the possible move from PBM rebates to pharmacy chargebacks in the private sector. Manufacturers, PBMs and pharmacies may find it confusing and administratively difficult to run concurrent PBM rebates (for the private sector) and pharmacy chargebacks (for the public sector) for the same drugs. So perhaps the safe harbor rule changes for Medicare and Medicaid will result in a marketwide change to pharmacy chargebacks.”

“Isolating the changes in list prices could well be nonlinear, varying across drugs.”

Kennedy points out that “isolating the changes in list prices could well be nonlinear, varying across drugs — so, for example, if you have a drug that is largely administered to older populations, such as a hypertension medication, you would find that the list price falls/remains constant, as the need to raise the list price to accommodate higher rebates won’t be such an issue. On the other hand, if you have drugs that are predominantly used by non-Medicare populations/commercially insured/employer self-insured populations,…then you might see list prices less affected.”

In addition, she says, the impact on self-insured employers could be an “increase [of] their costs in some ways; however, Azar highlights a United Healthcare [point-of-sale rebates] program for small employers that has saved employees $130 per prescription, so it is hard to say where employers will fall, and they are a key influencer/customer of commercial insurers.…Insurers don’t want to be in the situation where they are pitted against consumers taking an individual patient’s rebate, so with this change in HHS, it is very likely that many commercial insurers would follow.”

According to Harry G. Schiavi, managing partner at Insights Strategy Advisors, a unit of Precision Xtract, “Consider too that some players may be able to provide point-of-sale discounts and others may not, at least not right away, and you’ll have issues. The whole thing is easier said or decreed than done. I think the notion that this is only for Medicare is not realistic. There is and will be a degree of transparency that will force the issue across books of business.”

However, maintains Kocot, “This final rule will have little impact on the commercial markets until it can be operationalized and be demonstrated as an effective alternative to the current system of rebates. This will require a smooth implementation and experience over several months, if not longer. Congress could consider legislation to extend this approach to the commercial markets, but there does not seem to be overwhelming bipartisan support for that extension right now. Alternatively, commercial payers could voluntarily migrate to this type of a chargeback system; however, it is not clear whether commercial payers are willing to forgo all of the premium subsidy that rebates in the current commercial system provide to many plans. As a result, any nonmandated shift to a chargeback system in the commercial markets would probably occur over an extended period of time.”

“The whole thing is easier said or decreed than done.”

Various stakeholders stand to be affected if the commercial market shifts to a rebate-free world. With point-of-sale rebates for beneficiaries, the cost of pharmacy benefits for payers would go up, in turn pushing up beneficiary premiums, says Rubinstein. And as beneficiaries will have decreased out-of-pocket costs, this likely will increase their medication adherence. “However, the CBO report references a 2012 CBO report which studied the impact on medical cost of increased adherence, that projected a net cost reduction — so if adherence is improved, overall health plan premiums may be reduced,” he says. The report estimates that increased use of Part D would translate into a 2%, or $10 billion, rise in federal spending from 2020 to 2029 for those beneficiaries not in the low-income subsidy program. But it also says that increased patient adherence will mean fewer hospitalizations and less physician care under Medicare Parts A and B, reducing spending by about $20 billion over the same period, for a net of $10 billion in reduced Medicare spending.

The CBO expects that with “PBM rebate arrangements that are dependent on achieving product market share goals” no longer an option, drugmakers will withhold the approximately 15% they previously negotiated, notes Rubinstein. But, he wonders, “will manufacturers retain this 15% of what they currently rebate? Or will they allocate it to initiatives which may impact patient behavior at the point of dispensing — for example, increased prevalence and value of copay coupons?”

Kennedy adds that manufacturer comments on the proposal “suggest that they strongly support this because there is a level of transparency that they would like to see in pricing, so essentially they feel that they are beaten up in the market because of high list prices, but there are a number of drivers of this. Moreover, there isn’t a direct link between increases in list price and what a net price looks like — one could go up while the other goes down. It’s also interesting to note that the contracts in which a lot of these rebates sit can block new entrants.”

