Fraud and Abuse; Removal of Safe Harbor Protection for Rebates Involving Prescription Pharmaceuticals and Creation of New Safe Harbor Protection for Certain Point-of-Sale Reductions in Price on Prescription Pharmaceuticals and Certain Pharmacy Benefit Manager Service Fees

Published date06 February 2019
Citation84 FR 2340
Record Number2019-01026
SectionProposed rules
CourtInspector General Office
Federal Register, Volume 84 Issue 25 (Wednesday, February 6, 2019)
[Federal Register Volume 84, Number 25 (Wednesday, February 6, 2019)]
                [Proposed Rules]
                [Pages 2340-2363]
                From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
                [FR Doc No: 2019-01026]
                [[Page 2339]]
                Vol. 84
                Wednesday,
                No. 25
                February 6, 2019
                Part IIDepartment of Health and Human Services-----------------------------------------------------------------------Office of Inspector General-----------------------------------------------------------------------42 CFR Part 1001 Fraud and Abuse; Removal of Safe Harbor Protection for Rebates
                Involving Prescription Pharmaceuticals and Creation of New Safe Harbor
                Protection for Certain Point-of-Sale Reductions in Price on
                Prescription Pharmaceuticals and Certain Pharmacy Benefit Manager
                Service Fees; Proposed Rules
                Federal Register / Vol. 84 , No. 25 / Wednesday, February 6, 2019 /
                Proposed Rules
                [[Page 2340]]
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                DEPARTMENT OF HEALTH AND HUMAN SERVICES
                Office of Inspector General
                42 CFR Part 1001
                RIN 0936-AA08
                Fraud and Abuse; Removal of Safe Harbor Protection for Rebates
                Involving Prescription Pharmaceuticals and Creation of New Safe Harbor
                Protection for Certain Point-of-Sale Reductions in Price on
                Prescription Pharmaceuticals and Certain Pharmacy Benefit Manager
                Service Fees
                AGENCY: Office of Inspector General (OIG), Department of Health and
                Human Services (HHS).
                ACTION: Proposed rule.
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                SUMMARY: In this proposed rule, the Department of Health and Human
                Services (Department or HHS) proposes to amend the safe harbor
                regulation concerning discounts, which are defined as certain conduct
                that is protected from liability under the Federal anti-kickback
                statute, section 1128B(b) of the Social Security Act (the Act). The
                amendment would revise the discount safe harbor to explicitly exclude
                from the definition of a discount eligible for safe harbor protection
                certain reductions in price or other remuneration from a manufacturer
                of prescription pharmaceutical products to plan sponsors under Medicare
                Part D, Medicaid managed care organizations as defined under section
                1903(m) of the Act (Medicaid MCOs), or pharmacy benefit managers (PBMs)
                under contract with them. In addition, the Department is proposing two
                new safe harbors. The first would protect certain point-of-sale
                reductions in price on prescription pharmaceutical products, and the
                second would protect certain PBM service fees.
                DATES: To ensure consideration, comments must be delivered to the
                address provided below by 5 p.m. Eastern Standard Time on April 8,
                2019.
                ADDRESSES: In commenting, please reference file code OIG-0936-P.
                Because of staff and resource limitations, we cannot accept comments by
                facsimile (fax) transmission. However, you may submit comments using
                one of three ways (no duplicates, please):
                 1. Electronically. You may submit electronically through the
                Federal eRulemaking Portal at http://www.regulations.gov. (Attachments
                should be in Microsoft Word, if possible.)
                 2. By regular, express, or overnight mail. You may mail your
                printed or written submissions to the following address: Aaron Zajic,
                Office of Inspector General, Department of Health and Human Services,
                Attention: OIG-0936-P, Room 5527, Cohen Building, 330 Independence
                Avenue SW, Washington, DC 20201.
                 Please allow sufficient time for mailed comments to be received
                before the close of the comment period.
                 3. By hand or courier. You may deliver, by hand or courier, before
                the close of the comment period, your printed or written comments to:
                Aaron Zajic, Office of Inspector General, Department of Health and
                Human Services, Cohen Building, Room 5527, 330 Independence Avenue SW,
                Washington, DC 20201.
                 Because access to the interior of the Cohen Building is not readily
                available to persons without Federal Government identification,
                commenters are encouraged to schedule their delivery with one of our
                staff members at (202) 619-0335.
                 Inspection of Public Comments: All comments received before the end
                of the comment period will be posted on http://www.regulations.gov for
                public viewing. Hard copies will also be available for public
                inspection at the Office of Inspector General, Department of Health and
                Human Services, Cohen Building, 330 Independence Avenue SW, Washington,
                DC 20201, Monday through Friday from 8:30 a.m. to 4 p.m. To schedule an
                appointment to view public comments, phone (202) 619-0335.
                FOR FURTHER INFORMATION CONTACT: Aaron Zajic, (202) 619-0335.
                SUPPLEMENTARY INFORMATION:
                ------------------------------------------------------------------------
                 Social Security Act citation United States Code citation
                ------------------------------------------------------------------------
                1128B..................................... 42 U.S.C. 1320a-7b.
                1128D..................................... 42 U.S.C. 1320a-7d.
                1102...................................... 42 U.S.C. 1302.
                ------------------------------------------------------------------------
                I. Purpose and Need for Regulatory Action as Determined by the
                Secretary
                 Pursuant to section 14 of the Medicare and Medicaid Patient and
                Program Protection Act of 1987 and its legislative history, Congress
                required the Secretary of Health and Human Services (the Secretary) to
                promulgate regulations setting forth various ``safe harbors'' to the
                anti-kickback statute, which would be evolving rules that would be
                periodically updated to reflect changing business practices and
                technologies in the health care industry. In accordance with this
                authority, OIG published a safe harbor to protect certain discounts and
                reductions in price.\1\ The purpose of this proposed rule is to update
                the discount safe harbor to address the modern prescription drug
                distribution model and ensure safe harbor protections extend only to
                arrangements that present a low risk of harm to the Federal health care
                programs and beneficiaries.
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                 \1\ Medicare and State Health Care Programs: Fraud and Abuse;
                OIG Anti-Kickback Provisions, 56 FR 35952 (July 29, 1991). We note
                that to qualify as a ``discount,'' the remuneration must involve a
                reduction in price to a buyer. The safe harbor acknowledges that a
                ``rebate'' may qualify as a discount. However, some payments, while
                labeled as ``rebates,'' may not have the effect of reducing the
                price of an item or service to a buyer.
                 The determination of whether a particular payment is a protected
                discount depends on the circumstances. Rebates paid by drug
                manufacturers to or through PBMs to buy formulary position are not
                reductions in price. In the Secretary's view, such a payment would
                not qualify as ``a discount or other reduction in price.'' 42 U.S.C.
                1320a-7b(b)(3)(A).
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                A. Rebates to Medicare Part D and Medicaid Managed Care Plans
                 Since 2010, the prices of existing drugs have been rising in the
                United States much more rapidly than warranted either by inflation or
                costs.\2\ Since 2016, the prescription drug component of the consumer
                price index grew 2 percent less than inflation, and one official
                measure of drug price inflation was actually negative in 2018, for the
                first time in almost 50 years. Nevertheless, this January, drug
                companies once again announced large price increases--by one analysis
                averaging around 6 percent per drug. The Department's research shows
                that these price increases are largely unsupported by objective
                economic criteria (e.g., inflation, increased costs of goods sold,
                increased demand) and reflect significant distortions in the
                distribution chain.\3\
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                 \2\ Schondelmeyer SW. Purvis L. Trends in Retail Prices of
                Prescription Drugs Widely Used by Older Americans: 2006 to 2015.
                AARP Public Policy Institute. December 2017.
                 \3\ Observations on Trends in Prescription Drug Spending. U.S.
                Department of Health and Human Services. Assistant Secretary for
                Planning and Evaluation. March 8, 2016.
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                 Prescription drug manufacturers prospectively set the list price
                (i.e., wholesale acquisition cost) of the drugs they sell to
                wholesalers and other large purchasers. Manufacturers also
                retrospectively pay PBMs or other entities in the drug supply chain,
                under rebate arrangements, that meet certain volume-based or market-
                share criteria. Industry parlance refers to the ``net price'' of a drug
                as the drug's list price absent the rebate amount. Since the passage of
                the anti-kickback statute and
                [[Page 2341]]
                the establishment of the various safe harbors, the list prices of
                branded prescription drugs, and the ``rebate'' payments by
                manufacturers to PBMs, have grown substantially.\4\ The phenomenon of
                list prices rising faster than ``net prices'' is referred to as the
                ``gross to net bubble.'' \5\
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                 \4\ 2018 Annual Report of the Boards of Trustees of the Federal
                Hospital Insurance and Federal Supplementary Medical Insurance Trust
                Funds 143 (2018); see also Jared S. Hopkins, Drugmakers Raise Prices
                on Hundreds of Medicines, Wall St. J. (Jan. 1, 2019).
                 \5\ New Data Show the Gross-to-Net Rebate Bubble Growing Even
                Bigger. Drug Channels Institute. June 14, 2017.
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                 The prominence of rebate arrangements in the prescription drug
                supply chain has been cited as a potential barrier to lowering drug
                costs.\6\ For instance, the system may create incentives for
                manufacturers to raise list prices and discourage manufacturers from
                reducing their list prices or, in some cases, penalize them if they
                do.\7\ Often, a portion of PBM compensation is derived from the savings
                they create, or the gap between the list price and ``net price.'' This
                compensation may be derived from retaining a portion of the rebate, as
                well as receiving ``price protection'' payments from manufacturers.\8\
                Rebates and price protection payments increase when list prices
                increase.\9\ Thus, there may be a greater incentive for a PBM to
                encourage the use of drugs with higher list prices, typically via
                preferred formulary placement, than the use of lower price drugs that
                would generate lower rebates or price protection payments. A
                manufacturer choosing to lower the list price of a drug would be
                reducing the gap between list price and ``net'' price, which would
                reduce either the size of the rebate or price protection guarantee.
                This could result in a drug being removed from the formulary or being
                placed in a less-preferred formulary tier. As a result, the current
                system works to the disadvantage of beneficiaries, and the Federal
                health care programs.
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                 \6\ E.g., A perspective from our CEO: Gilead Subsidiary to
                Launch Authorized Generics to Treat HCV. Gilead Pharmaceuticals.
                https://www.gilead.com/news-and-press/company-statements/authorized-generics-for-hcv.
                 \7\ Letter from David A. Balto on Behalf of Consumer Action to
                Federal Trade Commission (Dec. 6, 2017). https://www.ftc.gov/system/files/documents/public_comments/2017/12/00303-142565.pdf.
                 \8\ Price protection provisions in PBM contracts provide a cost
                or growth-rate threshold above which a manufacturer provides an
                additional payment to the PBM. If a manufacturer increases its price
                beyond the cost or rate specified, the PBM is held harmless for some
                or all of the increase. These payments may be for multiple years,
                and may or may not be described as rebates in PBM contracts with
                plan sponsors.
                 \9\ ``Under this proposed structure, the PDP sponsor achieves
                cost control with less earnings volatility while the manufacturer
                achieves increased volume and regular revenue increases.'' Pharmacy
                manufacturer rebate negotiation strategies: A common ground for a
                common purpose. Milliman. November 17, 2015.
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                1. The Rebate-Based System Harms Beneficiaries
                 There are significant concerns about the ways in which the current
                rebate framework may be increasing financial burdens for beneficiaries.
                Many rebates do not flow through to consumers at the pharmacy counter
                as reductions in price. In these instances, beneficiaries experience
                out-of-pocket costs more closely related to the list price than the
                rebated amount during the deductible, coinsurance, and coverage gap
                phases of their benefits.\10\ More often, they are applied to reduce
                premiums for all enrollees. However, beneficiaries may not be fully
                benefitting from these premium reductions. Part D plan sponsors include
                estimates of the amount of rebates they expect to receive in their
                bids, which in turn drive premiums. A 2011 OIG study found that Part D
                plan sponsors commonly underestimated rebates in their bids. When this
                occurs, ``beneficiary premiums are higher than they otherwise would
                be.'' \11\
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                 \10\ See, e.g., Medicare Program; Contract Year 2019 Policy and
                Technical Changes to the Medicare Advantage, Medicare Cost Plan,
                Medicare Fee-for-Service, the Medicare Prescription Drug Benefit
                Programs, and the PACE Program, 82 FR 56336, 56419 (Nov. 28, 2017);
                MedPAC, Status Report on the Medicare Prescription Drug Program 403
                (Mar. 2017); CMS, Medicare Part D--Direct and Indirect Remuneration
                (DIR) (2017), https://www.cms.gov/newsroom/fact-sheets/medicare-part-d-direct-and-indirect-remuneration-dir; Nicole M. Gastala et
                al., Medicare Part D: Patients Bear the Cost of `Me Too' Brand-Name
                Drugs, 35 Health Affairs (2016).
                 \11\ OIG, Concerns with Rebates in the Medicare Part D Program
                (2011).
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                 In addition, OIG work shows that the increases in costs for Part D
                brand-name drugs have led to higher out-of-pocket spending for some
                beneficiaries. OIG found that beneficiaries' out-of-pocket costs for
                drugs with an average price of more than $1,000 per month in
                catastrophic coverage increased by 47 percent from 2010 to 2015. While
                beneficiaries paid an average of $175 per month in 2010 for each high-
                priced drug in catastrophic coverage, this amount increased to $257 per
                month in 2015.\12\ OIG also found that ``the percentage of
                beneficiaries who were responsible for out-of-pocket costs of at least
                $2,000 per year for brand-name drugs nearly doubled [between 2011 and
                2015],'' \13\ some of which is potentially driven by changing drug mix
                and some by increases in list prices.
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                 \12\ OIG, High-Price Drugs Are Increasing Federal Payments for
                Medicare Part D Catastrophic Coverage, supra note 24, at 10.
                 \13\ OIG, Increases in Reimbursement for Brand-Name Drugs in
                Part D, supra note 16, at 9.
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                 The following is one example in the context of a branded
                prescription drug dispensed at a retail pharmacy. In this example, a
                drug has a Wholesale Acquisition Cost (WAC)/list price of $100. A
                manufacturer sells the drug to a wholesaler at a 2 percent discount off
                of the WAC. Thus, the drug is sold to the wholesaler at $98. The
                wholesaler in this example sells the drug to a pharmacy for $100. A PBM
                negotiates on behalf of a plan both a negotiated reimbursement rate
                with a pharmacy that dispenses the drug and a rebate from the
                manufacturer for including the drug on the plan's formulary, tier
                placement within the formulary, etc. Under its contract with the PBM,
                the pharmacy agrees to be paid a negotiated rate such as, by way of
                example only, 1.20 x WAC/list price minus 15 percent plus a $2
                dispensing fee.
                 When a patient has a prescription for the medication, the pharmacy
                files a claim on behalf of the patient to the patient's prescription
                insurance. This claim is processed by the plan and/or the PBM on the
                plan's behalf. The PBM determines what they pay the pharmacy and the
                amount remaining for the patient to pay the pharmacy. In this instance,
                the pharmacy is paid $104 for the drug. After the transaction, the plan
                and/or PBM may also receive rebates from the manufacturer, and in some
                cases, pay the pharmacy less than the original amount.
                 In this example, the PBM has negotiated a rebate with the
                manufacturer, of 30 percent of the WAC/list price ($30), which is
                passed on entirely to the plan sponsor. Thus, in this example, the plan
                receives back $30 in rebates, reducing its net cost for the drug to $74
                (i.e., $104-$30). This rebate does not reduce the price charged at the
                pharmacy counter or the beneficiary's out-of-pocket cost, and the
                beneficiary's $26 coinsurance is actually 35 percent of the net cost of
                the drug ($104-$30), compared to the 25 percent coinsurance described
                in the benefits summary (which is based on negotiated pharmacy
                reimbursement and not net price.
                [[Page 2342]]
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                 Transaction Brand Notes
                ------------------------------------------------------------------------
                List Price........................ $100 (A).
                Pharmacy Reimbursement............ $104 (P).
                Rebates to Health Insurer......... ($30) (B) = 30% Rebate
                 from Manufacturer *
                 (A).
                Net Drug Cost..................... $74 (C) = (P)-(B).*
                Patient Coinsurance............... ($26) (D) = 25% * (P).
                Net Cost to Health Insurer........ $48 (E) = (C)-(D).
                Patient Coinsurance............... $26 (D)
                Gross Drug Cost................... $104 (P).
                Net Drug Cost..................... $74 (C).
                Share of Gross Cost............... 25% (H) = (P)/(A).
                Share of Net Cost................. 35% (I) = (D)/(C).
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                * The Federal Government shares in the rebates received by PBMs and Part
                 D plan sponsors. See also: https://www.cms.gov/newsroom/fact-sheets/medicare-part-d-direct-and-indirect-remuneration-dir.
                 Under the current rebate-based system, beneficiaries may not
                receive the benefits of reduced prices and costs that other parties do.
                The Department recognizes that parties to prescription drug sales are
                frequently paid based on a percentage of the WAC/list price and
                therefore, as the list price increases, so does the revenue to these
                parties. For example, in the context of branded prescription drugs, the
                absolute net revenue to the PBM and manufacturer generally may increase
                as the WAC increases.\14\ The net revenue to the pharmacy also may
                increase, but that would be contingent on the pharmacy's contract with
                the PBM. While the insurer's costs will increase as the WAC increases,
                under the current system, PBMs often offset the increase for insurers
                via a higher rebate from the manufacturer. In contrast, when a
                beneficiary is in the deductible phase, their out-of-pocket spending is
                more closely related to the WAC price than the net price. The rebate
                from the manufacturer is not utilized to offset beneficiary costs.
                Similarly, the beneficiary's coinsurance, which is often partly a
                percentage of WAC, will often increase as list price increases. Under
                the current system, rebates are often not applied at the point of sale
                to offset the beneficiary's deductible or coinsurance or otherwise
                reduce the price paid at the pharmacy counter.
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                 \14\ Perverse Market Incentives Encourage High Prescription Drug
                Prices. Garthwaite and Scott Morton. Pro-Market: The blog of the
                Stigler Center at the University of Chicago Booth School of
                Business. November 1, 2017.
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                 Beyond the effects of rebates on beneficiary cost-sharing, the
                rebate system could be skewing decisions on which drugs appear on a
                beneficiary's drug formulary, and a drug's placement on the formulary.
                It may also have a paradoxical effect on competition, which would
                normally be expected to decrease prices among competitors. The use of
                rebates creates a financial incentive to make formulary decisions based
                on rebate potential, not the quality or effectiveness of a drug.\15\
                Research suggests that in many therapeutic classes, the approval of a
                new drug leads to higher list prices not just for the new drug, but for
                the existing drugs as well.16 17 18 Comments submitted in
                response to a Request for Information \19\ from the Department
                reiterate these concerns, suggest that PBMs may favor drugs with higher
                rebates over drugs with lower costs, and raise new concerns about
                ``bundled'' rebates \20\ discouraging the adoption of new, lower-cost
                brand drugs and biosimilars.
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                 \15\ Shire, Pfizer antitrust lawsuits could rewrite the rules
                for formulary contracts: report. Arlene Weintraub. Fierce Pharma.
                October 10, 2017.
                 \16\ Hartung DM, et al. The cost of multiple sclerosis drugs in
                the US and the pharmaceutical industry: Too big to fail? Neurology
                2015; 84(21):2185-92.
                 \17\ https://www.achp.org/wp-content/uploads/Rheumatoid-Arthritis_Final.pdf.
                 \18\ https://www.achp.org/wp-content/uploads//Diabetes_FINAL_Revised-12.7.15.pdf.
