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Navigating Legal Issues Involving Medicare and Manufacturer Rebates
Prescription drug costs constitute a serious concern for consumers and government payors, such as Medicare and Medicaid, representing 10% of the national health spending and 20% of health benefit cost for large employers. Americans spend twice as much per capita on drugs as residents of other wealthy nations, because ours is the only country that allows drug manufacturers to set any price they want for their products. This article explores the legal issues surrounding Medicare and manufacturer rebates.
What Is a Drug Rebate?
The rebate rule was released under the Trump administration and sought to address Medicare Part D drug rebates that drug makers offer to pharmacy benefit managers in exchange for participation on their formularies. Rebates had a safe harbor that provides protection from federal anti-kickback laws. The rule would get rid of this safe harbor and replace it with a new protection for discounts offered at the pharmacy counter.
Drug rebates have increased considerably over the past decade, sometimes reaching 50% or even more of list price. The percentage of total Medicare Part D drug spending offset by rebates on branded drugs increased from 11.3% in 2010 to 25% in 2018. As required by Medicare, insurers have in turn reduced Part D monthly premiums by the rebates they collect, which in 2018 totaled $24 billion and represented the difference between higher (pre-rebate) list and lower (post-rebate) net prices.
The Centers for Medicare and Medicaid Services (CMS) cannot influence or negotiate the price of prescription medications for Medicare. Under the Medicare Part D program, which covers retail prescription drugs, CMS contracts with private insurers to offer a prescription drug benefit for consumers and gives the insurers authority to negotiate drug prices with pharmaceutical companies. Within the law that established Medicare Part D, there is a “noninterference” clause that stipulates that the Department of Health and Human Services (HHS) Secretary “may not interfere with the negotiations between drug manufacturers and pharmacies and PDP [prescription drug plan] sponsors, and may not require a particular formulary or institute a price structure for the reimbursement of covered part D drugs.”1
In effect, this provision means that the government can have no direct role in negotiating or setting the price of drugs in Medicare Part D.
President Biden supports a change in law that would allow Medicare to negotiate drug prices, according to recently signed, Executive Order (EO), which states:
“It is also the policy of my Administration to support aggressive legislative reforms that would lower prescription drug prices, including by allowing Medicare to negotiate drug prices, by imposing inflation caps, and through other related reforms. It is further the policy of my Administration to support the enactment of a public health insurance option.”2
The EO, which also endorsed other proposals to lower drug prices, such as inflation caps, called for HHS to develop more specific proposals to lower drug prices within 45 days of the order’s issue date. However, CMS is severely limited in its legal authority to demand that Part D prescription prices be lowered.
Thus, President Biden’s July 9, 2021, EO basically rewrites the U.S. Code and removes the “noninterference” clause. Even though EOs are “law,” the Executive branch cannot act on behalf of Congress, so an EO is not legislation. That means that the EO represents an instruction to Congress. Currently, multiple bills are floating around Congress creating legislation that CMS must negotiate prescription drug prices.
Rebates and the Safe Harbor Rule
The finalized rebate rule will prevent pharmacy benefits managers and Medicare Part D plans from receiving pharmaceutical manufacturers’ rebates except in certain situations. The rebate rule is scheduled to take effect January 1, 2022.
The anti-kickback statute (AKS) punishes any entity entrusted with federal dollars for accepting any type of reward for referrals. There are exceptions, and these are called the “safe harbor rules.” For example, one of the exceptions is that remuneration does not include any payment from a lessor to a lessee, as long as 6 criteria are met.3 Discounts are not considered a violation of AKS, as long as criteria are met.
The new rule excludes prescription drug rebates from safe harbor and institutes 2 new safe harbors. The first safe harbor is for drug price discounts for the consumer at the pharmacy counter. The second safe harbor protects arrangements between manufacturers and pharmacy benefit managers that are fixed-fee services arrangements—a practice that often occurs in government contract bids in which the services and final price are agreed upon upfront.
HHS decided to continue offering safe harbor for rebates that pharmaceutical manufacturers negotiate with Medicaid managed care organizations if the arrangement meets all requirements. The safe harbor also extends to reductions at the pharmacy counter for prescription drugs.
Medicaid Rebates
Medicaid provides health coverage for millions of Americans, including many with substantial health needs who rely on Medicaid drug coverage both for acute problems and for managing ongoing physical health care, mental health, substance abuse, and developmental disability issues. Even though the Medicaid pharmacy benefit is optional for the states, all states provide pharmacy benefit coverage. Due to federally required rebates (under the Medicaid Drug Rebate Program, or MDRP), Medicaid pays substantially lower net prices for prescription drugs than Medicare or private insurers, but Medicaid must provide coverage for all approved drugs for manufacturers participating in the MDRP. Within federal guidelines, states have plasticity to manage its pharmacy services with regard to pricing, utilization management, and supplemental rebates.
Medicaid rebates provide a hefty offset to the program’s drug spending, and several policy proposals aim to further increase drug rebates in Medicaid. Changes to the statutory rebate require changes in federal legislation; however, states have flexibility to use supplemental rebates and decide whether benefits are delivered through managed care organizations (MCOs) or are carved out. Increased rebates under MDRP would lead to direct federal savings, though the effect on state spending is dependent on how the policy is structured. States’ efforts to increase supplemental rebate agreements generally aim to increase purchasing power or other leverage in negotiation with manufacturers. States may be able to pool purchasing power across or within states, but ability to increase supplemental rebates in the future is uncertain. States may also seek to carve out prescription drugs from MCO contracts to capture all supplemental rebates and concentrate negotiating power.
If statutory rebates are reduced, MCOs and pharmacy benefit managers (PBMs) may have a larger role to negotiate lower prices or rebates for certain drugs with manufacturers.
Surprise Billing
I would be remiss in an article regarding prescription drug prices if I failed to mention the changes in the surprise billings rules, which become effective January 1, 2022. First, unlike state laws, the No Surprises Act applies to both self-funded and fully funded patients and is on the federal level. The No Surprises Act protects individuals, who suffer emergency medical services, from large and unexpected, surprise, medical bills. Unlike a non-emergency problem, a consumer cannot ensure that all the emergency personnel are “in network.” In some of these instances, a person can receive a surprise bill from an out-of-network provider that is higher than the amount they would otherwise pay or had planned for their in-network care.
Interestingly, the No Surprises Act has no reimbursement benchmark. The No Surprises Act intends that the payor and the provider will work out appropriate reimbursement by themselves through a negotiation and settlement process.
If a payor sends an initial reimbursement claim for services rendered, and, after 30 days pass, the provider does nothing, it is assumed that the reimbursement rate was accepted. If, on the other hand, the provider disputes the amount, then the provider can initiate an open negotiation process with the payor. One can only imagine how burdensome this administrative process will be on providers who dispute the lower reimbursement rates paid first.
If there is no settlement between the provider and the payer during this open negotiation period, the provider can then initiate an independent dispute resolution (IDR) process with a third-party arbitrator.
Knicole Emanuel is an attorney and a partner at Practus, LLP in Raleigh, NC. She blogs at https://medicaidlawnc.com/.
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