An End to the Rebate Trap? HHS Proposes Rule to End Safe Harbor

On Thursday, HHS proposed a rule intended to reduce patients’ out-of-pocket costs for prescription drugs by blocking rebates and discounts given to pharmacy benefit managers (PBMs), Part D plans, and Medicaid managed care organizations and encouraging discounts given directly to patients.

The rule would exclude rebates from safe harbor protections that currently shelter drug makers’ rebates from penalties under the federal Anti-Kickback Statute, and would create new safe harbor for discounts offered to patients, as well as fixed-fee service arrangements between drug makers and PBMs.

HHS says that the new rule will counteract incentives behind higher list prices; currently, when a list price rises, patients who pay a percentage or all of the list price for a drug see their out-of-pocket expenses increase while PBMs reap financial rewards. According to HHS, rebates that today equal 26% to 30% of a drugs’ list price may be passed directly to patients and reflected in what individuals pay at the pharmacy counter.

While those with commercial insurance will likely need to wait for Congress to act to block rebates from their plans, individuals covered under federal plans like Medicare could see substantial changes to their costs; HHS estimates that one-fourth of Part D plans require coinsurance for preferred drugs, and nearly all use coinsurance for nonpreferred drugs. Furthermore, lower list prices and upfront discounts will translate into savings during the deductible, coinsurance, and coverage gap phases of the benefit.

The proposed rule could also shake up the marketplace for biosimilars. While just 7 biosimilars have entered the US market, they have seen relatively low levels of uptake. In at least 1 of those cases, rebates have been blamed for sluggish adoption of a biosimilar product. In 2017, Pfizer, maker of a biosimilar infliximab product (Inflectra), filed suit against Johnson & Johnson (J&J), maker of the reference infliximab (Remicade), for using the so-called “rebate trap” to block biosimilar competition.

According to Pfizer, J&J threatened to withhold rebates (which often grow larger as performance metrics such as market share or volume rise, or which may be bundled together with rebates for other products) from insurers unless they agreed to exclude biosimilars from their formularies.

Pfizer also alleged that J&J simultaneously increased the list price for Remicade—causing patients to pay more out of pocket—even as it maintained its exclusive position in the market.

The proposed rule could undercut the existing incentive for PBMs to favor drugs with higher rebates over drugs, like biosimilars, that have lower costs, and could allow for increased biosimilar uptake if drug makers choose to compete on price.

HHS will receive comments for 60 days after the proposed rule appears on the Federal Register.