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Sanford Heisler Sharp LLP | 20th Anniversary 2004 - 2024

HHS Proposes Rule That Subjects Rebate System to Anti-Kickback Liability

On Behalf of | February 19, 2019 | Whistleblower Law

The Department of Health and Human Services (HHS) announced a proposal to amend the Anti-Kickback Statute to expressly exclude from safe harbor protections rebates on prescription drugs paid by manufacturers to pharmacy benefit managers (PBMs), Part D plans, and Medicaid-managed care organizations.[1]  This proposal, if finalized, will alter the incentive structure for PBMs, benefiting consumers in the form of lower prescription prices and a wider array of insured prescriptions.

What is the Anti-Kickback Statute?

The Anti-Kickback Statute makes it a felony to knowingly pay or accept remuneration (bribes, discounts, nonmonetary incentives, etc.) with the intent to induce a provider to supply an item or service that is paid for by a Federal health care program.[2]  For example, if a drug manufacturer offers a vacation to a physician to prescribe one of their drugs, they both could be liable for violating the Anti-Kickback Statute.

What is the Safe Harbor Provision?

The safe harbor provision protects certain business arrangements that might otherwise violate the Anti-Kickback Statute.[3] In 1989, the Office of Inspector General implemented a safe harbor for discounts that would apply “to individuals and entities, including providers, who solicit or receive price reductions, and to individuals and entities who offer or pay them.”[4] Over the years, this provision has been enlarged to encompass rebates to PBMs, Part D plans, and Medicaid-managed care organizations. By specifically excluding rebates to Part D Plans and Medicaid-managed care organizations,[5] the rebate scheme manufacturers and PBMs have participated are now prosecutable as kickbacks.

Who are Pharmacy Benefit Managers?

Pharmacy Benefit Managers (PBMs) are the intermediaries between manufacturers and health plans. PBMs negotiate with drug manufacturers the price for certain formularies (the list of prescription drugs covered by a prescription drug plan). Since PBMs managed pharmacy benefits for 266 million Americans in 2016, PBMs are instrumental in setting prescription drug prices.

While PBMs do not have an incentive to lower prices, they do receive discounts from the manufacturers list price. PBMs share in the rebates, the difference between the manufacturer list price and the negotiated price, with Part D Plans and Medicaid-managed care organizations. This provides two perverse incentives: (1) manufacturers are encouraged to raise their list price quicker than their negotiated price to increase the revenues PBMs receive while also receiving steady price increases for their drugs, and (2) PBMs are encouraged to select prescriptions with higher list prices for their formularies to maximize the size of the rebate. This phenomenon of list prices rising faster than the negotiated price (also called “net prices”) is called the “gross to net bubble.” The gross to net bubble, and therefore the amount of rebates, is increasing year after year.

The current incentive structure not only results in higher prescription prices, but also fails to incentivize formularies that are the most effective for treatment.  PBMs select which drugs appear and where they appear on the formulary based on the difference between list and negotiated prices. Insurers therefore only cover the drugs on their formularies, and doctors will prescribe patients insured drugs. One example of this rebate scheme having particularly devastating circumstances is opioid prescriptions.[6] As mentioned, PBMs established formularies that governed which opioids were reimbursed and how, encouraging insurers and physicians to prescribe opioids for even minor pain. Over-prescription was one of the factors which led to the opioid epidemic.

Potential Benefits of this Rule

This proposed rule is an effective starting point for altering the incentive structure for the pricing of prescription drugs.  By subjecting PBMs, Part D Plans, and Medicaid-managed care organizations to liability for engaging in the rebate system, PBMs would need to compete with other PBMs only on the negotiated price, not on the difference between list and negotiated prices. Also, without the incentive of identifying drugs with high list prices, PBMs may select a wide array of drugs that will be insured. This will bring the power back to the physician and patient in selecting the best course of treatment.

To preserve the benefits of this proposed rule change, there needs to be an effective system in place to monitor the behavior of PBMs and ensure their compliance with the anti-kickback statute.[7] That is one of the reasons why Sanford Heisler Sharp is working to enforce the Anti-Kickback Statute, relying on whistleblowers to hold violators accountable.


[1] The proposed rule also creates a new safe harbor for prescription drug discounts offered directly to patients through point-of-sale price reductions, as well as fixed fee service arrangements between drug manufacturers and PBMs.[2] 42 U.S.C. § 1320a-7b(b)(2)(A).[3] See 42 U.S.C. § 1320a–7b(b)(3)(A)–(J).[4] Medicare and Medicaid Programs; Fraud and Abuse OIG Anti-Kickback Provisions, 54 FR 3088 (Jan. 23, 1989).[5] HHS also proposed to specify that payments that are retained by PBMs—and not passed along to Medicaid-managed care organizations or Part D plans—are also excluded from the safe harbor provision.[6] Sanford Heisler Sharp is currently engaged in litigation against PBMs, and other defendants, for causing the opioid epidemic.[7] It would also be helpful the proposed rule specifically included rebates to PBMs as an anti-kickback violation, instead of specifically excluding PBMs from the safe harbor provision.