Health Law Scan

Legal Insights and Perspectives for the Healthcare Industry

Emerging as an industry disrupter, the Office of Inspector General for the US Department of Health and Human Services (OIG) has waded knee-deep into health policy and economics in proposing dramatic changes to the anti-kickback discount safe harbor protection. Its latest move targets certain industry sectors, proposing to remove their protection from administrative and criminal prosecution in connection with rebates and price reductions for prescription drugs.

Under the proposed rule issued February 6, the OIG proposes to amend the language of the existing discount safe harbor to no longer protect price reductions from prescription drug manufacturers to sponsors, MA plans, or Medicaid managed care organizations (MCOs), or to pharmacy benefit managers (PBMs) under contract with those entities, in connection with the sale or purchase of prescription drugs (unless the price reduction is otherwise required by law). The proposal is elegant and simply excludes from the definition of a “discount” price reductions or other remuneration paid from a drug manufacturer to sponsors and MA plans, Medicaid MCOs, and PBMs. If a price reduction is not a discount, it is not excepted or protected and can be subject to enforcement. No other health industry sector is apparently targeted for this administrative rule change. 

The OIG explains that these changes are necessary because of the “significant [economic] distortions in the distribution chain” for prescription drugs over the past decade. Noting that the price of prescription drugs has steadily increased faster than either inflation or production costs in the United States, the OIG intends to end any price incentives that may cause manufacturers to substantially increase the list price of various prescription drugs due to ever-growing rebates they also pay to the PBM industry. The OIG believes that the existing rebate-based system “harms beneficiaries” because in most situations their coinsurance does not take into account the amount of any rebates paid. 

Notably, additional safe harbors intended to protect PBM services fees on agreements with manufacturers related to data gathering and analytics from insurers are also part of the proposed rule. 

The anti-kickback statute’s discount exception safe harbor is arguably the broadest expression of congressional intent to protect price reductions in the health industry from the ambit of criminal provisions for a broad array of market-based transactions. This proposed rule is therefore justifiably viewed as a health industry disrupter. Whether the sweeping changes proposed for the safe harbor wipe out the statutory exception and override congressional intent in creating the broad discount exception will likely be litigated if the proposed rule is finalized. There are important questions as well about singling out certain industry sectors for different safe harbor treatment in a criminal statute that regulates transactions and relationships and whether the ambition of materially changing the discount exception is a job better suited for Congress. Comments to the proposed rule are due to the OIG by April 8, 2019.