                 \19\ https://www.federalregister.gov/documents/2018/05/16/2018-10435/hhs-blueprint-to-lower-drug-prices-and-reduce-out-of-pocket-costs.
                 \20\ Some manufacturer-PBM contracts tie the rebates or
                formulary position of one product, to the rebate or formulary
                position of other products made by the same manufacturer. These
                agreements may discourage PBM adoption of a lower-cost competitor in
                one therapeutic class because they would forgo manufacturer payments
                for the other drugs.
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                2. High List Prices Harm Federal Health Care Programs
                 The current rebate framework for prescription pharmaceutical
                products does not appear to translate into lower Medicare and Medicaid
                per beneficiary spending on prescription drugs, when age and inflation
                are accounted for, and, to the extent that the rebate structure fuels
                high list prices, may in fact increase Medicare and Medicaid costs,
                which is antithetical to the purposes of both the discount exception
                and the discount safe harbor. This issue is particularly salient for
                the Centers for Medicare & Medicaid Services (CMS), the single largest
                payor of prescription drugs in the nation.
                 The Medicare Part D and Medicaid programs, as purchasers of health
                care items and services, stand to benefit from robust competition on
                both the cost and quality of the products they cover. The cost to the
                Medicare Part D program and the Medicaid program for certain brand and
                specialty prescription pharmaceutical products has been rising at a
                rate far greater than the rate of general inflation.21 22
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                 \21\ See, e.g., OIG, INCREASES IN REIMBURSEMENT FOR BRAND-NAME
                DRUGS IN PART D 5 (2018); MEDICAID AND CHIP PAYMENT AND ACCESS
                COMMISSION, MEDICAID PAYMENT FOR OUTPATIENT PRESCRIPTION DRUGS
                (2018), https://www.macpac.gov/wp-content/uploads/2015/09/Medicaid-Payment-for-Outpatient-Prescription-Drugs.pdf.
                 \22\ Generic drugs prices have generally decreased over the last
                decade, save for a period of price increases in 2013-2014. See
                Schondelmeyer SW. Purvis L. Trends in Retail Prices of Prescription
                Drugs Widely Used by Older Americans: 2006 to 2015. AARP Public
                Policy Institute. December 2017.
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                 In 2016, gross drug spending in Medicare Part D was $146 billion,
                of which Part D plans paid $90 billion and beneficiaries paid $49.7
                billion (excluding the coverage gap discount program).\23\ OIG recently
                released a report finding that from 2011 to 2015, reimbursement for
                Part D brand drugs increased by 77 percent, despite a 17 percent
                decrease in the number of prescriptions for these drugs.\24\ In another
                recent report, OIG found that Federal payments for catastrophic
                coverage under Part D more than tripled from 2010 to 2015, growing from
                $10.8 billion to $33.2 billion.\25\ With respect to catastrophic
                coverage in particular, OIG found that spending for high-priced drugs,
                those with average prices of more than $1,000 per month, contributed
                [[Page 2343]]
                significantly to the growth in payments during this phase of
                coverage.\26\
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                 \23\ Analysis by the CMS Office of the Actuary.
                 \24\ OIG, Increases in Reimbursement for Brand-Name Drugs in
                Part D 5 (2018).
                 \25\ OIG, High-Price Drugs Are Increasing Federal Payments for
                Medicare Part D Catastrophic Coverage 6 (2017).
                 \26\ Id. at 7.
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                 Although the introduction and changing utilization patterns of new
                drugs and biologicals can contribute to a rise in Part D spending,
                increasing prices of existing drugs and biologicals also play a
                critical role. For example, of the 10 high-priced drugs responsible for
                nearly one-third of all spending in Part D catastrophic coverage in
                2015, OIG found that 6 were not new to the market but had large
                increases in their average price per month, ranging from 29 percent to
                145 percent.\27\ The remaining four were new to the market.\28\ OIG has
                also recently found that of the brand-name drugs reimbursed by Part D
                in every year from 2011 to 2015, 89 percent had some unit cost increase
                (on average 29 percent), and nearly half had an increase in unit cost
                of at least 50 percent (significantly greater than general inflation
                over this same time period).29 30
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                 \27\ Id. at 10.
                 \28\ Id. at 9.
                 \29\ OIG, Increases in Reimbursement for Brand-Name Drugs in
                Part D, supra note 16, at 6.
                 \30\ MEDPAC, The Medicare Prescription Drug Program (Part D):
                Status report. Report to the Congress: Medicare Payment Policy,
                (Mar. 2018).
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                 Although the precise amounts are difficult to isolate, the Medicare
                program also incurs costs for drugs furnished under prospective payment
                (e.g., the inpatient prospective payment system) and those covered by
                Medicare Advantage plans under Part C. In 2016, gross spending on
                prescription drugs in retail and non-retail settings by CMS and its
                beneficiaries exceeded $235 billion, more than half of total United
                States gross expenditures on prescription drugs of approximately $450
                billion.31 32
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                 \31\ CMS' spending estimate is the sum of Part D gross drug
                costs, Part B spending on outpatient drugs, and Medicaid gross drug
                costs.
                 \32\ IQVIA Institute for Human Data Science, Medicine Use and
                Spending in the U.S.: A Review of 2016 and Outlook to 2021, May
                2017.
                ---------------------------------------------------------------------------
                 In 2016, CMS and State Medicaid programs spent $64 billion ($29.1
                billion net rebates) on drugs covered under Medicaid. For brand-name
                drugs, manufacturers must pay rebates to Medicaid equal to 23.1 percent
                of the average manufacturer price (AMP) or the AMP minus the ``best
                price'' provided to most other purchasers, whichever is greater.
                Manufacturers must also pay additional rebates to Medicaid if drug
                prices rise higher than general inflation. However, rebates, discounts,
                or other financial transactions paid by manufacturers to PBMs are
                excluded from AMP and best price, and the maximum rebate (including the
                inflation penalty) is capped at 100 percent of the average manufacturer
                price. As a result, Medicaid is deprived of the lower costs or higher
                mandatory rebates that could result if rebates paid to PBMs were
                included in AMP or best price, and the inflation penalty no longer
                serves as an effective brake on list price increases for drugs already
                exceeding the 100 percent AMP cap.33 34 Because Medicaid is
                a much smaller drug market than Medicare Part D and commercial
                insurance coverage, it may be advantageous for manufacturers to
                increase list prices and pay rebates to PBMs in these markets.
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                 \33\ Horn and Dickson. Modernizing and Strengthening Existing
                Laws to Control Drug Costs. Health Affairs Blog. March 31, 2017.
                https://www.healthaffairs.org/do/10.1377/hblog20170331.059428/full/.
                 \34\ Comments to the HHS Blueprint to Lower Drug Prices and
                Reduce Out-of-Pocket Costs. Georgetown Health Policy Institute
                Center for Children and Families. June 29, 2018.
                ---------------------------------------------------------------------------
                 Though proponents of the current system describe rebates as
                discounts that lower drug costs, HHS believes that rebates have proven
                to be ineffective at and counterproductive to putting downward pressure
                on drug prices. Indeed, rebates may be harming Federal health care
                programs by increasing list prices, preventing competition to lower
                drug prices, discouraging the use of lower-cost brand or generic drugs,
                and skewing the formulas used to determine pharmacy reimbursement or
                Medicaid rebates.
                3. The Rebate System Is Not Transparent
                 In some or many instances, plan sponsors under Medicare Part D and
                Medicaid MCOs have limited information about the percentage of rebates
                passed on to them and the percentage retained by their PBMs. The terms
                of rebate agreements manufacturers negotiate with PBMs may be treated
                as highly proprietary and, in many instances, may be unavailable to the
                plans. For example, in a 2011 evaluation, OIG learned that some Part D
                plan sponsors had limited information about rebate contracts and
                rebated amounts negotiated by their PBMs.\35\ To the extent still true,
                this lack of transparency could potentially impede the ability of
                parties to disclose, report, and otherwise account accurately for
                rebates where required by program rules (and potentially, under the
                discount safe harbor). This, in turn, creates a potential program
                integrity vulnerability because compliance with program rules may be
                more difficult to verify. We are interested in stakeholder feedback on
                the issue of transparency and compliance with program rules,
                particularly as it relates to bundled rebates, price protection or
                rebate guarantees, and other information not readily apparent when
                rebates are reported.
                ---------------------------------------------------------------------------
                 \35\ OIG, Concerns with Rebates in the Medicare Part D Program,
                supra note 32, at 17.
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                4. Changing the Rebate Framework
                 Based on the problems described above, the Secretary is concerned
                that rebate arrangements are neither beneficial to health care programs
                and beneficiaries, nor are they innocuous. In the Secretary's view,
                moreover, the statutory exemption for discounts (42 U.S.C. 1320a-
                7b(b)(3)(A)) does not apply to most rebates paid by drug manufacturers
                to part D plans or to Medicaid managed care plans. To the extent those
                rebates are paid to or through PBMs to buy formulary position, such
                payments would not be protected by the discount statutory exemption. In
                accordance with the authority described above, this rule proposes to
                update the regulatory discount safe harbor at 42 CFR 1001.952(h) to
                exclude from the discount safe harbor certain types of remuneration
                offered by drug manufacturers to Part D plan sponsors and Medicaid MCOs
                that may pose a risk to certain Federal health care programs and
                beneficiaries.\36\ At the same time, this rule proposes a new safe
                harbor that would protect discount arrangements that the Department has
                determined would be beneficial and present a low risk of fraud and
                abuse if structured in accordance with the safe harbor's conditions.
                This new safe harbor (which is one of two new safe harbors proposed in
                this rule) would protect certain price reductions offered by
                manufacturers to Part D plans and Medicaid managed care organizations
                that are reflected at the point of sale to the beneficiary.
                ---------------------------------------------------------------------------
                 \36\ We recognize that the payments manufacturers
                retrospectively make to PBMs under rebate agreements would not
                constitute discounts or other reductions in price to the extent such
                payments are retained by the PBM and not passed through to any
                buyer, We do not intend to imply through the issuance of this
                proposed rule that such payments qualify for safe harbor protection
                under 42 CFR 1001.952(h). Notwithstanding, out of an abundance of
                caution and desire to offer bright line guidance regarding the
                treatment of retrospective payments to PBMs that they retain, we are
                proposing to specify that such payments (including payments that may
                be labeled as ``rebates'') are not protected by the discount safe
                harbor.
                ---------------------------------------------------------------------------
                 By excluding rebates paid by manufacturers to plan sponsors under
                Medicare Part D and Medicaid MCOs from the discount safe harbor and
                creating a new safe harbor for point of sale price reductions, the
                Department believes that there may be an improved
                [[Page 2344]]
                alignment of incentives among these parties that may curb list price
                increases, reduce financial burdens on beneficiaries, lower or increase
                Federal expenditures, improve transparency, and reduce the likelihood
                that rebates would serve to inappropriately induce business payable by
                Medicare Part D and Medicaid MCOs. The Department is soliciting comment
                on whether this action would advance those goals. Specifically, the
                Department is interested in comments on the effect that the proposed
                revision to the discount safe harbor and the proposed establishment of
                a new safe harbor that would protect only point-of-sale reductions in
                price may have on (i) beneficiary out-of-pocket spending for existing
                prescription pharmaceutical products, (ii) manufacturers' setting of
                list prices for newly launched products, (iii) the Federal Government,
                and (iv) commercial markets.
                 Additionally, the current rebate framework may deter plans or their
                PBMs from placing lower cost, therapeutically equivalent drugs on their
                formularies or may incentivize these entities to give preferred
                formulary placement to a higher-cost drug that carries a higher
                associated rebate.\37\ Therefore, the Department is soliciting comments
                on (i) the extent to which rebates deter plans or their PBMs from
                placing lower cost, therapeutically equivalent drugs on their
                formularies or incentivizes plans or their PBMs to give preferred
                formulary placement to a higher-cost drug that carries a higher
                associated rebate, and (ii) how these practices might change if the
                Department were to eliminate safe harbor protection for rebates and
                protect only point-of-sale discounts for prescription pharmaceutical
                products.
                ---------------------------------------------------------------------------
                 \37\ ``Meet the Rebate, the New Villain of High Drug Prices.''
                New York Times. July 27, 2018. ``The size of the rebate depends on a
                range of factors, including how many drugs are used by the insurers'
                members, and how generously the product will be covered on a
                formulary, or list of covered medicines. Companies that offer bigger
                rebates are often rewarded with better access like smaller co-
                payments.''
                ---------------------------------------------------------------------------
                 The goal is to better align protected discount arrangements with
                evolving understandings of beneficial industry practices. However, we
                understand that PBMs still would be in competition with other PBMs;
                likewise, manufacturers still would be in competition with other
                manufacturers. We seek comments on possible negative or positive
                effects on pricing or competition that could result from an increase in
                transparency under the proposed point-of-sale discount safe harbor.
                 The Department recognizes that modifications to the discount safe
                harbor will affect beneficiary and government spending on Part D plan
                premiums and cost sharing. However, it is difficult to predict
                manufacturer and Part D plan behavior in response to this regulation.
                Because their responses to the regulation will directly affect benefit
                design, plan bids and, ultimately, beneficiary and government spending
                on Part D plan premiums and cost sharing, the Department engaged CMS's
                Office of the Actuary (OACT) and two independent actuarial firms with
                experience working with Part D plan bid preparation to assess the
                potential effects on both premiums and out-of-pocket expenses under
                various assumptions.\38\ These analyses are discussed in greater detail
                in the Regulatory Impact Analysis, and we seek feedback on the various
                approaches to estimating the potential costs and benefits of this
                regulation.
                ---------------------------------------------------------------------------
                 \38\ These analyses were conducted by Milliman and Wakely
                Consulting Group. We will refer to them by firm name in later
                sections for clarity.
                ---------------------------------------------------------------------------
                B. Payments to PBMs
                 When PBMs contract to administer the pharmacy benefit for health
                plans, the PBMs are the health plans' agents. However, the contracting
                health plans may not always know the services their PBMs are providing
                to pharmaceutical manufacturers. Manufacturers often pay PBMs fees for
                certain services (e.g., utilization management, medical education,
                medication monitoring, data management, etc.), and these fees may be
                calculated as a percentage of the list price of a particular drug
                product. If service fees paid by manufacturers are tied to the list
                price of the prescription pharmaceutical product, based on sales
                volume, or far exceed the fair market value of the services performed,
                these fees could function as a disguised kickback. This proposed rule
                would create a new safe harbor that would provide a pathway, specific
                to PBMs, to protect remuneration in the form of flat fee service fees
                that would be protected if they meet specified criteria.
                 The Department believes the terms of the PBMs' agreements with the
                pharmaceutical manufacturers should be transparent to the health plans.
                Health plans may be better able to identify and protect themselves from
                conflicts of interest if they know with some specificity the fees
                manufacturers are paying PBMs and the services PBMs are rendering to
                the manufacturers. We solicit comments on any anticompetitive or other
                issues that may arise from providing health plans with transparency
                into interactions between pharmaceutical manufacturers and PBMs.
                II. Summary of the Major Provisions
                 This proposed rule would amend the discount safe harbor at 42 CFR
                1001.952(h) by adding an explicit exception to the definition of
                ``discount'' such that certain price reductions on prescription
                pharmaceutical products from manufacturers to plan sponsors under
                Medicare Part D, and Medicaid MCOs would not be protected under the
                safe harbor. In addition, the proposed rule would add one new safe
                harbor to protect discounts between those same entities if such
                discounts are given at the point of sale and meet certain other
                criteria. Finally, this proposed rule would add a second new safe
                harbor specifically designed to protect certain fees pharmaceutical
                manufacturers pay to PBMs for services rendered to the manufacturers
                that relate to PBMs' arrangements to provide pharmacy benefit
                management services to health plans.
                 The proposed rule would not alter obligations under the statutory
                provisions for Medicaid prescription drug rebates under Section 1927 of
                the Social Security Act, including without limitation the provisions
                related to best price, the additional rebate amounts for certain drugs
                if the rate of increase in AMP and the increase in the consumer price
                index for all urban consumers (CPI-U), or provisions regarding
                supplemental rebates negotiated between states and manufacturers. Nor
                would this proposed rule alter the regulations and guidance to
                implement Section 1927 provisions, although the Department may issue
                separate guidance if this proposal is finalized to clarify the
                treatment of pharmacy chargebacks in calculation of AMP and Best Price.
                This proposed rule recognizes that rebates paid by manufacturers to
                Medicaid MCOs should be treated differently than supplemental rebates
                paid by manufacturers to states because of the differing risk posed
                under the Federal anti-kickback statute.
                III. Background
                A. Anti-Kickback Statute and Safe Harbors
                 Section 1128B(b) of the Act, the anti-kickback statute, provides
                for criminal penalties for whoever knowingly and willfully offers,
                pays, solicits, or receives remuneration to induce or reward the
                referral of business reimbursable under any of the Federal
                [[Page 2345]]
                health care programs, as defined in section 1128B(f) of the Act. The
                offense is classified as a felony and is punishable by fines of up to
                $100,000 and imprisonment for up to 10 years. Violations of the anti-
                kickback statute may also result in the imposition of civil monetary
                penalties (CMPs) under section 1128A(a)(7) of the Act (42 U.S.C. 1320a-
                7a(a)(7)), program exclusion under section 1128(b)(7) of the Act (42
                U.S.C. 1320a-7(b)(7)), and liability under the False Claims Act (31
                U.S.C. 3729-33).
                 Congress's intent in placing the term ``remuneration'' in the
                statute in 1977 was to cover the transfer of anything of value in any
                form or manner whatsoever. The statute's language makes clear that
                illegal payments are prohibited beyond merely ``bribes,''
                ``kickbacks,'' and ``rebates,'' which were the three terms used in the
                original 1972 statute. The illegal payments are covered by the statute
                regardless of whether they are made directly or indirectly, overtly or
                covertly, in cash or in kind. In addition, prohibited conduct includes
                not only the payment of remuneration intended to induce or reward
                referrals of patients but also the payment of remuneration intended to
                induce or reward the purchasing, leasing, or ordering of, or arranging
                for or recommending the purchasing, leasing, or ordering of, any good,
                facility, service, or item reimbursable by any Federal health care
                program.
                 Because of the broad reach of the statute, concern was expressed
                that some relatively innocuous commercial arrangements were covered by
                the statute and, therefore, potentially subject to criminal
                prosecution.\39\ In response, Congress enacted section 14 of the
                Medicare and Medicaid Patient and Program Protection Act of 1987,
                Public Law 100-93, which specifically requires the development and
                promulgation of regulations, the so-called safe harbor provisions, that
                would specify various payment and business practices that would not be
                subject to sanctions under the anti-kickback statute, even though they
                may potentially be capable of inducing referrals of business for which
                payment may be made under a Federal health care program.
                ---------------------------------------------------------------------------
                 \39\ See, e.g., Medicare and State Health Care Programs: Fraud
                and Abuse; OIG Anti-Kickback Provisions, 56 FR 35952 (July 29,
                1991).
                ---------------------------------------------------------------------------
                 Section 205 of the Health Insurance Portability and Accountability
                Act of 1996, Public Law 104-191, established section 1128D of the Act,
                which includes criteria for modifying and establishing safe harbors.
