Reasons for reversing safe harbor protection under the aptly titled proposal, Removal of Safe Harbor Protection for Rebates to Plans or PBMs Involving Prescription Pharmaceuticals and Creation of New Safe Harbor Protection, are varied. They include a lack of benefit to consumers who pay the list price of a product rather than the net price and continued pressure around rebates driving up drug costs. In addition, because more rebates are earned on higher list price drugs, the very entities charged with controlling costs have a perverse incentive to select higher-cost products. Whether or not these reasons are valid is certainly open to debate, as are the potential advantages of eliminating the rebates.

The Trump administration is considering removing the safe harbor protection used to prevent drug rebates from being considered a kickback, and therefore illegal.1 If the proposal is enacted, the assumption is that the rebates in place will be used to decrease the price of the drugs at the point of sale. Adam Fein of Drug Channels suggests a chargeback mechanism administered by pharmacies and wholesalers, with the discounts being payer specific.2 In this system, PBMs, pharmacies, and wholesalers would be paid with transaction fees for their roles in claims processing and drug distribution. Across the distribution system, drug price would be eliminated from the compensation equation. Whether or not this is the recommended approach, the implementation challenges for any such change are significant.

Although the details of any proposal are critical to make accurate predictions, some results regarding impact are fairly likely. It can be assumed that the transaction fees earned by PBMs and insurers will not be equivalent to the rebates earned today, and that those entities will seek other means to recoup that revenue. For PBMs, this could mean charging for services that have been provided for free, or at a substantially subsidized cost, such as claims processing, DUR services, and disease management programs. Other approaches could include upward adjustment of trend guarantees, and stricter formulary and UM measures to qualify for trend guarantees. For insurers, the likely consequence of rebates being removed from the system is an increase in premiums or a reduction in benefits.

With respect to patients, those with co-insurance will see the most significant benefit from this change, particularly those utilizing high-cost specialty products. Others may see their overall costs increase through some combination of more cost sharing (higher deductible and/or co-payments) and/or higher premiums. Overall, this should be a positive outcome, as higher-cost products become more “affordable” for patients.

Health care providers such as physicians and nurses will be mostly unaffected by the change. Specialty pharmacies, however, will need to reconsider their business model if the suggested approach is implemented. It will be necessary to determine if the “high touch” model can be maintained when reimbursement is based on a flat dispensing fee, rather than a percentage of AWP.

For the pharmaceutical industry, this proposal is relatively neutral, at least in the short term. Assuming rebates and administrative fees are used to decrease the cost of the drug, their net on each sale should remain the same. Possible financial impacts for them would include a rise in their copay offset efforts, assuming that patient benefits change as described, and a positive impact on their level of discounting brought about by more visibility into other manufacturers’ pricing. A final consideration will be the treatment of value-based contracts. As they are currently structured, many could easily be considered rebates. Given the administration’s approval of the concept, as well as the title of the proposal stating “creation of new safe harbor protection,” it appears that such contracts will be given their own safe harbor and encouraged.

This approach would require significant operational and financial changes within the distribution system. Some costs, particularly for patients with co-insurance utilizing expensive medications, may decrease; other costs, such as premiums, are likely to rise. In this approach, there are no proposed mechanisms, other than greater pricing transparency, that address either the initial cost of a new drug, or the potential for future price increases. An accurate understanding of the benefits of this approach will only become apparent as we learn more about this measure.

References:

  1. Dickson V. Drug rebates’ legal protections are on the chopping block. Modern Healthcare. http://www.modernhealthcare.com/article/20180719/NEWS/180719882. Published July 19, 2018. Accessed October 24, 2018.
  2. Fein AJ. A System Without Rebates: The Drug Channels Negotiated Discounts Model. Drug Channels Institute. https://www.drugchannels.net/2018/08/a-system-without-rebates-drug-channels.html. Published August 2, 2018. Accessed October 24, 2018.