The impact of the rule would be felt most among those therapeutic classes that are heavily rebated and contested already, are high cost and have at least three competing therapies, such as rheumatoid arthritis, diabetes and some respiratory conditions, says Schiavi. “Also affected would be any categories where the market leader with high volume of TRx [i.e., total prescriptions] has a high WAC [i.e., wholesale acquisition cost] and a moderate or high rebate to secure access, and the other somewhat similar therapies with maybe a lower WAC are unable to attain similar access.”

“Dramatic shifts in drug formularies are not expected.”

Kocot points out that drugs within the six Part D protected classes — anticonvulsants, antidepressants, antineoplastics, antipsychotics, antiretrovirals and immunosuppressants — “are protected from competition, so any change in rebates is not likely to cause major changes to formulary placement for these classes of drugs. Presumably, as rebates are converted to discounts in a chargeback world, competition would still exist among remaining drugs in therapeutic classes in which it exists today, so dramatic shifts in drug formularies are not expected. Additionally, the shift of rebates to chargebacks will have virtually no impact on drugs with no competition within those therapeutic classes.”

Ultimately, if rebates in the commercial market go away, what reimbursement models or programs might replace them? Jacki Chou, senior director, policy and economics at Precision Health Economics, points to “increasing interest in risk sharing and other innovative pricing approaches. One example is licensing, which is currently being explored by some Medicaid programs for covering hepatitis C treatments.”

Rubinstein says that “increased prevalence and value of copay coupons are likely, to directly influence patient behavior at the point of dispensing.” Kennedy says she agrees with this, adding, “you may see a greater push for copay accumulators, as this is an obvious way in which payers could recoup any hypothetical losses…from rebates going directly to patients.

“I think there is an interesting thing here that no one has discussed, which is the prospect of negotiating rebates for patients that preferentially steer a patient towards one drug over another,” she continues. “So, for example, a payer could negotiate with one manufacturer to offer greater rebates for patients that would steer that patient away from more expensive drugs on formulary — so a carrot that goes on top of the ‘sticks’ of step edits, copays, coinsurance and prior authorization.”

“You may see a greater push for copay accumulators, as this is an obvious way in which payers could recoup any hypothetical losses.”

In light of the CBO report, as well as pushback from various stakeholders, it is anyone’s guess as to whether the proposed rule will be implemented without changes. Kennedy says she “suspect[s] that there may be some change to Medicaid, but it is hard to know what this would look like” in a final rule. She points out that “comments have raised some concerns on Medicaid both on the statutory rebates and separately rebates to MCOs. This may have some impact on the cost of the plan for states and the federal government, and then the question is where those rebates could go as there isn’t drug cost-sharing for Medicaid beneficiaries. Insurers and provider/hospital comments have suggested that the ruling should be tethered to price controls to the pharmaceutical industry. I suspect that Azar may be thinking that these price controls may be the product of/achieved through other legislation.”

“It is unlikely that the rule in its current draft would be implemented.”

Kocot points out that “the CBO score has attracted the attention of members of Congress and advocates on both sides of the debate about the merits of the proposed rule. At a minimum, a final rule will force the administration to explain how the cost of the final rule will be offset by the intended benefit of the federal government spending an additional $177 billion over the coming decade. This will certainly spark more Congressional scrutiny regarding this approach when the rule is finalized.”

While acknowledging that it’s “difficult to predict what will happen in our current policy environment,” Chou says that “in light of the CBO’s finding that the proposed rebate rule is likely to increase federal spending, it is unlikely that the rule in its current draft would be implemented. Policymakers may look for a different solution to support lowering prices.”

Schafer tells AIS Health that “in terms of the impact on the proposed rule, it provides ample ammunition to the opponents of the rule. Given that the 2020 election is kicking off, it is difficult to think the rule will be implemented as is when it would both increase government spending as well as premium costs on one of America’s most reliable voting blocks. I would suspect the rule will either be changed significantly, attempted in a very limited pilot form or scrapped entirely.”

View the CBO report at https://bit.ly/2LsOzlq. Contact Chou, Schiavi and Schafer via Tess Rollano at trollano@coynepr.com; Kennedy at lisa.kennedy@epiphanomics.co; Kocot through Bill Borden at wborden@kpmg.com; and Rubinstein at elan.b.rubinstein@gmail.com.