                Specifically, section 1128D(a)(2) of the Act provides that, in
                modifying and establishing safe harbors, the Secretary may consider
                whether a specified payment practice may result in:
                 [square] An increase or decrease in access to health care services;
                 [square] an increase or decrease in the quality of health care
                services;
                 [square] an increase or decrease in patient freedom of choice among
                health care providers;
                 [square] an increase or decrease in competition among health care
                providers;
                 [square] an increase or decrease in the ability of health care
                facilities to provide services in medically underserved areas or to
                medically underserved populations;
                 [square] an increase or decrease in the cost to Federal health care
                programs;
                 [square] an increase or decrease in the potential overutilization
                of health care services;
                 [square] the existence or nonexistence of any potential financial
                benefit to a health care professional or provider, which benefit may
                vary depending on whether the health care professional or provider
                decides to order a health care item or service or arrange for a
                referral of health care items or services to a particular practitioner
                or provider; or
                 any other factors the Secretary deems appropriate in the
                interest of preventing fraud and abuse in Federal health care
                programs.\40\
                ---------------------------------------------------------------------------
                 \40\ See also section 1102 of the Act (vesting the Secretary
                with the authority to make and publish rules and regulations, not
                inconsistent with the Act, as may be necessary to the efficient
                administration of his functions under the Act).
                ---------------------------------------------------------------------------
                 Since July 29, 1991, there have been a series of final regulations
                published in the Federal Register establishing safe harbors in various
                areas.\41\ These safe harbor provisions have been developed ``to limit
                the reach of the statute somewhat by permitting certain non-abusive
                arrangements, while encouraging beneficial or innocuous
                arrangements.''\42\
                ---------------------------------------------------------------------------
                 \41\ Medicare and State Health Care Programs: Fraud and Abuse;
                OIG Anti-Kickback Provisions, 56 FR 35952 (July 29, 1991); Medicare
                and State Health Care Programs: Fraud and Abuse; Safe Harbors for
                Protecting Health Plans, 61 FR 2122 (Jan. 25, 1996); Federal Health
                Care Programs: Fraud and Abuse; Statutory Exception to the Anti-
                Kickback Statute for Shared Risk Arrangements, 64 FR 63504 (Nov. 19,
                1999); Medicare and State Health Care Programs: Fraud and Abuse;
                Clarification of the Initial OIG Safe Harbor Provisions and
                Establishment of Additional Safe Harbor Provisions Under the Anti-
                Kickback Statute, 64 FR 63518 (Nov. 19, 1999); 64 FR 63504 (Nov. 19,
                1999); Medicare and State Health Care Programs: Fraud and Abuse;
                Ambulance Replenishing Safe Harbor Under the Anti-Kickback Statute,
                66 FR 62979 (Dec. 4, 2001); Medicare and State Health Care Programs:
                Fraud and Abuse; Safe Harbors for Certain Electronic Prescribing and
                Electronic Health Records Arrangements Under the Anti-Kickback
                Statute, 71 FR 45109 (Aug. 8, 2006); Medicare and State Health Care
                Programs: Fraud and Abuse; Safe Harbor for Federally Qualified
                Health Centers Arrangements Under the Anti-Kickback Statute, 72 FR
                56632 (Oct. 4, 2007); Medicare and State Health Care Programs: Fraud
                and Abuse; Electronic Health Records Safe Harbor Under the Anti-
                Kickback Statute, 78 FR 79202 (Dec. 27, 2013); and Medicare and
                State Health Care Programs: Fraud and Abuse; Revisions to the Safe
                Harbors Under the Anti-Kickback Statute and Civil Monetary Penalty
                Rules Regarding Beneficiary Inducements, 81 FR 88368 (Dec. 7, 2016).
                 \42\ Medicare and State Health Care Programs: Fraud and Abuse;
                OIG Anti-Kickback Provisions, 56 FR at 35958.
                ---------------------------------------------------------------------------
                 Health care providers and others may voluntarily seek to comply
                with safe harbors so that they have the assurance that their business
                practices will not be subject to any anti-kickback enforcement action.
                In giving the Department the authority to protect certain arrangements
                and payment practices under the anti-kickback statute, Congress
                intended the safe harbor regulations to be updated periodically to
                reflect changing business practices and technologies in the health care
                industry.
                B. The Discount Safe Harbor
                1. Discount Safe Harbor
                 The discount safe harbor was created to align with the statutory
                exception's intent to encourage price competition that benefits the
                Medicare and Medicaid programs.\43\
                ---------------------------------------------------------------------------
                 \43\ Medicare and Medicaid Programs; Fraud and Abuse OIG Anti-
                Kickback Provisions, 54 FR at 3092.
                ---------------------------------------------------------------------------
                 Section 1128B(b)(3)(E) of the Act protects from the anti-kickback
                statute ``any payment practice specified by the Secretary in
                regulations promulgated pursuant to section 14 of the Medicare and
                Medicaid Patient and Program Protection Act of 1987.'' Using the
                authority granted under section 14 of the Medicare and Medicaid Patient
                and Program Protection Act of 1987, in the January 23, 1989, Federal
                Register, OIG published a notice of proposed rulemaking that proposed
                various safe harbors, including 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.'' \44\ Subject to certain modifications, OIG finalized the
                discount safe harbor, among others, in a final rule published on July
                29, 1991.\45\ This regulatory discount safe harbor was designed to
                [[Page 2346]]
                protect all discounts or reductions in price protected by Congress in
                the statutory exception, as well as additional discounting practices
                not included in the statutory exception that are not abusive.\46\
                ---------------------------------------------------------------------------
                 \44\ Medicare and Medicaid Programs; Fraud and Abuse OIG Anti-
                Kickback Provisions, 54 FR 3088 (Jan. 23, 1989).
                 \45\ Medicare and State Health Care Programs: Fraud and Abuse;
                OIG Anti-Kickback Provisions, 56 FR 35952 (July 29, 1991).
                 \46\ 64 FR 63518, 63528 (Nov. 19, 1999).
                ---------------------------------------------------------------------------
                 In response to requests from stakeholders, in the July 21, 1994,
                Federal Register, OIG proposed a number of clarifications to the
                discount safe harbor. For instance, OIG proposed to divide the relevant
                parties into three groups (buyers, sellers, and offerors) in order to
                delineate the different obligations individuals or entities must meet
                to receive protection under the discount safe harbor.\47\
                ---------------------------------------------------------------------------
                 \47\ Medicare and State Health Care Programs: Fraud and Abuse;
                Clarification of the OIG Safe Harbor Anti-Kickback Provisions, 59 FR
                37202 (July 21, 1994).
                ---------------------------------------------------------------------------
                 OIG modified the proposed regulations in response to comments
                received and finalized the clarifications to the discount safe harbor,
                among others, in the final rule published in the November 19, 1999,
                Federal Register.\48\ Specifically, OIG defined ``rebate'' to include
                ``any discount the terms of which are fixed at the time of the sale of
                the good or service and disclosed to the buyer, but which is not
                received at the time of the sale of the good or service.'' OIG
                recognized that a manufacturer may offer a discount in the form of a
                rebate to a buyer. In addition, OIG stated that the regulatory safe
                harbor both incorporates and enlarges upon the statutory exception.\49\
                ---------------------------------------------------------------------------
                 \48\ Medicare and State Health Care Programs: Fraud and Abuse;
                Clarification of the Initial OIG Safe Harbor Provisions and
                Establishment of Additional Safe Harbor Provisions Under the Anti-
                Kickback Statute, 64 FR 63518 (Nov. 19, 1999). That final rule also
                confirmed that ``the regulatory safe harbor expands upon the
                statutory [exception] by defining additional discounting practices
                not included in the statutory exception that are not abusive . . .
                .'' Id. at 63528.
                 \49\ 64 FR 63518, 63528 (Nov. 19, 1999).
                ---------------------------------------------------------------------------
                 Finally, in the October 20, 2000, Federal Register, OIG proposed
                several technical revisions to the discount safe harbor, including a
                revision that would expand the safe harbor to cover discounts for items
                or services for which payment may be made, in whole or in part, under
                Medicare, Medicaid, or other Federal health care programs.\50\ OIG
                finalized this expanded scope of the discount safe harbor in the
                Federal Register published on March 18, 2002.\51\
                ---------------------------------------------------------------------------
                 \50\ Medicare and State Health Care Programs: Fraud and Abuse;
                Revisions and Technical Corrections, 65 FR 63035, 63041 (Oct. 20,
                2000).
                 \51\ Medicare and Federal Health Care Programs: Fraud and Abuse;
                Revisions and Technical Corrections, 67 FR 11928, 11934 (Mar. 18,
                2002).
                ---------------------------------------------------------------------------
                 Subsequent OIG guidance has emphasized that, ``to qualify for the
                discount exception, the discount must be in the form of a reduction in
                the price of the good or service based on an arms-length transaction.''
                \52\
                ---------------------------------------------------------------------------
                 \52\ 2003 Compliance Program Guidance for Pharmaceutical
                Manufacturers, 68 FR 23731, 23735 (May 5, 2003) (emphasis in the
                original).
                ---------------------------------------------------------------------------
                2. Treatment of ``Rebates'' Under the Discount Safe Harbor
                 Section 1128B of the statute explicitly identifies rebates, along
                with kickbacks and bribes, as remuneration. When OIG first proposed a
                regulation implementing the discount exemption, it closely followed the
                statutory language, limiting its application to reductions in the
                amount a seller charges in a specific transaction for a good or service
                to a buyer.\53\ It specifically did not apply to remuneration in the
                form of things of value, such as rebates of cash, other free goods or
                services, redeemable coupons, or credit towards the future purchases of
                other goods or services.\54\ At the time, OIG recognized that these
                forms of remuneration may not be legitimate ``discounts'' and could be
                subject to abuse.\55\ In the July 29, 1991 final rule, OIG recognized
                that rebates can function like legitimate reductions in price, and
                defined discount to include protection for rebate checks, subject to
                the limitation that they only be applied to the same good or service
                that was purchased or provided, and must be fully and accurately
                reported.\56\ In the July 21, 1994, Federal Register, OIG proposed to
                clarify the definition of the term ``rebate'' for purposes of the safe
                harbor.\57\ OIG modified the proposed regulations in response to
                comments received and finalized the clarifications to the discount safe
                harbor, among others, in the final rule published in the November 19,
                1999, Federal Register.\58\ Specifically, OIG defined ``rebate'' to
                include ``any discount the terms of which are fixed at the time of the
                sale of the good or service and disclosed to the buyer, but which is
                not received at the time of the sale of the good or service.'' \59\ OIG
                recognized that a manufacturer may offer a discount in the form of a
                rebate to a buyer.\60\
                ---------------------------------------------------------------------------
                 \53\ Medicare and Medicaid Programs; Fraud and Abuse OIG Anti-
                Kickback Provisions, 54 FR at 3092.
                 \54\ Id.
                 \55\ Id.
                 \56\ Medicare and State Health Care Programs: Fraud and Abuse;
                OIG Anti-Kickback Provisions, 56 FR at 35978-35979.
                 \57\ Medicare and State Health Care Programs: Fraud and Abuse;
                Clarification of the OIG Safe Harbor Anti-Kickback Provisions, 59 FR
                37202 (July 21, 1994).
                 \58\ Medicare and State Health Care Programs: Fraud and Abuse;
                Clarification of the Initial OIG Safe Harbor Provisions and
                Establishment of Additional Safe Harbor Provisions Under the Anti-
                Kickback Statute, 64 FR 63518 (Nov. 19, 1999). That final rule also
                confirmed that ``the regulatory safe harbor expands upon the
                statutory [exception] by defining additional discounting practices
                not included in the statutory exception that are not abusive . . .
                .'' Id. at 63528.
                 \59\ Id. at 63527.
                 \60\ Id. at 63528.
                ---------------------------------------------------------------------------
                3. Further Developments: Establishment of the Medicare Prescription
                Drug Benefit and Drug Rebates to Medicaid Managed Care Organizations
                 Long after Congress passed the legislation creating the modern
                anti-kickback statute and discount exception, and OIG issued the
                discount safe harbor regulation, Congress passed the Medicare
                Prescription Drug, Improvement, and Modernization Act of 2003, Public
                Law 108-173, establishing a prescription drug benefit for Medicare
                Beneficiaries (Medicare Part D).
                 The standard Part D benefit structure established by the Medicare
                Modernization Act required beneficiaries to pay a monthly premium,
                annual deductible, and copayments or coinsurance for drugs purchased at
                pharmacies. The standard benefit also included a coverage gap (also
                known as the doughnut hole) during which beneficiaries were required to
                pay 100 percent of their drug costs until their out-of-pocket spending
                reached the catastrophic threshold. The Part D benefit has been
                modified by a number of statutory changes, including the Patient
                Protection and Affordable Care Act of 2010 and the Bipartisan Budget
                Act of 2018.
                 In 2019, applicable beneficiaries enrolled in standard coverage
                would pay a $415 deductible, 25 percent of their gross drug costs up to
                the initial coverage limit of $3,820 (an additional $851.25), and 25
                percent of their brand drug costs and 37 percent of generic drug costs
                until reaching the out-of-pocket threshold of $5,100 (an estimated
                $8,139.54 of total covered Part D spending). These thresholds, and the
                actuarial equivalence of alternative benefits designs, are determined
                annually based on gross Part D drug costs.
                 Applicable beneficiaries, defined as those enrollees of
                prescription drug plans who do not receive the Low-Income Subsidy, pay
                5 percent of their gross drug costs after reaching the out-of-pocket
                limit and entering catastrophic coverage. Part D plan sponsors are
                responsible for 75 percent of the gross covered drug costs between the
                deductible and the initial coverage limit, 5 percent and 63 percent of
                gross brand and generic drug costs,
                [[Page 2347]]
                respectively, in the coverage gap, and 15 percent of the gross drug
                costs in the catastrophic phase of the benefit. The Federal Government
                pays 74.5 percent of the plan benefit costs,\61\ and 80 percent of the
                gross drug costs during catastrophic coverage. The government also
                provides premium subsidies and cost-sharing subsidies for low-income
                beneficiaries.
                ---------------------------------------------------------------------------
                 \61\ On average, beneficiary premiums are 25.5 percent of the
                benefit costs, or the cost of a standard Part D plan, as determined
                by annual bids submitted by Part D plan sponsors.
                ---------------------------------------------------------------------------
                 Part D plan sponsors are permitted to offer plans with alternative
                benefit designs that are actuarially equivalent to standard Part D
                coverage, but have different deductibles and cost-sharing requirements.
                In 2019, many Part D plan sponsors will offer an alternative benefit
                design. The weighted average total premium for all Part D plans is
                $43.50 per month. Part D beneficiaries enrolled in the 10 largest Part
                D plans will have formularies with 5 tiers of cost-sharing, and pay
                between $0 to $5 copayments for preferred generic drugs, $1 to $13
                copayments for generic drugs, $25 to $47 copayments for preferred
                brands, 32 percent to 50 percent coinsurance for non-preferred drugs,
                and 25 percent to 33 percent coinsurance for specialty drugs.
                 Like the statutory exception, the discount safe harbor and all
                revisions to such safe harbor were promulgated prior to the enactment
                of the Medicare prescription drug benefit and prior to the promulgation
                of comprehensive regulations governing Medicaid managed care delivery
                systems. Moreover, after the current version of the discount safe
                harbor was finalized, there were two statutory changes involving the
                intersection of drug pricing under the Medicaid Drug Rebate Program and
                Medicaid MCOs (including the availability of mandatory Medicaid rebates
                for drugs dispensed to individuals enrolled with a Medicaid MCO if the
                MCO is responsible for covering those drugs),\62\ and the Department
                recently finalized regulations to modernize the Medicaid managed care
                regulatory structure.\63\
                ---------------------------------------------------------------------------
                 \62\ Medicare Prescription Drug, Improvement, and Modernization
                Act of 2003, Public Law 108-173, sec. 1002; Patient Protection and
                Affordable Care Act, Public Law 111-148, as amended by the Health
                Care and Education Reconciliation Act of 2010, Public Law 111-152,
                sec. 2501(c).
                 \63\ Medicaid and Children's Health Insurance Program (CHIP)
                Programs; Medicaid Managed Care, CHIP Delivered in Managed Care, and
                Revisions to Third Party Liability, 81 FR 27498 (May 6, 2016).
                ---------------------------------------------------------------------------
                III. Provisions of the Proposed Rule
                 To address the Department's concerns with the current rebate
                system, the Department proposes to eliminate safe harbor protection for
                manufacturer reductions in price on prescription pharmaceutical
                products to Medicare Part D plans operating under section 1860D-1 et
                seq. of the Act, and Medicaid MCOs, as defined under section 1903(m) of
                the Act. In conjunction with this amendment, the Department is
                proposing a new safe harbor that would protect manufacturer point-of-
                sale reductions in price on prescription pharmaceutical products to a
                plan sponsor under Medicare Part D, a Medicaid MCO, or a PBM acting
                under contract with either, that would be applied at the point of sale
                to benefit the beneficiary, the plan, and, by extension, the
                Government. Finally, the Department is proposing a new safe harbor to
                protect certain fixed service fees that pharmaceutical manufacturers
                pay to PBMs. We are interested in and solicit comments on how these
                proposals, individually and/or collectively, would align or conflict
                with program requirements and any legal requirements (e.g., antitrust
                laws) that may apply to affected parties.
                A. Amendment to the Discount Safe Harbor
                 The Department proposes to amend the existing discount safe harbor
                so that it would no longer protect price reductions from manufacturers
                to plan sponsors under Medicare Part D or Medicaid MCOs, either
                directly or through PBMs acting under contract with plan sponsors under
                Medicare Part D or Medicaid MCOs, in connection with the sale or
                purchase of prescription pharmaceutical products, unless the reduction
                in price is required by law. Given that the discount safe harbor
                applies to items payable under Medicare, Medicaid, or other Federal
                health care programs, we solicit comments on whether this amendment
                should be limited to prescription pharmaceutical products payable by
                Medicare Part D and Medicaid MCOs, or whether the amendment also should
                apply to prescription pharmaceutical products payable under other HHS
                programs (e.g., Medicare Part B fee-for-service, a Medicaid managed
                care program operated using waiver authority under section 1915(b) of
                the Act).
                 For purposes of this amendment as well as the proposed new safe
                harbor, we propose to interpret the term ``plan sponsor under Medicare
                Part D'' to include the sponsor of a prescription drug plan (PDP) as
                well as a Medicare Advantage organization offering a Medicare Advantage
                prescription drug plan. These two categories of plans are the
                predominant types of plans through which beneficiaries receive
                prescription drug coverage under Part D. We solicit comments on this
                definition and also whether we should adopt a broader definition that
                would include all entities considered to be ``Part D plan sponsors''
                under 42 CFR 423.4 (i.e., expand to also include PACE organizations
                offering a PACE plan including qualified prescription drug coverage and
                cost plans offering qualified prescription drug coverage).
                 We also note that nothing in this proposed rule changes the
                discount safe harbor's provision that excludes from protection price
                reductions offered to one payor but not to Medicare or Medicaid,
                particularly when such discounts serve as inducements for the purchase
                of federally reimbursable products. OIG has a long-standing concern
                about arrangements under which parties ``carve out'' referrals of
                Federal health care program beneficiaries or business generated by
                Federal health care programs from otherwise questionable financial
                arrangements. Such arrangements implicate, and may violate, the anti-
                kickback statute by disguising remuneration for Federal health care
                program business through the payment of amounts purportedly related to
                non-Federal health care program business. This concern would extend to
                certain pharmaceutical rebate arrangements. For example, if a
                manufacturer offered a rebate on a product to an insurer for its
                private pay plans conditioned (explicitly or implicitly) on the
                product's favorable formulary placement across all plans (including
                Part D plans), such a rebate could be remuneration that would implicate
                the anti-kickback statute and would not be protected by the current
                discount safe harbor or by the provisions of this proposed rulemaking.
                 While this amendment would exclude from protection all price
                reductions from manufacturers on prescription pharmaceutical products
                in connection with their sale to or purchase by plan sponsors under
                Medicare Part D, Medicaid MCOs, or PBMs acting under contract with plan
                sponsors under Medicare Part D or Medicaid MCOs, unless the reduction
                in price is required by law (e.g., rebates under the Medicaid Drug
                Rebate Program), the Department is proposing a new safe harbor, with
                different criteria, that would protect certain point-of-sale discounts
                that the proposed amendment would carve out from the current discount
                safe harbor. For the policy and program integrity reasons articulated
                above, the changes reflected in this proposed rulemaking
                [[Page 2348]]
                are intended to exclude from discount safe harbor protection rebates
                from manufacturers to plan sponsors under Medicare Part D and Medicaid
                MCOs, whether negotiated by the plan or by a PBM or paid through a PBM
                to the plan or Medicaid MCO.
                 The Department intends for the discount safe harbor to continue to
                protect discounts on prescription pharmaceutical products offered to
                other entities, including, but not limited to, wholesalers, hospitals,
                physicians, pharmacies, and third-party payors in other Federal health
                care programs. We solicit comments regarding whether the proposed
                regulatory text amending the discount safe harbor (when read in
                conjunction with the proposed new safe harbor at 42 CFR 1001.952(cc))
                excludes reductions in price not contemplated by the proposed
                amendment. In addition, we solicit comments on any additional or
                different regulatory text necessary to clarify that other types of
                discounts (e.g., volume or prompt payment discounts to wholesalers)
                that currently are protected by the discount safe harbor would remain
                protected if all safe harbor conditions are met. We also solicit
                comments regarding whether declining to protect rebates to plan
                sponsors under Medicare Part D and Medicaid MCOs under a safe harbor
                might affect beneficiary access to prescription pharmaceutical products
                either due to cost or formulary placement.
                 While the Department intends for the discount safe harbor to
                continue to protect discounts on prescription pharmaceutical products
                offered to entities other than plan sponsors under Medicare Part D, and
                Medicaid MCOs, the Department is concerned about the potential for
                unintended loopholes. For example, we are concerned that in some
                circumstances, such price reductions could be used to funnel
                remuneration to parties that otherwise would have been in the form of
                rebates where such rebates, under this proposed rule, would no longer
                qualify for safe harbor protection.
                 We also are aware that many states have negotiated supplemental
                rebate agreements with drug manufacturers, which the Department does
                not presently believe should be affected by this proposal. We are
                considering and solicit comments on the extent, if any, to which these
                supplemental rebates would be affected by this proposal. In addition,
                we solicit comments on other types of entities who receive price
                reductions from manufacturers for the same types of prescription
                pharmaceutical products that are also sold to or purchased by plan
                sponsors under Medicare Part D, Medicaid MCOs, or pharmacy benefit
                managers acting under contract with either and whether price reduction
                arrangements with those entities may pose similar risks. We are
                considering and seek comments on safeguards that already may be in
                place or could be included in the discount safe harbor to protect
                beneficial price reductions (i.e., that benefit programs or
                beneficiaries) while at the same time preventing the potential abuses
                described above.
                 As part of this proposal, the Department is soliciting comments on
                a definition for ``in connection with'' in the discount safe harbor;
                such a definition would clarify the scope of those price reductions
                that would no longer be protected under the discount safe harbor
                because they relate to the purchase of pharmaceutical products
                ultimately sold to or purchased by a plan sponsor under Medicare Part
                D, a Medicaid MCO, or a pharmacy benefit manager acting under contract
                with either. As stated above, we are considering and also soliciting
                comments on whether additional or different regulatory text would be
                necessary to clarify that other types of discounts (e.g., volume or
                prompt payment discounts to wholesalers) that currently are protected
                by the discount safe harbor would remain protected if all safe harbor
                conditions are met.
                 The Department is exploring value-based arrangements and their use
                in the sale of prescription pharmaceutical products. The Department
                does not intend for this proposal to have any effect on existing
                protections for value-based arrangements between manufacturers and plan
                sponsors under Medicare Part D and Medicaid MCOs. We are interested in
                hearing from stakeholders about, and are soliciting comments on, the
                extent to which the proposed amendment and accompanying proposed safe
                harbor may affect any existing or future value-based arrangements. We
                request that any such comments specify how any currently protected
                arrangements or arrangements that might be protected under the proposed
                safe harbor are ``value based.''
                 We are proposing that this amendment, if finalized, be effective on
                January 1, 2020. We are mindful that many entities may be using the
                current discount safe harbor to protect financial arrangements that no
                longer would meet the definition of ``discount'' under this proposed
                change. We are soliciting comments on whether the proposed effective
                date gives affected entities a sufficient transition period to
                restructure any arrangements that could implicate the anti-kickback
                statute and no longer would be protected by a safe harbor.
                 Finally, we solicit comments on proposed definitions for the terms
                ``manufacturer,'' ``wholesaler,'' ``distributor,'' ``pharmacy benefit
                manager'' or ``PBM,'' and ``prescription pharmaceutical product'' for
                purposes of 42 CFR 1001.952(h). We solicit comments on the sufficiency
                of the proposed definitions to accurately describe these terms for use
                in this proposed rule.
                B. New Safe Harbor for Certain Price Reductions on Prescription
                Pharmaceutical Products
                 The Department is proposing a new safe harbor (Point-of-Sale
                Reductions in Price for Prescription Pharmaceutical Products) that
                would protect point-of-sale price reductions offered by manufacturers
                on certain prescription pharmaceutical products that are payable under
                Medicare Part D or by Medicaid MCOs that meet certain criteria. The
                proposed effective date for the new safe harbor would be 60 days after
                publication of the final rule. The Department intends for this new safe
                harbor to protect reductions in price for prescription pharmaceutical
                products without regard to what phase of the benefit the beneficiary is
                in. We solicit comment on potential revisions to clarify how the safe
                harbor would apply during periods of 100 percent beneficiary cost
                sharing.
                 As we describe throughout this preamble, point-of-sale reductions
                in price pose less risk to Medicare Part D, Medicaid MCOs, and
                beneficiaries than the current rebate system for prescription
                pharmaceutical products. In that regard, we are soliciting comments on
                the extent to which the safe harbor, if finalized, would incentivize
                manufacturers to provide point-of-sale discounts. We are considering
                whether and, if so, how the proposed safe harbor conditions should be
                modified to encourage these point-of-sale price reductions without
                posing any undue risk to programs or patients. We will consider
                alternative suggestions as well.
                 We continue to believe that ``discounts are distinct from across-
                the-board price reductions offered to all buyers where the inducement
                that is made is so diffuse that it does not appear intended to
                encourage a particular buyer to purchase or order a particular good or
                service payable under
                [[Page 2349]]
                Medicare or Medicaid.'' \64\ For example, if a manufacturer were to
                implement an across-the-board reduction in price for a prescription
                pharmaceutical product (e.g., a reduction in WAC), such a reduction in
                price would not need the protection of the discount safe harbor or the
                safe harbor proposed in this rulemaking.
                ---------------------------------------------------------------------------
                 \64\ Medicare and State Health Care Programs: Fraud and Abuse;
                OIG Anti-Kickback Provisions, 56 FR 35952, 35977 (July 29, 1991).
                ---------------------------------------------------------------------------
                 Under the proposed new safe harbor, a manufacturer could offer a
                reduction in price on a particular prescription pharmaceutical product
                to a plan sponsor under Medicare Part D, to a Medicaid MCO, or through
                a PBM acting under contract with either if certain conditions are met.
                First, the reduction in price would have to be set in advance with the
                plan sponsor under Medicare Part D, a Medicaid MCO, or a PBM. We
                propose that ``set in advance'' would mean that the terms of the
                reduction in price would be fixed and disclosed in writing to the plan
                sponsor under Medicare Part D or the Medicaid MCO by the time of the
                initial purchase. We propose to interpret ``the initial purchase'' to
                mean the first purchase of the product at that reduced price by the
                plan sponsor or Medicaid MCO on behalf of an enrollee. Like the current
                discount safe harbor, we propose that this new safe harbor would
                exclude from protection price reductions offered to one payor but not
                to Medicare or Medicaid and solicit comments on whether the regulation
                captures this intent.
                 Second, the reduction in price could not involve a rebate, as
                defined in 42 CFR 1001.952(h), unless the full value of the reduction
                in price is provided to the dispensing pharmacy through a chargeback or
                a series of chargebacks, or the rebate is required by law. We propose
                to define a ``chargeback'' as a payment made directly or indirectly by
                a manufacturer to a dispensing pharmacy so that the total payment to
                the pharmacy for the prescription pharmaceutical product is at least
                equal to the price agreed upon in writing between the Plan Sponsor
                under Part D, the Medicaid MCO, or a PBM acting under contract with
                either, and the manufacturer of the prescription pharmaceutical
                product. For example, when a pharmacy dispenses a drug to a beneficiary
                that is reimbursed by a particular Part D plan or Medicaid MCO, the
                total payment to the pharmacy (i.e., cost-sharing from the beneficiary,
                payment from the Part D plan or Medicaid MCO, and any chargeback) will
                be at least equal to the price agreed upon between the manufacturer of
                that drug and the Part D Plan or Medicaid MCO, or a PBM acting under
                contract with either. We solicit comments on this definition. Notably,
                the current rebate frameworks under which a manufacturer pays the plan
                sponsor under Medicare Part D or Medicaid MCO directly or through a PBM
                would not meet this criterion absent those chargebacks resulting in the
                dispensing pharmacy receiving the full value of the reduction in price.
                 Third, the reduction in price must be completely reflected in the
                price the pharmacy charges to the beneficiary at the point of sale. For
                example, if the discounted rate is set in advance, at the time of
                dispensing the pharmacy would have the necessary information to
                appropriately charge a beneficiary who owes coinsurance, even if the
                manufacturer ultimately tenders the dispensing pharmacy a payment
                through a chargeback to reflect this negotiated price with the payor.
                 The proposed safe harbor's requirements are intended to exclude
                from its protection conduct that mimics rebates but are referenced in
                other ways in the contracts between a manufacturer and a PBM, a plan
                sponsor under Medicare Part D, or a Medicaid MCO. For example, fees
                that are based on a percentage of a prescription pharmaceutical
                product's list price could be a disguised kickback and would not be
                protected by this proposed safe harbor unless the requirements created
                by this rule are met. We are soliciting comments on this approach and
                whether, and if so, how the regulatory text should be modified to best
                reflect this intent.
                 We recognize that some pharmacies and PBMs are related through
                ownership, and we solicit comments on any potential issues such
                ownership interests might create under this proposed safe harbor and
                how best to address them. We also recognize that some PBMs may argue
                that allowing the reduction in price to be processed at the point of
                sale may provide pharmacies sufficient data to reverse engineer the
                manufacturer's or the PBM's discount structure. We solicit comments on
                whether this is likely, and if so, how it might transpire, what impact
                it might have on competition, and how, if at all, this should be
                addressed in the proposed safe harbor.
                 For purposes of proposed 42 CFR 1001.952(cc) we propose to
                incorporate the definitions of the terms ``manufacturer,'' ``pharmacy
                benefit manager'' or ``PBM,'' ``prescription pharmaceutical product,''
                ``rebate,'' and ``Medicaid managed care organization'' or ``Medicaid
                MCO'' as they would be set forth in the proposed amendment to 42 CFR
                1001.952(h). We also propose a definition of ``chargeback.'' We solicit
                comments on the sufficiency of the proposed definitions to accurately
                describe these terms for use in this proposed rule.
                C. New Safe Harbor for Certain PBM Service Fees
                 The Department is proposing a new safe harbor (PBM Service Fees)
                that would protect fixed fees that manufacturers pay to PBMs for
                services rendered to the manufacturers that meet specified criteria. In
                some circumstances, services that PBMs provide to health plans and
                pharmaceutical manufacturers put PBMs in a position to recommend or
                arrange for the purchase of pharmaceutical manufacturers' products. The
                Department recognizes the possibility that certain types of
                remuneration that manufacturers might pay to PBMs either would not
                implicate the anti-kickback statute or could be protected under another
                existing safe harbor. However, this proposed new safe harbor would
                provide a pathway, specific to PBMs, to protect remuneration in the
                form of flat fee service fees that would be low risk if they meet
                specified criteria.
                 This proposed safe harbor would protect payments pharmaceutical
                manufacturers make to PBMs for services the PBMs provide to the
                pharmaceutical manufacturers, for the manufacturers' benefit, when
                those services relate in some way to the PBMs' arrangements to provide
                pharmacy benefit management services to health plans. This safe harbor
                would protect only a pharmaceutical manufacturer's payment for those
                services that a PBM furnishes to the pharmaceutical manufacturer, and
                not for any services that the PBM may be providing to a health plan.
                With respect to services that relate in some way to the PBM's
                arrangements with health plans, we have in mind, by way of example,
                services rendered to manufacturers that depend on or use data gathered
                by PBMs from their health plan customers (whether claims or other types
                of data). For example, PBMs might provide services for pharmaceutical
                manufacturers to prevent duplicate discounts on 340B claims.\65\ Such a
                service is for the benefit of the manufacturer but relies on certain
                [[Page 2350]]
                information the PBM would have from its contracted health plans. We
                note, however, that nothing in this proposed safe harbor would preempt
                any contractual terms that a PBM has with a health plan that limits or
                delineates the PBM's use of the health plan's data.
                ---------------------------------------------------------------------------
                 \65\ Section 256b(a)(5)(A)(i) of Title 42 provides that
                manufacturers are not required to provide a discounted 340B price
                and a Medicaid drug rebate for the same drug.
                ---------------------------------------------------------------------------
                 We consider ``pharmacy benefit management services'' to be services
                such as contracting with a network of pharmacies; establishing payment
                levels for network pharmacies; negotiating rebate arrangements;
                developing and managing formularies, preferred drug lists, and prior
                authorization programs; performing drug utilization review; and
                operating disease management programs. We do not propose to create a
                definition for ``pharmacy benefit management services'' as these
                services could evolve over time. We solicit comments on this approach
                and whether other services should be considered ``pharmacy benefit
                management services'' for purposes of this safe harbor. We also solicit
                comments on our proposal to limit this safe harbor to the fees that
                pharmaceutical manufacturers pay to PBMs that relate to the PBM's
                arrangements to provide pharmacy benefit management services to health
                plans.
                 The first proposed condition of the safe harbor would require the
                PBM and the pharmaceutical manufacturer to have a written agreement
                that: (i) Covers all of the services the PBM provides to the
                manufacturer in connection with the PBM's arrangements with health
                plans for the term of the agreement, and (ii) specifies each of the
                services to be provided by the PBM and the compensation for such
                services. Compliance with this first condition is necessary to
                demonstrate compliance with the second proposed condition. We solicit
                comments regarding whether the safe harbor should specify the format of
                any such agreement (e.g., whether it would be sufficient for a PBM to
                have one agreement with a manufacturer that covers all of the services
                the PBM provides to that manufacturer, or whether separate agreements
                for services that relate to each health plan would be necessary).
                 The second proposed condition would specify that compensation paid
                to the PBM must: (i) Be consistent with fair market value in an arm's-
                length transaction; (ii) be a fixed payment, not based on a percentage
                of sales; and (iii) not be determined in a manner that takes into
                account the volume or value of any referrals or business otherwise
                generated between the parties, or between the manufacturer and the
                PBM's health plans, for which payment may be made in whole or in part
                under Medicare, Medicaid, or other Federal health care programs. The
                first sub-condition requires that the remuneration be consistent with
                fair market value in an arm's length transaction and we welcome
                comments on the requirement, including comments on avoiding any risks
                of gaming with respect to valuation or other conditions in this
                proposed safe harbor. The second sub-condition would permit flat fees,
                but not percentage-based fees, including fees based on a percentage of
                sales. Flat fees pose lower risk of abuse and conflicts of interest.
                For example, if a pharmaceutical manufacturer were to offer
                compensation to a PBM for its services based on a percentage of the
                price of the manufacturer's product, the PBM could be influenced to
                include higher-priced alternatives in favorable tiers on its formulary,
                which would increase the PBM's own profits but be less beneficial for
                the health plans for which the PBM is supposed to be acting as an
                agent. (We note that the current rebate framework, where we understand
                that PBMs generally seek payments (which the parties refer to as
                ``rebates'') from manufacturers in exchange for a favorable formulary
                placement, may be instructive with respect to the relative risks of
                payments based on sales versus fixed fees.) Therefore, we are proposing
                that the protected payments must be fixed fees, rather than fees that
                are based on a percentage of sales or other variable. We solicit
                comments on this approach and these concerns.
                 The third sub-condition would require that the fees not be
                determined in a manner that takes into account the volume or value of
                any referrals or other business generated. We solicit comments
                regarding this volume or value criterion. In particular, we solicit
                comments on any services arrangements between pharmaceutical
                manufacturers and PBMs that take into account the volume or value of
                referrals or business otherwise generated between the parties, or the
                manufacturer and the PBM's health plans, but otherwise would be low
                risk or appropriate. We are considering whether, and if so how, we
                could include criteria that would allow us to deem certain arrangements
                not to take into account the volume or value of any referrals or
                business otherwise generated between the parties so that they may be
                protected under this safe harbor if all other criteria are met.
                 Finally, the Department proposes that the PBM disclose in writing
                to each health plan with which it contracts at least annually, and to
                the Secretary upon request, the services it rendered to each
                pharmaceutical manufacturer that are related to the PBM's arrangements
                with that health plan and the associated costs for such services. We
                are also considering, and solicit comments on, whether, and if so under
                what conditions, PBMs should also be required as an additional
                condition of safe harbor compliance to disclose the fee arrangements to
                the health plans. We propose that the PBMs be required to disclose the
                fee arrangements to the Secretary upon request. To promote transparency
                and minimize risks of fraud or abuse, we are also considering, and
                solicit comments on, requiring PBMs to disclose, in order to use the
                safe harbor, additional information about the fee arrangements to the
                Secretary upon request, including information about some or all of the
                following: Information about valuation and valuation methodology;
                information demonstrating that fee arrangements are not duplicative of
                other arrangements for which the PBM might receive duplicative payments
                (``double-dipping''); and information demonstrating that fee
                arrangements meet the ``volume or value'' criterion. The Department
                believes that PBMs are agents of the health plans with which they
                contract and that this transparency requirement is important to ensure
                that the PBM's arrangements with pharmaceutical manufacturers are not
                in tension with the services that the PBM provides to the health plans
                for which it is acting as an agent. We solicit comments on this
                transparency requirement. For example, we solicit comments on whether
                arrangements that PBMs have, or would seek to have, with pharmaceutical
                manufacturers could be attributed to services provided to particular
                health plans. We are also soliciting comments on any competitive
                concerns this transparency condition would raise and how we might
                address them in this rulemaking. Nothing in this proposal would affect
                the ability of the health plan and PBMs to negotiate different
                disclosure provisions in their contracts; however, safe harbor
                protection would only apply if the conditions of the safe harbor are
                fully met.
                IV. Regulatory Impact Statement
                 Executive Orders 12866 and 13563 direct agencies to assess all
                costs and benefits of available regulatory alternatives and, if
                regulation is necessary, to select regulatory approaches that maximize
                net benefits (including potential economic, environmental, public
                health and safety effects, distributive impacts, and equity). A
                regulatory impact analysis
                [[Page 2351]]
                (RIA) must be prepared for major rules with economically significant
                effects of $100 million or more in any one year.
                 Executive Order 13771 (January 30, 2017) requires that the costs
                associated with significant new regulations ``to the extent permitted
                by law, be offset by the elimination of existing costs associated with
                at least two prior regulations.'' The Department believes that this
                proposed rule is a significant regulatory action as defined by
                Executive Order 12866 that imposes costs, and therefore is considered a
                regulatory action under Executive Order 13771. The Department estimates
                that this rule generates $56.2 million in annualized costs at a 7%
                discount rate, discounted relative to 2016, over a perpetual time
                horizon.
                 The Regulatory Flexibility Act and the Small Business Regulatory
                Enforcement and Fairness Act of 1996, which amended the RFA, require
                agencies to analyze options for regulatory relief of small businesses.
                For purposes of the RFA, small entities include small businesses, non-
                profit organizations, and government agencies. Based on subsequent
                analysis, the Secretary does not believe that this rule will have
                significant impact on a substantial number of small entities.
                 In addition, section 1102(b) of the Act requires us to prepare a
                regulatory impact analysis if a rule may have a significant impact on
                the operations of a substantial number of small rural hospitals. This
                analysis must conform to section 603 of the RFA. For purposes of
                section 1102(b) of the Act, we define a small rural hospital as a
                hospital that is located outside a Metropolitan Statistical Area for
                Medicare payment regulations and has fewer than 100 beds. The Secretary
                has determined that this proposed rule would not have a significant
                impact on the operations of a substantial number of small rural
                hospitals.
                 Section 202 of the Unfunded Mandates Reform Act of 1995 also
                requires that agencies assess anticipated costs and benefits before
                issuing any rule whose mandates require spending in any one year of
                $100 million in 1995 dollars, updated annually for inflation. In 2018,
                that threshold is approximately $150 million. The proposed rule may
                have effects on states through its effects on the Medicaid Drug Rebate
                Program, under which rebates are shared between the Federal Government
                and the states based on the Federal Medical Assistance Percentage
                (FMAP) for each state, and through its effects on Medicaid managed
                care. We invite comments on these or other potential impacts.
                 The rule does not alter the statutory provisions for Medicaid
                prescription drug rebates under Section 1927 of the Social Security Act
                that are calculated as percentages of AMP plus the difference between
                the rate of increase in AMP and the increase in the consumer price
                index for all urban consumers (CPI-U). It also does not alter Section
                1927's provisions for Medicaid rebates based on the Best Price
                available to other payers for innovator drugs or for supplemental
                rebates negotiated between states and manufacturers. Nor does the rule
                alter the regulations and guidance to implement Section 1927
                provisions.
                 To the extent that the rule reduces Average Manufacturer Price
                (AMP), however, it will also reduce Medicaid prescription drug rebates
                calculated as percentages of AMP plus the difference between the rate
                of increase in AMP and the increase in the CPI-U. The Milliman analysis
                includes an extended example demonstrating that the loss of revenue
                from these rebates can exceed the savings from lower list prices.\66\
                ---------------------------------------------------------------------------
                 \66\ Milliman. ``Impact of Potential Changes to the Treatment of
                Manufacturer and Pharmacy Rebates.'' September 2018. The Milliman
                analysis is posted as supplementary material in the docket for this
                rule at regulations.gov.
                ---------------------------------------------------------------------------
                 The proposed rule would also change the safe harbor provision that
                currently protects rebates that PBMs negotiate on behalf of Medicaid
                MCOs while establishing a new safe harbor that allows point-of-sale
                price reductions under certain conditions. Finally, we seek comment
                regarding how these changes would influence bids submitted by Medicaid
                MCOs, including whether or not reducing rebate revenue for Medicaid
                managed care plans could result in states receiving bids with increased
                costs for Medicaid MCO contracts.
                 The Office of the Actuary estimates that the rule will result in
                estimated aggregate savings of $4.0 billion for states over ten years,
                as follows.\67\ The impact of the rule on Medicaid prescription drug
                rebates, MCO premiums, and prescription drug prices could result in net
                Federal Medicaid costs of $1.7 billion between 2020 and 2029, and net
                state Medicaid costs of $0.2 billion over the same period.\68\ The
                Office of the Actuary also estimates that state governments will save
                $4.3 billion between 2020 and 2029 through lower prescription drug
                prices for state employees.\69\ These estimates are at the national
                level; Medicaid costs, state employee savings, and the net of the two
                may vary among states.
                ---------------------------------------------------------------------------
                 \67\ CMS Office of the Actuary. ``Proposed Safe Harbor
                Regulation.'' August 2018. The OACT analysis is posted as
                supplementary material in the docket for this rule at
                regulations.gov.
                 \68\ CMS Office of the Actuary. ``Proposed Safe Harbor
                Regulation.'' August 2018. The OACT analysis is posted as
                supplementary material in the docket for this rule at
                regulations.gov.
                 \69\ CMS Office of the Actuary. ``Proposed Safe Harbor
                Regulation.'' August 2018. The OACT analysis is posted as
                supplementary material in the docket for this rule at
                regulations.gov.
                ---------------------------------------------------------------------------
                 We further note that the Veterans Health Administration, the Indian
                Health Service, tribes administering health programs under tribal self-
                governance, and other entities are eligible to purchase prescription
                drugs under the Federal Supply Schedule (FSS). FSS pricing is
                negotiated based on a unique commercial sales practices format, using
                commercial list pricing and most favored customer pricing as a base for
                negotiating, in most cases, up front discounts. In addition, the
                Veterans Health Administration, Department of Defense, Coast Guard, and
                the Public Health Service (including the Indian Health Service) are
                eligible to purchase drugs under the Federal Ceiling Price (FCP)
                Program. The Federal Ceiling Price is calculated as a percentage of
                non-Federal average manufacturer pricing (non-FAMP). Eligible programs
                can purchase drugs using the lesser of the FSS Price and FCP. Although
                it is difficult to determine the operation of the proposed rule on FSS
                users or entities entitled to FCPs, if the overall effect of lowering
                list pricing is achieved and that results in lower prices to commercial
                customers (and wholesalers) or pricing components of non-FAMP, it is
                possible VA may realize some additional savings. We solicit comment on
                effects on these stakeholders.
                 Executive Order 13132 establishes certain requirements that an
                agency must meet when it promulgates a proposed rule (and subsequent
                final rule) that imposes substantial direct requirement costs on State
                and local governments, preempts State law, or otherwise has federalism
                implications. Since this regulation does not impose any direct costs on
                State or local governments, preempt State law, or otherwise have
                federalism implications, the requirements of Executive Order 13132 are
                not applicable.
                A. Need for Regulation
                 As described above, manufacturers paying rebates to PBMs may be a
                factor in list prices rising faster than inflation. This phenomenon may
                also be causing PBMs to favor higher-cost drugs with higher rebates
                over drugs with lower costs, and discouraging the adoption of lower-
                cost brand drugs and biosimilars. As a result, rebates may increase
                costs
                [[Page 2352]]
                for consumers, because their out-of-pocket costs during the deductible,
                coinsurance, and coverage gap phases of their benefits are based on the
                list price. Rebates may also increase costs for the government, which
                pays a portion of the premium, cost-sharing, and reinsurance payments
                associated with the use of highly-rebated drugs instead of less-costly
                alternatives).
                 Prescription drug spending can be measured based on WAC price (also
                referred to as list price or invoice price) and the so-called ``net
                price'' (which accounts for all price concessions).\70\ According to
                the IQVIA Institute for Human Data Science (a private research
                organization affiliated with the human data science and consulting firm
                IQVIA that uses proprietary data from IQVIA), the difference between
                total US invoice spending (the amount paid by distributors) and net
                spending (which accounts for all price concessions) across all
                distribution channels has increased from approximately $74 billion in
                2013 to $130 billion 2017 for retail drugs. The IQVIA Institute found a
                similar growth in the difference between invoice and net spending for
                the total US retail market.\71\
                ---------------------------------------------------------------------------
                 \70\ ``Net price'' is industry jargon. Each PBM or plan sponsor
                may treat payments and price concessions differently. Thus the ``net
                price'' of a drug is more difficult to define than the Wholesale
                Acquisition Cost set by the manufacturer.
                ---------------------------------------------------------------------------
                 Department analysis shows that within Medicare there has been a
                similar trend of growing differences between list and net prices.
                Manufacturer rebates grew from about 10 percent of gross prescription
                drug costs in 2008 to about 20 percent in 2016, and are projected to
                reach 28 percent in 2027 under current policy (Figure 1). Reinsurance
                spending and gross drug costs, after rising in tandem with premiums in
                the early years of the Part D benefit, are now growing much faster than
                premiums.
                [GRAPHIC] [TIFF OMITTED] TP06FE19.000
                B. Background on Costs, Benefits, and Transfers
                 This proposed rule seeks to eliminate rebates so that manufacturers
                will have an incentive to lower list prices and PBMs will have more
                incentive to negotiate greater discounts from manufacturers. The goal
                of this policy is to lower out-of-pocket costs for consumers and reduce
                government drug spending in Federal health care programs.
                 The full magnitude of these savings is difficult to quantify, and
                the Office of Management and Budget has specific definitions of costs,
                benefits, and transfers. As such, a brief summary of potential effects
                of this rule is provided here. More information about these effects may
                be found in the respective costs, benefits, and transfers sections.
                 Notably, the Department intends for this proposal to result in
                manufacturers lowering their list prices, and replacing rebates with
                discounts. One way to quantify this impact is to simply replace all
                manufacturer rebates paid to PBMs with discounts paid to consumers, and
                estimate the effect of this transfer on stakeholders. However, this
                approach does not consider the range of strategic behavior changes
                stakeholders may make in response to this rule, including the extent to
                which manufacturers lower list prices or retain a portion of current
                rebate spending, PBMs change benefit designs or obtain additional price
                concessions, and the impact on consumer utilization of lower-cost
                drugs. The section below describes the current system and the potential
                system that could result from finalizing this rule, based on current
                Medicare Part D spending and a range of potential behavioral changes,
                including the manufacturer pricing changes and PBM negotiation
                practices described above.
                 Today, prescription drug manufacturers prospectively set the
                Wholesale Acquisition Cost, or list price, of the drugs they sell to
                wholesalers and other large purchasers. Manufacturers also
                retrospectively make payments to pharmacy benefit managers (PBMs) or
                other customers who meet certain volume-based or market-share criteria.
                The difference between the list price of a drug and the rebate amount
                is referred to in industry parlance as the ``net price.'' Since the
                passage of the Anti-Kickback Statute and the establishment of the
                various safe harbors, the list prices of branded prescription drugs,
                and the rebates paid by manufacturers to pharmacy benefit managers,
                have grown substantially. The phenomenon of list prices rising faster
                than ``net prices'' is referred to as the ``gross to net bubble.''
                 Research suggests that the approval of a new drug can lead to
                higher list prices for existing drugs in the therapeutic class. PBMs
                may favor drugs with higher rebates over drugs with lower costs, or
                otherwise discourage the
                [[Page 2353]]
                adoption of lower-cost brand or generic drugs and biosimilars. As a
                result, rebates may increase costs for consumers (who experience out-
                of-pocket costs more closely related to the list price than the rebated
                amount during the deductible, coinsurance, and coverage gap phases of
                their benefits) and the government (who pays a portion of the premium,
                cost-sharing, and reinsurance payments associated with the use of
                higher-rebated drugs instead of less-costly alternatives). This rule
                seeks to correct the incentives that have created the widening gaps
                between gross and net prescription drug costs and between gross
                prescription drug costs and Part D premiums.
                 This proposed rule would remove safe harbor protection for rebates
                received by PBMs from manufacturers in connection with Medicare Part D
                and Medicaid MCOs, and create two new safe harbors protecting certain
                discounts by manufacturers and protecting certain flat fees paid by
                manufacturers to a PBM for services the PBM renders to the
                manufacturer. To the extent that this rule would result in
                manufacturers reducing the list price of drugs, this rule would impact
                all cash flows throughout the system.
                 The intent of this rule is to eliminate rebates from manufacturers
                to PBMs, and replace them with discounts provided to beneficiaries at
                the point of sale. This change would also impact the price that many
                patients pay for prescription drugs. As part of their health insurance
                coverage, many consumers pay some cost sharing for the use of health
                care services. For many plans, consumers first pay a deductible. This
                typically means that the consumer pays the full cost of services until
                the deductible is met. After the consumer has met the deductible, cost
                sharing often takes the form of coinsurance, in which consumers pay a
                percentage of the cost of the covered health care service or product,
                or copayments, in which consumers pay a fixed amount for a covered
                health care service or product. A recent IQVIA report found that in
                2017 more than 55 percent of commercially-insured consumer spending on
                branded medicines was filled under coinsurance or before the deductible
                is met.\72\ For most health care services, consumer deductibles and
                coinsurance are based on the prices health insurers negotiate with
                their network providers. However, for prescription drugs, often the
                price the plan ultimately pays is based on rebates that are paid after
                the point of sale to the consumer, whereas the consumers' deductible
                and coinsurance payments are based on the list price.
                ---------------------------------------------------------------------------
                 \72\ Consumer Affordability Part One: The Implication of
                Changing Benefit-Designs and High Cost sharing.
                ---------------------------------------------------------------------------
                 With a reduced price charged by the pharmacy, patients with
                coinsurance or deductible plans will likely experience reductions in
                cost-sharing for rebated brand-name at the point of sale. Patients with
                fixed co-payments may not see changes in their cost-sharing at the
                point of sale outside of the deductible, coverage gap, or catastrophic
                phases of their benefits. These effects will accrue to some
                beneficiaries through lower out-of-pocket costs and to all
                beneficiaries through more transparent pricing. If this rule closes the
                gap between list and net prices and leads to additional price
                concessions, the benefit of lower premiums and out-of-pocket costs
                could accrue to all beneficiaries with individual out-of-pocket savings
                varying by beneficiary prescription drug utilization. If this rule
                closes the gap between list and net prices but leads to fewer price
                concessions, all beneficiaries could experience higher premiums with
                only some experiencing lower out-of-pocket costs. The potential impact
                of these distributional changes is described in the transfers section
                of this regulatory impact analysis.
                 Consumers also select health insurance plans based on their
                understanding of relevant plan characteristics, including premiums,
                cost sharing, coverage, and in-network providers. Research shows that
                consumers often do not understand their health insurance plans and
                would better understand a simpler plan.\73\ Research specific to
                Medicare Part D suggests beneficiaries place a greater weight on
                premium than out-of-pocket cost, are most likely to choose the plan
                with the lowest premium.\74\ Oftentimes they select the plan with the
                lowest premiums when plans with higher premiums and more comprehensive
                coverage were actuarially favorable.\75\ However, consumers in poorer
                health or with higher drug costs are more likely to anticipate their
                future drug spending and choose a plan that places them at less
                financial risk. Also, as stated earlier, a beneficiary paying 20%
                coinsurance on a drug with a $100 WAC and 30% rebate effectively pays
                28% of the plan's cost after accounting for payments made by the
                manufacturer to the PBM. Thus, the publication of premiums and cost-
                sharing amounts that more accurately reflect the discounted price of a
                prescription drug could help align consumer understanding of health
                insurance benefits with reality and help consumers to choose the health
                insurance plans that best meet their needs. These effects are described
                in the benefits section.
                ---------------------------------------------------------------------------
                 \73\ Loewenstein G et al. Consumers misunderstanding of health
                insurance. Journal of Health Economics. 32(2013) 850-862.
                 \74\ Abaluck and Gruber. Evolving Choice Inconsistencies in
                Choice of Prescription Drug Insurance. Am Econ Rev. 2016 Aug;
                106(8): 2145-2184.
                 \75\ Heiss, Leive, McFadden and Winter. Plan Selection in
                Medicare Part D: Evidence From Administrative Data. J Health Econ.
                2013 Dec; 32(6): 1325-1344.
                ---------------------------------------------------------------------------
                 The Federal Government pays a significant portion of the premium
                for every Medicare Part D beneficiary, and subsidizes the cost sharing
                of beneficiaries eligible for the Part D low-income subsidy. If this
                rule increases premiums, Federal spending on premium subsidies will
                also increase, potentially outweighing estimated Federal savings
                associated with this proposal. These potential effects are described in
                the transfers section of this regulatory impact analysis.
                 Lastly, stakeholders involved in the manufacture, sale,
                distribution, and dispensing of prescription drugs, as well as those
                who provide prescription drug coverage, will need to review this policy
                and determine how it affects them. They may also need to make changes
                to existing business practices, update systems, or implement new
                documentation and recordkeeping requirements. These effects are
                described in the costs section of this regulatory impact analysis. We
                seek comment on the impacts identified and any other impacts.
                C. Affected Entities
                 This proposed rule would affect the operations of entities that are
                involved in the distribution and reimbursement of prescription drugs to
                Medicaid beneficiaries and Medicare Part D prescription drug benefit
                enrollees. According to the US Census \76\ and other sources, \77\
                there were 67,753 community pharmacies (including 19,500 pharmacy and
                drug store firms and 21,909 small business community pharmacies), 1,775
                pharmaceutical and medicine manufacturing firms, and 880 direct health
                and medical insurance carrier firms operating in the US in 2015. In
                2018, there are 44 Pharmacy Benefit Managers (PBMs) listed in the
                Pharmacy Benefit Management
                [[Page 2354]]
                Institute \78\ directory. Organizations are required to pay a fee if
                they choose to register, and therefore we estimate that participation
                in the directory is incomplete and that the total number of PBMs
                operating in the U.S. is approximately 60.
                ---------------------------------------------------------------------------
                 \76\ https://www.census.gov/data/tables/2015/econ/susb/2015-susb-annual.html.
                 \77\ Qato, Zenk, Wilder, et al. PLoS One. 2017 Aug 16;12(8).
                 \78\ https://www.pbmi.com/PBMI/Directory/Pharmacy_Benefit_Manager_Directory.aspx, accessed 7/13/2018.
                ---------------------------------------------------------------------------
                 This rule also affects the operation of 56 Medicaid agencies,
                including all states, the District of Columbia, American Samoa, the
                Commonwealth of the Northern Mariana Islands, Guam, Puerto Rico, and
                the US Virgin Islands.
                 Finally, the proposed rule if finalized would affect Medicare
                prescription drug enrollees. CMS reports there were 44,491,003 Medicare
                prescription drug enrollees in December 2018.\79\ CMS reports there
                were 80,184,501 beneficiaries in Medicaid in 2016, 65,005,748 of which
                were enrolled in any type of managed care plan. However, these
                beneficiaries are less likely to be significantly affected, given
                Medicaid's low beneficiary cost-sharing requirements. Throughout, we
                use these numbers as estimates of affected entities in relevant
                categories, and we request comments on these assumptions.
                ---------------------------------------------------------------------------
                 \79\ https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/Dashboard/Medicare-Enrollment/Enrollment%20Dashboard.html.
                ---------------------------------------------------------------------------
                 The Department estimates the hourly wages of individuals affected
                by this proposed rule using the May 2016 National Occupational
                Employment and Wage Estimates provided by the US Bureau of Labor
                Statistics.\80\ We note that, throughout, estimates are presented in
                2016 dollars. We use the wages of Medical and Health Services Managers
                as a proxy for management staff, the wages of Lawyers as a proxy for
                legal staff, and the wages of Network and Computer Systems
                Administrators as a proxy for information technology (IT) staff
                throughout this analysis. To value the time of Medicare prescription
                drug benefit enrollees, we take the average wage across all occupations
                in the US. We assume that the total dollar value of labor, which
                includes wages, benefits, and overhead, is equal to 200 percent of the
                wage rate. Estimated hourly rates for all relevant categories are
                included below. We seek public comment on these assumptions.
                ---------------------------------------------------------------------------
                 \80\ https://www.bls.gov/oes/2016/may/oes_nat.htm.
                 Table 1--Hourly Wages \81\
                ------------------------------------------------------------------------
                
                ------------------------------------------------------------------------
                Medical and Health Services Managers........................... $52.58
                Lawyers........................................................ 67.25
                Network and Computer Systems Administrators.................... 40.63
                Medicare Prescription Drug Benefit Enrollees................... 23.86
                ------------------------------------------------------------------------
                D. Costs
                ---------------------------------------------------------------------------
                 \81\ https://www.bls.gov/oes/2016/may/oes_nat.htm.
                ---------------------------------------------------------------------------
                 In order to comply with the regulatory changes proposed in this
                proposed rule, affected businesses and Medicaid agencies would first
                need to review the rule. The Department estimates that this would
                require an average of 2 hours for affected businesses to review,
                divided evenly between managers and lawyers, in the first year
                following publication of the final rule. As a result, using wage
                information provided in Table 1, this implies costs of $5.3 million in
                the first year following publication of a final rule after adjusting
                for overhead and benefits. We seek public comment on these assumptions.
                 After reviewing the rule, businesses and Medicaid agencies would
                need to review their policies in the context of these new requirements,
                and determine how to respond. For some affected businesses, this may
                mean substantially changing their pricing models, and engaging in
                lengthy negotiations with other businesses. For others, much more
                modest changes are likely needed. The Department estimates that this
                would result in affected businesses spending an average of 20 hours
                reviewing their policies and determining how to respond, divided evenly
                between lawyers and managers, in the first year following publication
                of the final rule. In subsequent years, the Department estimates this
                would result in affected businesses spending an average of 10 hours
                implementing policy changes, with 20% of time spent by lawyers and 80%
                of time spent by managers. As a result, using wage information provided
                in Table 1, the Department estimates costs of $53.5 million in the
                first year and $24.8 million in years two through five following
                publication of the final rule after adjusting for overhead and
                benefits. We seek public comment on these assumptions.
                 The Department is proposing that this amendment, if finalized, be
                effective on January 1, 2020, and is soliciting comments on whether the
                proposed effective date gives affected entities a sufficient transition
                period for any necessary restructuring of arrangements. Plan sponsor
                and manufacturer negotiations for the 2020 benefit year could be
                influenced by the release of this proposal, and bids could be submitted
                without knowledge of whether or not the proposal will be finalized with
                a January 1, 2020 effective date. Parties who wish to enjoy protection
                under a new safe harbor may need to restructure their contractual
                arrangements, and the change in law itself would trigger contractual
                obligations to terminate or amend existing contracts. These changes
                could affect the assumptions underlying plan sponsors' bids. As a
                result, we estimate the cost of 218 Part D parent organizations of Part
                D plan sponsors updating their bids with new information to be $5.45
                million in the first year this rule is finalized.
                 This rule imposes documentation and reporting requirements on PBMs.
                In particular, PBMs and pharmaceutical manufacturer must have a written
                agreement that specifies their contractual arrangements and
                interactions with health plans, and PBMs must disclose their services
                rendered and compensation associated with transactions with
                pharmaceutical manufacturers related to interactions between the PBM
                and the health plan. In addition, PBMs may be required to disclose this
                information to the Secretary upon request. We believe that these
                written agreements already exist as a matter of standard business
                practice, as they need to be in place in order to enforce contractual
                arrangements between these entities. As a result, we believe that the
                documentation requirement merely codifies standard practice, and
                therefore imposes no marginal costs on affected entities. We believe
                that the disclosure requirements will not require PBMs to generate new
                information or retain additional records related to their interactions
                with pharmaceutical manufacturers or health plans. However, we believe
                that the disclosure requirements will result in additional disclosure
                to health plans and potentially the Secretary. We estimate that each
                PBM will provide this information an additional 50 times each year. We
                estimate that these disclosures will require an average of 4 hours,
                with 50% of time spent by managers, 25% of time spent by attorneys, and
                25% of time spent by IT staff. As a result, using wage information
                provided in Table 1, the Department estimates costs of $1.28 million in
                each year following publication of the final rule after adjusting for
                overhead and benefits. We request comments on these assumptions.
                 We expect that this rule will also lead PBMs, pharmacies, and
                health insurance providers to update their IT
                [[Page 2355]]
                systems for processing claims and payments. For these entities, the
                Department estimates that this will require an average of five hours
                per year over the first five years following publication of the final
                rule to make these changes. Using wage information provided in Table 1,
                we estimate this will cost $10.8 million in each of the first five
                years following publication of a final rule after adjusting for
                overhead and benefits. We seek public comment on these assumptions.
                 Medicare prescription drug benefit enrollees will also spend time
                responding to the rule. In particular, the Department believes that
                this rule will result in changes to the characteristics of Medicare
                prescription drug plans. Once enrollees become aware that changes have
                been made, we believe they will review available plans to determine the
                plan which best suits their needs. The Department expects that Medicare
                enrollees will become aware of these changes gradually over time. In
                particular, the Department expects that 20% of enrollees will become
                aware of these changes in each of the five years following publication
                of the final rule, and that responding to these changes will require an
                average of thirty minutes per enrollee. As a result, using wage
                information provided in Table 1, we estimate costs of $209 million in
                each of the first five years following publication of a final rule
                after adjusting for overhead and benefits. We seek public comment on
                these assumptions.
                 This rule may lead to shifts in the composition of affected
                industries by affecting the extent to which entities vertically
                integrate, and the rate at which entities of various sizes
                (particularly small entities) enter and exit the market. Vertical
                integration is a strategy where a firm acquires business operations in
                a different sector of the supply chain and reimbursement system.
                Entities are affected by this rule to the extent that their business
                models depend on using rebates, and rebates are streamlined regardless
                of where they are paid if a company is vertically integrated. As a
                result, this rule may affect incentives for vertical integration for
                affected entities. For example, PBMs, plan sponsors, and pharmacies may
                want to vertically integrate as a result of this rule. At the same
                time, the potential loss of retained rebate revenue by PBMs may cause
                existing vertically-integrated businesses to consider new
                organizational structures. These changes, in turn, may generate costs
                and benefits.
                E. Benefits
                 It is difficult to accurately quantify the benefits of this
                proposed rule due to the complexity and uncertainty of stakeholder
                response. As such, the Department has qualitatively described two
                potential benefits of the proposed rule, and we request comment on the
                methodology and data sources that could be used to quantify these
                benefits.
                 First, if this rule is finalized, the Department anticipates the
                enhanced transparency of premiums, out-of-pocket costs and improved
                formulary designs will help beneficiaries make more actuarially
                favorable decisions, because the new discounts negotiated by PBMs would
                be passed on to beneficiaries at the point of sale for those enrolled
                in health plans electing to use the proposed new safe harbor protecting
                certain point-of-sale reductions in price on prescription
                pharmaceutical products.
                 Second, with reduced out-of-pocket payments, patient adherence and
                persistence with prescription drug regimens may improve. Patients
                abandoned 21 percent of all prescriptions for branded drugs processed
                by pharmacies in the United States in the fourth quarter of 2017,\82\
                and copayment or coinsurance amounts can be a predictor of abandonment
                \83\ While there may be a variety of reasons patients may not pick up a
                medication, one factor that may impact patient decision-making is the
                out-of-pocket cost of a prescription. One study suggested that for
                chronic myeloid leukemia, patients using tyrosine kinase inhibitors
                were 42% more likely to be non-adherent (which may include delaying the
                purchase of, never purchasing, or switching their prescription to a
                less optimal choice) if they were in the higher copayment group
                compared to the lower copayment group.\84\ The intent of this proposal
                is to lower the out-of-pocket costs for prescription drugs for some
                Medicare prescription drug enrollees. The pricing decisions of drug
                companies, and negotiations between manufacturers and PBMs, will
                determine how plan sponsors make formulary decisions that determine
                whether or not beneficiaries pay more or less in out-of-pocket costs.
                ---------------------------------------------------------------------------
                 \82\ IQVIA Institute for Human Data Science, Medicine Use and
                Spending in the U.S.: A Review of 2017 and Outlook to 2022, April
                2018, p. 31.
                 \83\ William H. Shrank et al., The Epidemiology of Prescriptions
                Abandoned at the Pharmacy 153 Annals Internal Med. 633 (2010).
                 \84\ Stacie B. Dusetzina et al. ``Cost Sharing and Adherence to
                Tyrosine Kinase Inhibitors for Patients With Chronic Myeloid
                Leukemia.'' 32:4 Journal of Clinical Oncology. February 2014.
                ---------------------------------------------------------------------------
                 Furthermore, lower out-of-pocket costs may lead to fewer enrollees
                abandoning prescription drugs. This could result in beneficiaries
                filling more prescriptions, and thus increasing spending, as
                prescriptions that were once unaffordable are now attainable. It could
                also lead to lower total costs-of-care, if increased adherence led to
                improved health outcomes. The Department is unable to estimate the
                extent to which this proposal would reduce abandonment across all drug
                markets or the resulting health benefits of higher adherence of
                prescription drugs. We request comment on the methodology and data
                sources that could be used to estimate such impacts.
                 In addition, the reduction in abandonment could benefit pharmacies
                by reducing costs related to storage and tracking of abandoned
                prescriptions. We request comment on the methodology or data sources
                that could be used to estimate such impacts. Further, we request
                comment on any other benefits of this rule and the data sources that
                could be used to estimate such benefits.
                F. Transfers
                 The provisions of this proposed rule are specifically aimed at
                incentives related to pharmaceutical list prices as set by
                manufacturers, increases in these prices by manufacturers, rebates paid
                by manufacturers to PBMs acting on behalf of Part D plan sponsors and
                Medicaid MCOs, and the misalignment of incentives caused by
                concurrently increasing list prices and rebates. A significant, though
                difficult to quantify, potential transfer resulting from this rule if
                finalized would be the reduction of list prices and/or a reduction in
                the annualized increases thereof. Retrospective rebate-based
                contractual arrangements between manufacturers and PBMs and health
                insurers may be renegotiated to match these regulations' new
                conditions. Manufacturers may reset their pricing strategies to better
                match net pricing trends and strategies. Changes in list prices could
                flow throughout the entire pharmaceutical supply chain and
                reimbursement system.
                 If manufacturers reduced their current list prices to an amount
                equal or similar to their current net prices, there would be less
                impact on premiums. If manufacturers did not reduce their list price,
                or adopted pricing processes that led to higher net prices, beneficiary
                and Federal spending on premiums and cost sharing could increase beyond
                the increase attributable to simply eliminating rebates. We seek
                feedback from stakeholders about the impact of
                [[Page 2356]]
                this regulation on list and net prices, and the magnitude of these
                changes.
                 If Part D plans changed their benefit structures (e.g., increased
                formulary controls, greater use of generic drugs), and sought to
                prevent or ameliorate premium increases, they may able to obtain
                additional price concessions from manufacturers. If list price
                reductions and increased price concessions led to lower net prices and
                gross drug costs in Part D plans, beneficiary and Federal spending on
                premiums and cost sharing could decrease. If Part D plans were unable
                to achieve additional price concessions, and net prices increased,
                beneficiary and Federal spending on premiums and cost sharing could
                increase. We seek feedback from Part D plans and others about the
                impact of this regulation on list and net prices, and the magnitude of
                these changes.
                 Under the Part D program, plan sponsors pay network pharmacies a
                negotiated price for a covered Part D drug that is intended to cover a
                pharmacy's acquisition cost (termed the negotiated price at section
                1860D-2(d) of the Act), plus a dispensing fee. Currently, pharmacies
                are not a part of the financial flow related to rebates that are paid
                after the point of sale, nor do beneficiaries receive any out-of-pocket
                benefit from these rebates. This means that beneficiaries, whose cost
                sharing for Part D covered drugs is calculated as coinsurance, or a
                percentage of the price of the drug dispensed, are charged a percentage
                of the price paid to pharmacies (or the full price prior to meeting
                their deductible), which does not include the rebates plans receive
                through PBMs from manufacturers. Removing the existing safe harbor
                protection for retrospectively-paid rebates that are not reflected in
                the prices paid at the point of sale may, if the proposal is finalized
                and if list prices decrease as a result, reduce beneficiary out-of-
                pocket spending for Part D covered drugs. If the proposal is finalized
                but list prices do not decrease, beneficiaries could see an increase in
                premiums without the benefit of decreased cost-sharing.
                 Below, this section discusses the potential specific effects within
                Part D on premiums, benefit design thresholds, and Federal outlays for
                the portions of the benefit subsidized by the Medicare Part D program.
                 The Department's Medicare Part D analysis is based on the CMS
                Office of the Actuary's work commissioned specifically for this
                rulemaking \85\ and two commissioned actuarial analyses independent of
                the CMS Office of the Actuary.\86\ The Office of the Actuary `directs
                the actuarial program for CMS and directs the development of and
                methodologies for macroeconomic analysis of health care financing
                issues.' The two external actuarial firms were chosen based on their
                commercial experience assisting plan sponsors with their plan bids.
                ---------------------------------------------------------------------------
                 \85\ CMS Office of the Actuary. ``Proposed Safe Harbor
                Regulation.'' August 2018. The OACT analysis is posted as
                supplementary material in the docket for this rule at
                regulations.gov.
                 \86\ Wakely Consulting Group. ``Estimate of the Impact of
                Eliminating Rebates for Reduced List Prices at Point-of Sale on
                Beneficiaries.'' August 2018. The Wakely analysis is posted as
                supplementary material in the docket for this rule at
                regulations.gov.
                 Available at XXX. And Milliman. ``Impact of Potential Changes
                to the Treatment of Manufacturer and Pharmacy Rebates.'' September
                2018. The Milliman analysis is posted as supplementary material in
                the docket for this rule at regulations.gov.
                ---------------------------------------------------------------------------
                 There are significant differences in the assumptions the respective
                actuaries used to estimate stakeholder behavior. The Office of the
                Actuary predicts that while some current rebates will be retained by
                manufacturers, future price increases will be smaller and fewer. Per
                the Office of the Actuary's assumption, rather than reducing list
                prices and offering discounts to achieve current net prices, the
                expected behavior is to reduce future price increases so that post-rule
                net prices converge over time to meet the trend on pre-rule net price
                forecasts. As such, the Office of the Actuary predicts that the Federal
                Government would increase spending on premium subsidies for Medicare
                beneficiaries, and that consumers and private businesses would
                experience decreased overall spending.
                 Because drug manufacturers pay a portion of the drug costs incurred
                by beneficiaries in the Part D coverage gap, their expenses would be
                reduced in relation to the reduction of beneficiary spending in the
                coverage gap. The Milliman non-behavioral analysis estimates gross drug
                costs would decrease by $679.7 billion and coverage gap discount
                payments would decrease by $20.6 billion over the same period,
                representing a $659.1 billion decrease in gross manufacturer revenue.
                The same analysis also shows that drug spending net of all discounts
                and rebates would increase more than $20 billion over 10 years; Federal
                spending would increase by $34.8 billion, and beneficiary spending
                would decrease by $14.5 billion.\87\ We seek feedback on these
                estimates, and are interested in assessing the full economic effects of
                this proposed rulemaking. We invite comment on the structure of and
                sources for such an analysis.
                ---------------------------------------------------------------------------
                 \87\ Milliman. ``Impact of Potential Changes to the Treatment of
                Manufacturer and Pharmacy Rebates.'' September 2018. The Milliman
                analysis is posted as supplementary material in the docket for this
                rule at regulations.gov. Appendix A1, Scenario 1A, page 1.
                ---------------------------------------------------------------------------
                 In addition to the actuarial analysis described above, the economic
                analysis of this rule is also informed by stakeholder comments and
                meetings in response to the drug pricing Blueprint.\88\ We invite
                comment on additional sources the Department could consider related to
                the economic impacts on the Part D program, and stakeholders to
                specifically comment on the most likely strategic behavior changes in
                response to this rule.
                ---------------------------------------------------------------------------
                 \88\ Comments are available for viewing at https://www.regulations.gov/document?D=CMS-2018-0075-0001.
                ---------------------------------------------------------------------------
                 All three of these analyses contemplate and quantify the behavioral
                changes by plans in the form of changes to benefit offerings, or by
                manufacturers in the form of changes to pricing processes, but differed
                in their assumptions. All three assessed pharmaceutical manufacturers'
                unique opportunity to adjust their overall pricing and rebate strategy,
                but differed in the assumed amount of rebates that would be retained by
                manufacturers, if any, and the effect on list and net prices.
                 The OACT analysis assumed manufacturers would retain 15 percent of
                the existing Medicare Part D rebates, that 75 percent of the remaining
                rebates would be applied as discounts to beneficiaries, and that
                manufacturers would apply the remaining 25 percent to lower list
                prices. OACT based this assumption on the belief that consumer
                discounts provide less return on investment to drug manufacturers than
                rebates and that resetting the rebate system would allow manufacturers
                to recapture forgone revenue streams such as those that occurred from
                the changes in the Coverage Gap Discount Program included in the
                Bipartisan Budget Act of 2018. OACT's assumption would lead to higher
                net prices in Medicare Part D at the beginning of time period analyzed,
                while the reduced price increase trend would lead to post-rule net
                prices eventually converging to pre-rule net price forecasts. Each of
                the analyses took varying approaches to the treatment of discounts and
                acknowledge uncertainty around this assumption. Wakely's analysis
                assumed that all existing manufacturer rebates would be passed along as
                either list price reductions or discounted prices at the point of sale.
                The Milliman baseline assumption was that manufacturers
                [[Page 2357]]
                would reduce list prices to their current net prices, which would lead
                to no changes in net prices.
                 Milliman provided six additional scenarios based on a range of
                strategic behavior changes by stakeholders, including increased
                formulary controls, increased price concessions, reduced price
                concessions in Part D to offset list price decreases in other markets,
                decreased brand unit cost trend, and increased utilization and
                decreased brand unit cost trend. These scenarios are intended to
                bookend the baseline analysis by showing a range of possible scenarios,
                given the uncertainty inherent in such a policy change. Tables 2A, 2B,
                4A, and 4B later in this section present the main assumptions and
                findings of the analyses we discuss.
                 Only one analysis contemplated, but did not seek to quantify, the
                behavioral change of beneficiaries choosing lower-cost plans, switching
                from PDPs to MA-PDs, or in the form of increased persistence and
                adherence caused by induced demand due to decreased out-of-pocket
                costs. We invite comment on sources the Department could consider to
                more fully illustrate the effects of reduced purchase prices for drugs.
                 We note that all the actuaries who submitted analyses developed
                different results based on differing, yet plausible, assumptions. The
                sheer size of the Medicare Part D program makes these results sensitive
                to small differences in assumptions, particularly over a ten year
                period. As such, there are often good reasons for small differences in
                assumptions that are neither right nor wrong, but may be reasonable
                within a plausible range of outcomes. The different assumptions made
                include the initial values used for the direct subsidy and base
                beneficiary premium, the pattern of future costs, the granularity with
                which growth rates or future effects are applied uniformly or based on
                product type. The actuarial analyses used to prepare this impact
                analysis are posted as supplementary material in the docket for this
                proposal at regulations.gov.
                 Given that all stakeholders involved in the manufacture, sale,
                dispensing and coverage of prescription drugs have their own actuarial
                models and financial estimates, we invite comment on additional sources
                the Department could consider related to the economic impacts on the
                Part D program, and encourage stakeholders to specifically comment on
                the most likely strategic behavior changes in response to this rule.
                Effect on Beneficiary Spending
                 This rule will likely impact beneficiary spending on Part D premium
                subsidies, low-income cost-sharing, and reinsurance. It is difficult to
                quantify the impact on beneficiary spending without knowing
                manufacturer and Part D plan behavior in response to this regulation.
                As noted above, the Department is presenting three actuarial analyses
                (six total scenarios) conducted under various behavioral assumptions.
                 The projected decrease in beneficiary spending on premiums and
                cost-sharing in 2020 is $1.0 to 1.4 billion. The projected decrease in
                beneficiary spending on premiums and cost-sharing from 2020-2029 is
                $14.5 billion to $25.2 billion. Individuals who qualify for the Low
                Income Subsidy (LIS) pay low or no premiums to enroll in the Part D
                benefit and have their cost sharing obligations under each benefit
                phase reduced significantly (called the Low Income Cost Sharing Subsidy
                or LICS). We expect a smaller effect among these enrollees (about 30%
                of total Part D enrollees) than among those not receiving the LIS and
                LICS.
                 All three actuarial reports support the conclusion that non-LIS
                Medicare beneficiaries enrolled in, and actively utilizing, plans with
                coinsurance-based cost-sharing structures for covered out-patient drugs
                for which their respective plan has negotiated a rebate, will likely
                see lower out-of-pocket cost sharing at the pharmacy counter as a
                result of this regulatory change.
                 The Office of the Actuary, Wakely and five of the six Milliman
                scenarios considered by the Department suggest total beneficiary cost
                sharing would decrease and premiums would increase, and that the
                decrease in total beneficiary cost-sharing would offset the total
                increase in premiums across all beneficiaries, regardless of
                assumptions regarding whether or not manufacturers retained rebates or
                applied a percentage of them as list price reduction, or PBMs and plan
                sponsors changed formularies or obtained additional price concessions.
                However, more beneficiaries would pay more for premiums than they would
                save in cost sharing, suggesting that out-of-pocket impacts are likely
                to vary by individual and the greatest benefit of these transfers
                accrues to sicker beneficiaries (e.g., those with more drug spending
                and/or those using high-cost drugs).
                 However, it is important to note that the effect of this rule on
                individual beneficiaries depends on whether they use medications, and
                whether the manufacturers of the drugs in their regimen are paying
                rebates.
                 Analyses that contemplated increased price concessions or benefit
                design changes predicted beneficiaries having lower premiums and out of
                pocket costs overall. Tables 2A and 2B describe the net beneficiary
                impact predicted by each analysis and assumption. (Scenarios 5, 6, and
                7 in the Milliman analysis are available online rather than reproduced
                here, since they are not referenced further in our write-up.) We seek
                feedback on these estimates and the assumptions.
                 Table 2.A.--Beneficiary Impacts, per Member per Month, Non-Low Income Subsidy Enrollees, CY 2020
                --------------------------------------------------------------------------------------------------------------------------------------------------------
                 Milliman, Scenario Milliman, Scenario Milliman, Scenario Milliman, Scenario
                 OACT 1 2 3 4 Wakely
                --------------------------------------------------------------------------------------------------------------------------------------------------------
                Modeled Assumptions........ 15% of 100% of 100% of More than 20% of 100% of
                 current Part D current Part D current rebates 100% of rebates current Part D current
                 rebates retained rebates are are converted into are converted into rebates are manufacturer
                 by manufacturer. converted into list price list price retained by rebates are
                 75% of list price concessions. concessions (same manufacturers converted into
                 remaining amount concessions Part D agnosticism on how (same agnosticism reductions in
                 applied to per- (agnostic on list plans exert applied). on how applied). drug costs at the
                 sponsor/PBM price reductions greater formulary Part D 80% of point of sale.
                 negotiated versus up front control.. plans exert current Part D No
                 discounts.. discounts). greater formulary rebates are beneficiary or
                 control.. converted to price plan behavioral
                 concessions (list changes are
                 price or assumed.
                 discounts)..
                 25% of
                 remainder applied
                 as reduction to
                 list price.
                 No
                 beneficiary or
                 plan behavioral
                 changes are
                 assumed..
                [[Page 2358]]
                
                Impact on Beneficiary +$5.64, (+19%) \89\ +$3.15, (+14%) \90\ +$2.70, (+12%)..... +$2.77, (+12%)..... +$5.11, (+22%)..... +$3.73, (+8%).\91\
                 Premium.
                Impact on Beneficiary Cost -$8.01, (-14%)..... -$4.85, (-11%)..... -$5.44, (-13%)..... -$5.22, (-12%)..... -$3.86, (-9%)...... -$5.75, (-10%).
                 sharing.
                 ----------------------------------------------------------------------------------------------------------------------------
                 Total.................. -$2.37, (-3%)...... -$1.70, (-3%)...... -$2.74, (-4%)...... -$2.44, (-4%)...... +$1.25, (+2%)...... -$2.02, (-2%).
                --------------------------------------------------------------------------------------------------------------------------------------------------------
                 Table 2.B.--Beneficiary Impacts, per Member per Month, Non-Low Income Subsidy Enrollees, CY 2020-CY 2029
                --------------------------------------------------------------------------------------------------------------------------------------------------------
                 Milliman, Scenario Milliman, Scenario Milliman, Scenario Milliman, Scenario
                 OACT 1 2 3 4 Wakely
                --------------------------------------------------------------------------------------------------------------------------------------------------------
                Premium \92\............... +25%............... +$4.03, +13%....... +$1.27, +4%........ +$0.61, +2%........ +$6.84, +21%....... N/A.
                Cost sharing............... -18%............... -$6.23, -12%....... -$9.85, -19%....... -$9.68, -19%....... -$4.97, -10%....... N/A.
                 ----------------------------------------------------------------------------------------------------------------------------
                 Total.................. -4%................ -3%................ -18%............... -11%............... +2%................ N/A.
                --------------------------------------------------------------------------------------------------------------------------------------------------------
                Premiums
                 All analyses that assumed no behavioral changes that would reduce
                net prices below current net prices saw Part D premiums increase in
                2020 and beyond. The increase in 2020 Part D premiums ranged from $3.20
                per beneficiary per month to $5.64 per beneficiary per month (PBPM).
                ---------------------------------------------------------------------------
                 \89\ Calculated against actual paid premium, not basic premium,
                calculated as $29.22 for non-LIS enrollees absent this proposal.
                 \90\ For this and the next two columns, calculated against
                actual paid premium.
                 \91\ Calculated against basic premium, calculated as $47.02 for
                2020 absent this proposal.
                 \92\ See footnotes above regarding actual paid versus basic
                premium.
                ---------------------------------------------------------------------------
                 The Milliman analyses that contemplated behavioral changes that
                increased price concessions beyond current levels and/or greater
                formulary controls predicted a significant decrease in premiums
                compared to the baseline scenarios presented in Table 3 of the Milliman
                analysis. (That is, premiums would increase 2 to 8% by 2029 rather than
                13 to 25% without such assumptions.) We seek feedback on these
                estimates and the assumptions.
                Out of Pocket Spending
                 Absent behavioral changes leading to lower list and net prices, two
                groups of beneficiaries would benefit most from this rule: (1)
                Beneficiaries that are prescribed and dispensed high cost drugs and (2)
                beneficiaries with total drug spending into the coverage gap. The range
                of total decreased beneficiary cost-sharing in 2020 was -$8.01 PBPM to
                -$4.85 PBPM.
                 However, reductions in cost-sharing would only accrue to
                beneficiaries using drugs for which manufacturers are currently paying
                rebates. For example, a beneficiary taking a brand name drug in a
                competitive class may see his or her coinsurance-based cost sharing for
                the drug reduced significantly, if behavioral changes in response to
                this policy result in rebates largely being converted to point of sale
                discounts. By contrast, a beneficiary using high cost drugs in
                protected classes is less likely to benefit from a reduced pharmacy
                purchase price, because manufacturers generally offer low or no rebates
                to plans for these drugs, since drugs in protected classes must be
                included on Part D plan formularies.
                 The analysis by the Office of the Actuary estimated the annual
                changes in benefit parameters as a result of this rule. See Table 3
                below.
                ---------------------------------------------------------------------------
                 \93\ This limit varies by beneficiary, according to the mix of
                brand and generic drugs taken. As presented here, this figure is
                calculated assuming that only brand name drugs are dispensed, which
                represents the lowest possible estimate for this threshold.
                 Table 3--Part D Standard Benefit Design Parameters With and Without This Proposed Rulemaking
                --------------------------------------------------------------------------------------------------------------------------------------------------------
                 Year 2020 2021 2022 2023 . . . 2029
                --------------------------------------------------------------------------------------------------------------------------------------------------------
                Baseline:
                 Deductible................................................. $435 $460 $490 $520 ....... $725
                 Initial Coverage Limit..................................... 4,010 4,250 4,520 4,800 ....... 6,690
                 Catastrophic Limit......................................... 6,350 6,750 7,150 7,600 ....... 10,600
                 ----------------------------------------------------------------------------------------
                 Total Drug Costs at TrOOP Limit \93\................... 9,296 9,874 10,470 11,126 ....... 15,515
                Under Proposed Rule:
                 Deductible................................................. 435 405 395 420 ....... 580
                 Initial Coverage Limit..................................... 4,010 3,740 3,630 3,840 ....... 5,310
                 Catastrophic Limit......................................... 6,350 5,950 5,750 6,100 ....... 8,400
                 ----------------------------------------------------------------------------------------
                 Total Drug Costs at TrOOP Limit........................ 9,296 8,699 8,416 8,919 ....... 12,297
                Difference (Percent):
                 Deductible................................................. 0% -12.0% -19.4% -19.2% ....... -20.0%
                 Initial Coverage Limit..................................... 0% -12.0% -19.7% -20.0% ....... -20.6%
                 Catastrophic Limit......................................... 0% -11.9% -19.6% -19.7% ....... -20.8%
                 ----------------------------------------------------------------------------------------
                 Total Drug Costs at TrOOP Limit........................ 0% -11.9% -19.6% -19.8% ....... -20.7%
                --------------------------------------------------------------------------------------------------------------------------------------------------------
                [[Page 2359]]
                 Under the CMS Actuary's analysis, the majority of beneficiaries
                would see an increase in their total out-of-pocket payments and premium
                costs; reductions in total cost sharing will exceed total premium
                increases. The minority of beneficiaries who utilized drugs with
                significant manufacturer rebates would experience a substantial
                decrease in costs, causing average beneficiary cost across the program
                to decline.
                 Medicare beneficiaries with lower levels of drug spending are
                expected to benefit by way of a lowered deductible. Following the first
                year of this new environment, and into the second year as well, the
                Part D benefit design thresholds are projected to change to the benefit
                of lower-cost beneficiaries, providing lower out-of-pocket payments for
                these beneficiaries. Because the Part D benefit design's parameters are
                calculated annually to account for aggregate growth in Part D spending,
                and because the estimated potential effects of this regulation would be
                to reduce aggregate spend levels to more closely match net spending
                level trends, the applicable deductible would decrease for plan year
                2021. Beneficiaries whose spending is above the current deductible
                amount but lower than the coverage gap would benefit from a reduced
                deductible.
                 The CMS Actuary also finds that while the deductible and initial
                coverage limit would decrease, the patient out-of-pocket spending
                threshold to enter catastrophic coverage would increase significantly
                in year 2 as the full effects of reduced purchase prices are
                incorporated. The out-of-pocket threshold is set in statute and updated
                annually by aggregate Part D program growth. Because overall
                beneficiary spending levels would now match the net price of drugs
                rather than their list prices, progress toward the out-of-pocket limit
                would be slowed, though total dollars paid by beneficiaries would not
                change aside from statutory and annual updates.
                 Milliman's analysis did not incorporate changes to the Part D
                benefit thresholds, and these actuaries based their break-even analyses
                on the 2019 threshold amounts. Their analysis projects that the
                distribution of changes is far from uniform, and that the impact of the
                change is concentrated around the non-LIS beneficiaries who account for
                about 70% of the benefit. The break-even point would be $3.20 per-
                member per month in cost-sharing reductions. Beneficiaries with cost-
                sharing reductions above that point would save money, and those with
                cost-sharing reductions below that figure would spend more on premiums
                than they saved in cost-sharing. Their analysis also projects about 7%
                of non-LIS beneficiaries do not use any medication, and therefore would
                see premium costs exceeding reductions in cost sharing ($0 reductions
                in cost-sharing). Up to 30% of non-LIS beneficiaries have drug costs
                such that they could directly benefit from the changes in the point-of-
                sale costs by enough to make up for the average increase in premium.
                The remaining 63% of beneficiaries may or may not have their out-of-
                pocket costs reduced enough to offset any potential premium increase,
                depending on the mix of brand and generic drugs used. All else
                constant, these members generally do not have enough cost sharing
                savings to fully offset the increase in premium. However, they may
                benefit from changes to copayments made by plan sponsors to maintain
                the minimum required actuarial value of 25%.
                 Taken together, the actuarial analyses project reductions in total
                cost sharing will exceed total premium increases; however, impact on
                beneficiaries will vary greatly with some beneficiaries seeing savings
                while others experience increases in out-of-pocket spending. We invite
                comment on the impact of the changes in premiums and cost sharing on
                beneficiaries with different levels of drug spending.
                Effect on Federal Government Spending
                 This rule will impact Federal spending on Part D direct premium
                subsidies, reinsurance, low-income cost-sharing subsidies, and low-
                income premium subsidies.
                 If there were no behavioral changes by manufacturers and Part D
                plans (e.g., drug prices and benefit designs were held constant), all
                three actuarial analyses previously described predicted increased
                Federal spending. The projected increase in 2020 Federal spending
                ranged from $2.8 billion to $13.5 billion. The projected increase in
                Federal spending from 2020-2029 ranged from $34.8 billion to $196.1
                billion.
                 The Milliman analyses that contemplated behavior changes that would
                lower net prices from current levels predicted Federal spending from
                2020-2029 could decrease by $78.9 billion if Part D plan sponsors
                increased formulary controls, decrease by $99.6 billion if Part D plan
                sponsors increased formulary controls and obtained additional price
                concessions, but increase by $139.9 billion if manufacturers reduced
                price concessions in Part D to offset list price decreases in other
                markets.
                 Tables 4A and 4B describe the impact on Federal spending predicted
                by each analysis and assumption. We seek feedback on these estimates
                and the assumptions.
                 Table 4.A.--Government Spending Impacts, CY 2020
                 [$billions]
                --------------------------------------------------------------------------------------------------------------------------------------------------------
                 Milliman, Scenario Milliman, Scenario Milliman, Scenario Milliman, Scenario
                 OACT 1 2 3 4 Wakely
                --------------------------------------------------------------------------------------------------------------------------------------------------------
                Modeled Assumptions........ 15% of 100% of 100% of More than 20% of 100% of
                 current Part D current Part D current rebates 100% of rebates current Part D current Part D
                 rebates retained rebates are are converted into are converted into rebates are rebates converted
                 by manufacturer. converted into list price list price retained by to up front
                 75% of list price concessions. concessions (same manufacturers discounts
                 remaining amount concessions Part D agnosticism on how (same agnosticism No
                 applied to per- (agnostic on list plans exert applied). on how applied). beneficiary or
                 sponsor/PBM price reductions greater formulary Part D 80% of plan behavioral
                 negotiated versus up front control.. plans exert current Part D changes are
                 discounts.. discounts). greater formulary rebates are assumed.
                 control.. converted to price
                 concessions (list
                 price or
                 discounts)..
                 25% of
                 remainder applied
                 as reduction to
                 list price.
                 No
                 beneficiary or
                 plan behavioral
                 changes are
                 assumed..
                [[Page 2360]]
                
                Direct subsidy............. +$20.1, (+128%).... +$15.1, (+149%).... +$14.5, (+144%).... +$14.8, (+146%).... +$15.6, (+154%).... Not avail., (+146%
                 \94\).
                Low income premium subsidy. +$0.9, (+20%)...... +$0.8, (+14%)...... +$0.7, (+12%)...... +$0.7, (12%)....... +$1.4, (+22%)...... Not avail., (+8%).
                Low income cost sharing -$1.8, (-6%)....... -$5.8, (-18%)...... -$6.2, (-20%)...... -$6.1, (-20%)...... -$4.4, (-14%)...... Not avail., (-
                 subsidy. 12%).
                Reinsurance................ -$5.9, (-12%)...... -$7.3, (-16%)...... -$7.9, (-17%)...... -$8.0, (-17%)...... -$3.0, (-6%)....... Not avail., (-
                 14%).
                 ----------------------------------------------------------------------------------------------------------------------------
                 Total.................. +$13.4, (+14%)..... +$2.8, (+3%)....... +$1.1, (+1%)....... +$1.5, (+1%)....... +$9.5, (+10%)...... Not avail., +3%.
                --------------------------------------------------------------------------------------------------------------------------------------------------------
                 Table 4.B.--Government Spending Impacts, CY 2020 Through 2029
                 [$billions]
                --------------------------------------------------------------------------------------------------------------------------------------------------------
                 Milliman, Scenario Milliman, Scenario Milliman, Scenario Milliman, Scenario
                 OACT 1 2 3 4 Wakely
                --------------------------------------------------------------------------------------------------------------------------------------------------------
                Direct subsidy............. +$258.7, (+119%)... +$215.4, (+193%)... +$174.7, (+157%)... +$180.3, (+162%)... +$221.1, (+199%)... Not avail.
                Low income premium subsidy. +$15.4, (+24%)..... +$12.0, (+13%)..... +$3.8, (+4%)....... +$1.9, (+2%)....... +$20.5, (+21%)..... ..................
                Low income cost sharing -$57.7, (-15%)..... -$89.5, (-20%)..... -$118.3, (-26%).... -$118.5, (-26%).... -$71.4, (-16%)..... ..................
                 subsidy.
                Reinsurance................ -$20.3, (-3%)...... -$103.1, (-13%).... -$139.1, (-18%).... -$163.2, (-18%).... -$30.2, (-4%)...... ..................
                 ----------------------------------------------------------------------------------------------------------------------------
                 Total.................. +$196.1, (+14%).... +$34.8, (+2%)...... -78.8, (-5%)....... -$99.6, (-7%)...... +$139.9, (+10%).... N/A.
                --------------------------------------------------------------------------------------------------------------------------------------------------------
                Direct Premium Subsidy Spending
                 The Medicare program provides a direct subsidy to Part D plans of
                74.5% of expected costs. Medicare program payments for direct subsidies
                will increase by an estimated $14.1 to $20.1 billion (128% to 154%) in
                2020 and $174.7 to $258.7 billion (119% to 199%) from 2020-2029. The
                proposed change would require plans to smooth the effects of negotiated
                discounts across the entire benefit, rather than concentrate them on
                the initial coverage limit as is current practice. As noted above,
                premiums paid by beneficiaries are predicted to increase overall in
                analyses without behavioral changes that would reduce net prices below
                current levels.
                ---------------------------------------------------------------------------
                 \94\ Calculated as percent change in per member per month
                payments for each category.
                ---------------------------------------------------------------------------
                 In the Milliman analysis, the two scenarios that contemplated
                behavior changes that would reduce net prices compared to current
                levels predicted that Federal spending on direct premium subsidies from
                2020-2029 could increase less compared to a scenario with no behavior
                change. In these scenarios, Part D plan sponsors increased formulary
                controls and/or obtained additional price concessions. Payments for
                direct premium subsidies would be higher than under the scenario with
                no behavior change, if manufacturers reduced price concessions in Part
                D to offset list price decreases in other markets (as described in the
                OACT analysis and Milliman scenario 4). See Table 4B for magnitude and
                percent changes.
                Reinsurance Spending
                 Transforming rebates into upfront discounts may result in fewer
                beneficiaries reaching catastrophic coverage. This benefits the
                government because the government bears the majority of the cost (80%)
                for beneficiaries who reach catastrophic levels of drug spending. As
                such, all analyses suggest Medicare payments for reinsurance will
                decrease by an estimated $3.0 to $7.9 billion (6 to 17%) in 2020 and 3
                to 18% from 2020-2029. In the catastrophic coverage phase, Medicare
                makes reconciliation payments to Part D plans for 80% of gross drug
                costs incurred once the beneficiary reaches the out-of-pocket
                threshold. As discussed above, the effect of this proposed rule would
                be to reduce the effective purchase price of drugs, which in turn would
                require more prescriptions before a beneficiary would enter the
                catastrophic phase. If fewer beneficiaries enter this benefit phase,
                and the prices of the drugs they receive in this benefit phase are
                reduced, the Medicare Program would experience lower reinsurance
                payments to Part D plans.
                 Milliman's scenarios that contemplated behavior changes predicted
                Federal spending on reinsurance from 2020-2029 could decrease by $139.1
                billion if Part D plan sponsors increased formulary controls, decrease
                by $163.2 billion if Part D plan sponsors increased formulary controls
                and obtained additional price concessions, and decrease by only $30.2
                billion if manufacturers reduced price concessions in Part D to offset
                list price decreases in other markets.
                Low Income Subsidy Spending
                 Medicare payments for Low Income Subsidy enrollees will on net
                decrease by an estimated $0.9 to $5.5 billion in 2020 and $42.3 to
                $114.5 billion from 2020-2029. Generally LIS enrollees will not see the
                same out-of-pocket savings that non-LIS enrollees will, because they
                are assessed cost sharing based almost exclusively on copayments.
                However, payments for the Low Income Cost Sharing Subsidy (LICS) will
                decrease for the same reasons that Medicare payments for reinsurance
                will decrease. Under the provisions of LICS, the Medicare program makes
                payments to plans to cover the difference between the LIS enrollee's
                copayment and the otherwise applicable coinsurance. As prices are
                reduced to account for discounts rather than applied to the plan
                liability exclusively, Medicare payments for these amounts will
                decrease. These savings are estimated to be $57.5 to $118.3 billion
                over ten years.
                 Analyses that contemplated behavior changes predicted Federal
                spending on low-income cost sharing subsidies from 2020-2029 could
                decrease by $118 billion if Part D plan sponsors increased formulary
                controls, decrease by $119 billion if Part D plan sponsors increased
                formulary controls and obtained additional price concessions, and
                decrease by $71 billion if manufacturers reduced price concessions in
                Part D to offset list price decreases in other markets.
                [[Page 2361]]
                Other Stakeholder Impacts
                 Based on the provisions of this proposed rulemaking, the actuarial
                estimates we received estimated that drug manufacturers will see
                revenues, as measured by changes in gross drug costs and Coverage Gap
                Discount Program payments, decrease beginning in CY2020 and each year
                thereafter. However, when drug costs net of all discounts and rebates
                are considered, the actuarial analyses results converged in finding net
                increases in total drug spending. In terms of dollar effects,
                Milliman's analysis identifies a reduction in gross revenues of $38
                billion in CY2020 and $588 billion through the ten year budget window.
                However, Milliman's analysis also estimated an increase in government
                costs of $34.8 billion over ten years, with beneficiary costs
                decreasing by $14.5 billion, resulting in an increase in Part D drug
                spending net of all discounts and rebates of more than $20 billion over
                10 years.\95\ These changes in revenue will predominantly affect brand
                name drugs more so than generic drugs. Since 2011, brand name drug
                manufacturers have been required to provide a discount applied at the
                point of sale to beneficiaries whose claims occur during the coverage
                gap. Since the intent of this proposed rulemaking is to reduce the
                negotiated prices paid by plans to pharmacies by incorporating up front
                discounts into them, both the frequency of beneficiaries entering the
                coverage gap, and the length of the coverage gap itself, are
                potentially reduced by the rule's effects. We seek feedback on this
                analysis and potential impacts.
                ---------------------------------------------------------------------------
                 \95\ Milliman. ``Impact of Potential Changes to the Treatment of
                Manufacturer and Pharmacy Rebates.'' Appendix A1, Scenario 1A, page
                1. September 2018. The Milliman analysis is posted as supplementary
                material in the docket for this rule at regulations.gov.
                ---------------------------------------------------------------------------
                 Likewise, this rule will affect the way pharmacies are reimbursed.
                If list prices come down, pharmacies will experience lower acquisition
                costs, and their combined reimbursement from plan sponsors and
                beneficiaries will be reduced by the amount of discount provided by
                manufacturers to beneficiaries of each particular plan sponsor. The use
                of chargebacks to make pharmacies whole for the difference between
                acquisition cost, plan payment, and beneficiary out-of-pocket payment
                is described earlier in this rule. The actuarial analyses we
                commissioned were not designed to evaluate the effects on the pharmacy
                supply chain by moving from a system where reimbursement rates were
                divorced from actual negotiated prices after accounting for rebates. We
                invite comments on how we might structure such an analysis, along with
                the effects on these and other stakeholders. We also seek comment on
                the ability of wholesalers to facilitate chargebacks to pharmacies in a
                timely fashion, replacing PBMs rebates with manufacturer discounts
                routed through wholesalers, and other concerns related to disrupting
                the relationship between pharmacies and PBMs.
                Summary of Part D Impacts
                 This proposed rule, if finalized, would significantly redirect the
                dollars flowing through the Part D program. Several of the positive and
                negative transfers are imperfect offsets of one another. For example,
                the analyses commissioned for this proposed rule estimated that the
                amount saved by reducing cost-sharing exceeds the cost of increasing
                premiums for beneficiaries overall. However, more beneficiaries would
                pay more for premiums than they would save in cost sharing, suggesting
                that out-of-pocket impacts are likely to vary by individual and the
                greatest benefit of these transfers accrues to sicker beneficiaries
                (e.g., those with more drug spending and/or those using high-cost
                drugs).
                 It is difficult to predict the full extent of the transfers created
                by this proposed rule in the absence of information about strategic
                behavior changes by manufacturers and Part D plan sponsors in response
                to this rule. Without behavioral changes, enrolled beneficiaries may
                see premiums increase in 2020 by $3.15 PBPM to $3.73 PBPM (14 to 19%)
                but average cost-sharing under their benefits will decline by -$8.01
                PBPM to -$5.75 PBPM (11 to 14%).\96\ Premium and cost-sharing estimates
                were calculated on a different basis by each firm. The Office of the
                Actuary estimated actual beneficiary paid amounts for all enrollees on
                average. Milliman estimated beneficiary payments based upon the basic
                benchmark amounts. We present the range across these calculation types.
                ---------------------------------------------------------------------------
                 \96\ Wakely Consulting Group. ``Estimate of the Impact of
                Eliminating Rebates for Reduced List Prices at Point-of Sale on
                Beneficiaries.'' August 2018. The Wakely analysis is posted as
                supplementary material in the docket for this rule at
                regulations.gov.
                 And Milliman. ``Impact of Potential Changes to the Treatment of
                Manufacturer and Pharmacy Rebates.'' Scenario 1. September 2018. The
                Milliman analysis is posted as supplementary material in the docket
                for this rule at regulations.gov.
                ---------------------------------------------------------------------------
                 In the absence of the stakeholder behavior changes described often
                in this section, government payments to plans for direct subsidies,
                subsidies for low income enrollees' premiums and cost sharing will
                likely increase and be partially offset by reduced payments to plans
                for reinsurance, increasing overall by 2 to 14% in the absence of
                behavior change.
                 If manufacturer and plan behavior caused net prices to decrease in
                response to this rule, enrolled beneficiaries may see premiums increase
                12% ($3.15 PBPM) and average cost-sharing under their benefits may
                decline by 13% (-$4.85 PBPM) in 2020. Total government payments to
                plans would increase 1-3%, as the net result of increased payments for
                direct subsidies (144-149%) and low income premium subsidies (12-14%)
                and decreased payments for low income cost sharing (-18 to -20%) and
                reinsurance (-16 to -17%).
                 If manufacturer and plan behavior caused Part D net prices to
                increase in response to this rule, enrolled beneficiaries will see
                published premiums increase 8 to 22% ($5.11 to $5.64) and average cost-
                sharing under their benefits will decline by 9 to 14% (-$5.22 to -
                $8.01). Government payments to plans for direct subsidies and subsidies
                for low income enrollees' premiums and cost sharing will increase and
                reinsurance payments will also decrease.
                 The goal of this policy is to lower out-of-pocket costs for
                consumers and reduce government drug spending in Federal health care
                programs. We seek feedback from stakeholders about the impact of this
                regulation on list and net prices, the magnitude of these changes, and
                the ability of this regulation to meet these goals.
                G. Accounting Statement
                ------------------------------------------------------------------------
                 Category Benefits ($Millions)
                ------------------------------------------------------------------------
                Improved information for consumers Not Quantified.
                 regarding the characteristics of their
                 health insurance plans supporting more
                 actuarially favorable plan choices.
                Lower prescription abandonment rates Not Quantified.
                 leading to better medication adherence.
                [[Page 2362]]
                
                Lower prescription abandonment rates Not Quantified.
                 leading to decreased storage and
                 restocking costs for pharmacies.
                ------------------------------------------------------------------------
                ----------------------------------------------------------------------------------------------------------------
                 Category Costs ($Millions) Timeframe
                ----------------------------------------------------------------------------------------------------------------
                Manufacturers, PBMs, and plan sponsors 5.3.................................. First year.
                 reading and understanding the rule.
                Changes to business practices for 53.5; 24.8........................... First year; years two
                 manufacturers, PBMs, and plan sponsors. through five.
                Cost of plan sponsors updating contracts 5.45................................. First year.
                 and bids.
                Cost of annual disclosures from PBMs to 1.28................................. Each year.
                 health plans.
                Costs to PBMs, pharmacies, and health 10.8................................. In each of the first five
                 insurance providers to update their IT years.
                 systems for claims processing and payments.
                Beneficiaries comparing new Part D plan 209.................................. In each of the first five
                 features and benefits. years.
                ----------------------------------------------------------------------------------------------------------------
                ------------------------------------------------------------------------
                 Transfers ($Billions) CY
                 Category 2020-2029
                ------------------------------------------------------------------------
                Decreased Medicare beneficiary spending.... -25.2 to -59.5.
                Decreased employee premium and OOP spending -11.7.
                Decreased beneficiary premium and cost- -14.5 to -25.2.
                 sharing spending.
                Changes in Federal spending................ -99.6 to 196.1.
                Decreased State spending (OACT only)....... -4.0.
                Decreased manufacturer coverage gap 17 to 39.8.
                 discount payments.
                ------------------------------------------------------------------------
                H. Regulatory Alternatives
                 The first option is no action. This means that there would be no
                change in the safe harbor regulations. None of the costs or benefits of
                the rule would be realized and Medicare drug plan enrollees will
                continue to pay deductibles and coinsurance based on the list prices
                for prescription drugs.
                 As a second option, the compliance date could be delayed by one
                year from January 1, 2020 to January 1, 2021. This would lower
                transition costs by giving affected entities additional time to respond
                to the rule and institute necessary changes into contracts and claim
                software updates, and to integrate these changes into their scheduled
                updates. However, this also means that benefits and costs would be
                delayed by a year.
                 A third option contemplated by the Department, unrelated to safe
                harbor rulemaking, would require sponsors to incorporate into the point
                of sale price for a covered drug a specified minimum percentage of the
                average rebates expected to be received for the therapeutic class of
                drugs to which that covered drug belongs. This option, described in an
                RFI contained in the 2019 Part C & D policy and technical NPRM, would
                require sponsors to report the point of sale price for a covered drug
                as the lowest possible reimbursement that a network pharmacy could
                receive for that drug, inclusive of all pharmacy price rebates and
                concessions.
                I. Regulatory Flexibility Analysis
                 As discussed above, the RFA requires agencies that issue a
                regulation to analyze options for regulatory relief of small entities
                if a proposed rule has a significant impact on a substantial number of
                small entities. HHS considers a rule to have a significant economic
                impact on a substantial number of small entities if at least 5 percent
                of small entities experience an impact of more than 3 percent of
                revenue. The Department calculates the costs of the proposed changes
                per affected business over 2020-2024. The estimated average costs of
                the rule per business peak in 2020 at approximately $3,200, and are
                approximately $1,600 in subsequent years. The Department notes that
                relatively large entities are likely to experience proportionally
                higher costs. The U.S. Small Business Administration establishes size
                standards that define a small entity. For entities with standards based
                on revenue, they range from $17.5 million to $38.5 million in 2017.
                Since the estimated average costs of the proposed rule are a small
                fraction of these thresholds, the Department anticipates that the
                proposed rule would not have a significant economic impact on a
                substantial number of small entities. We seek public comment on this
                determination, and the rule's impact on small entities.
                V. Paperwork Reduction Act
                 In accordance with the Paperwork Reduction Act of 1995, we are
                required to solicit public comments, and receive final OMB approval, on
                any information collection requirements set forth in rulemaking. This
                rule imposes documentation and disclosure requirements on PBMs.
                Specifically, for one of the new safe harbors, PBMs and pharmaceutical
                manufacturer must have a written agreement that specifies their
                contractual arrangements and interactions with health plans, and PBMs
                must disclose their services rendered and compensation associated with
                transactions with pharmaceutical manufacturers related to interactions
                between the PBM and the health plan. In addition, PBMs may be required
                to disclose this information to the Secretary upon request.
                 We believe that the documentation requirements necessary to enjoy
                safe harbor protection do not qualify as an added paperwork burden,
                because the requirements deviate minimally, if at all, from the
                information PBMs and manufacturers would routinely collect in their
                normal course of business. We believe it is usual and customary for
                PBMs and manufacturers to memorialize contracts and other similar
                agreements in writing. Ensuring that such writings are comprehensive
                and that the actual business activities are accurately reflected by
                documentation are standard prudent business practices. However, we
                recognize that the disclosure of this information to plans, and
                potentially to the Secretary, is not a routine business practice. We
                have included estimates of disclosure related burden in the Regulatory
                Impact Statement and seek feedback on these
                [[Page 2363]]
                estimates. We request comments on this proposed collection of
                information in accordance with the Paperwork Reduction Act.
                List of Subjects in 42 CFR Part 1001
                 Administrative practice and procedure, Fraud, Grant programs--
                health, Health facilities, Health professions, Maternal and child
                health, Medicaid, Medicare, Social Security.
                 For the reasons set forth in the preamble, the Office of the
                Inspector General, Department of Health and Human Services proposes to
                amend 42 CFR part 1001 as set forth below:
                PART 1001--[AMENDED]
                0
                1. The authority citation for part 1001 continues to read as follows:
                 Authority: 42 U.S.C. 1302; 1320a-7; 1320a-7b; 1395u(j);
                1395u(k); 1395w-104(e)(6), 1395y(d); 1395y(e); 1395cc(b)(2)(D), (E),
                and (F); 1395hh; 1842(j)(1)(D)(iv), 1842(k)(1), and sec. 2455, Pub.
                L. 103-355, 108 Stat. 3327 (31 U.S.C. 6101 note).
                0
                2. Section 1001.952 is amended by revising paragraphs (h)(5)(vi) and
                (vii) and adding paragraphs (h)(5)(viii), (h)(6) through (10), (cc),
                and (dd) to read as follows:
                Sec. 1001.952 Exceptions.
                * * * * *
                 (h) * * *
                 (5) * * *
                 (vi) Services provided in accordance with a personal or management
                services contract;
                 (vii) Other remuneration, in cash or in kind, not explicitly
                described in this paragraph (h)(5); or
                 (viii) A reduction in price or other remuneration from a
                manufacturer in connection with the sale or purchase of a prescription
                pharmaceutical product to a plan sponsor under Medicare Part D, a
                Medicaid Managed Care Organization as defined in section 1903(m) of the
                Act, or to a pharmacy benefit manager acting under contract with a plan
                sponsor under Medicare Part D, or Medicaid Managed Care Organization,
                unless it is a price reduction or rebate that is required by law.
                 (6) For purposes of this paragraph (h), the term manufacturer
                carries the meaning ascribed to it in Social Security Act section
                1927(k)(5).
                 (7) For purposes of this paragraph (h), the terms wholesaler and
                distributor are used interchangeably and carry the same meaning as the
                term ``wholesaler'' defined in Social Security Act section 1927(k)(11).
                 (8) For purposes of this paragraph (h), the term pharmacy benefit
                manager or PBM means any entity that provides pharmacy benefits
                management on behalf of a health benefits plan that manages
                prescription drug coverage.
                 (9) For purposes of this paragraph (h), a prescription
                pharmaceutical product is either a drug or a biological as those terms
                are defined in Social Security Act section 1927(k)(2)(A), (B), and (C).
                 (10) For purposes of this paragraph (h), the term Medicaid Managed
                Care Organization or Medicaid MCO carries the meaning ascribed to it in
                section 1903(m) of the Social Security Act.
                * * * * *
                 (cc) Point-of-sale reductions in price for prescription
                pharmaceutical products. (1) As used in section 1128B of the Act,
                ``remuneration'' does not include a reduction in the price charged by a
                manufacturer for a prescription pharmaceutical product that is payable,
                in whole or in part, by a plan sponsor under Medicare Part D or a
                Medicaid Managed Care Organization, provided the manufacturer meets the
                following conditions with regard to that reduction in pprice:
                (i) The reduced price must be set in advance with a plan sponsor
                under Medicare Part D, a Medicaid MCO, or the PBM acting under contract
                with either;
                 (ii) The sale does not involve a rebate unless the full value of
                the reduction in price is provided to the dispensing pharmacy through a
                chargeback or series of chargebacks, or is required by law; and
                 (iii) The reduction in price must be completely applied to the
                price of the prescription pharmaceutical product charged to the
                beneficiary at the point of sale.
                 (2)(i) For purposes of this paragraph (cc), the terms manufacturer,
                pharmacy benefit manager or PBM, prescription pharmaceutical product,
                rebate, and Medicaid managed care organization or Medicaid MCO have the
                meanings ascribed to them in paragraph (h) of this section.
                 (ii) For purposes of this paragraph (cc), a chargeback is a payment
                made directly or indirectly by a manufacturer to a dispensing pharmacy
                so that the total payment to the pharmacy for the prescription
                pharmaceutical product is at least equal to the price agreed upon in
                writing between the Plan Sponsor under Part D, the Medicaid MCO, or a
                PBM acting under contract with either, and the manufacturer of the
                prescription pharmaceutical product.
                 (dd) PBM service fees. As used in section 1128B of the Act,
                ``remuneration'' does not include any payment by a pharmaceutical
                manufacturer to a pharmacy benefit manager (PBM) for services the PBM
                provides to the pharmaceutical manufacturer related to the pharmacy
                benefit management services that the PBM furnishes to one or more
                health plans as long as the following conditions are met:
                 (1) The PBM must have a written agreement with the pharmaceutical
                manufacturer that covers all of the services the PBM provides to the
                manufacturer in connection with the PBM's arrangements with health
                plans for the term of the agreement and specifies each of the services
                to be provided by the PBM and the compensation associated with such
                services.
                 (2) The compensation paid to the PBM must:
                 (i) Be consistent with fair market value in an arm's-length
                transaction;
                 (ii) Be a fixed payment, not based on a percentage of sales; and
                 (iii) Not be determined in a manner that takes into account the
                volume or value of any referrals or business otherwise generated
                between the parties, or between the manufacturer and the PBM's health
                plans, for which payment may be made in whole or in part under
                Medicare, Medicaid, or other Federal health care programs.
                 (3) The PBM must disclose in writing to each health plan with which
                it contracts at least annually, and to the Secretary upon request, the
                services rendered to each pharmaceutical manufacturer related to the
                PBM's arrangements to furnish pharmacy benefit management services to
                the health plan.
                 (4) For purposes of safe harbor in this paragraph (dd), the terms
                manufacturer, pharmacy benefit manager or PBM, and prescription
                pharmaceutical product have the meanings ascribed to them in paragraph
                (h) of this section, and health plan has the meaning ascribed to it in
                paragraph (l) of this section.
                 Dated: January 25, 2019.
                Alex M. Azar II,
                Secretary.
                 Dated: January 18, 2019.
                Daniel R. Levinson,
                Inspector General.
                [FR Doc. 2019-01026 Filed 1-31-19; 4:45 pm]
                 BILLING CODE 4152-01-P
                

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