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Lowering Drug Costs – The New Proposed Rule Targeting Drug Rebates

We cannot watch TV without a constant barrage of ads for prescription drugs.

The ads depict thriving people able to overcome their ailment by taking some medication. The communication also includes a laundry list of warnings and contraindications for its use. With more than 4 billion prescriptions dispensed annually, this is a big business affecting the majority of our population.

The Numbers

Prescription drugs accounted for 10% of health spending in the US but 21% of employer-sponsored health plan spending. For employers, this is second only to the 23% spent on inpatient hospital. With Part D reimbursements and Affordable Care Act (ACA) provision closing the donut hole, Medicare, is now the second largest contributor to drug spending (30%) after private insurance (42%).

According to the National Institute on Drug Abuse, more than 80% of older patients (57-85) use at least one prescription medication daily and more than 50% take more than five medications or supplements daily.

Political Focus on Prescription Drugs

From the campaign through the first two years of the term, the Trump Administration remains consistent in its focus on prescription drugs in America. From the opioid crisis to the cost and regulation, it remains top of mind.

With national healthcare in most countries, European lawmakers negotiate directly with drug makers to set prices and limit the costs to the government. They also approve or deny drugs based on value for the money, which provides some reduction in drug options for some patients.

The US does not directly regulate drug pricing leaving the pricing up to the pharmaceutical companies and cost negotiations to third-party pharmacy benefit managers. These negotiations may also limit the drugs options available to patients. Medicare covers drugs for a significant portion of the population. While the government’s Medicaid program receives drug rebates, these same discounts and rebates do not apply to private insurance or Medicare.




United Kingdom

United States

Humira (28 day supply) Rheumatoid Arthritis $822 $1,362 $2,669
Xarelto (30 day supply) Blood clots $102 $126 $292
Harvoni (4 week supply) Hepatitis C $16,861 $22,554 $32,114
Truvada (30 day supply) HIV/AIDS $906 $689 $1,301

The Landscape

Drug manufacturers sell to wholesalers. Wholesalers buy based on a list price. This “list price” is the basis for rebates and discounts.

Pharmacy benefit managers (PBMs) provide services to manufacturers and, in exchange, receive rewards for volume, value, or exclusivity. These rewards come in the form of performance-based rebates, most often as a percentage of the list price.

This current reward system encourages increases in a drug’s list price. The rebate cost savings stays with the health plan and PBM and never transfers to the consumer. Additionally, the current rebate system discourages the use of generics and lower-priced alternative medicines.

The Proposed Rule – Issued February 6, 2019, by the Department of Health and Human Services (HHS)

The new proposed rule on drug rebates provides actionable items around the ideas in the “American Patients First” document the President put forth last year. The proposal creates three actions to work toward lowering health care costs.

  1. It amends current safe harbor rules to prohibit price reductions from drug manufacturers to Medicaid managed care organizations and Medicare Part D plan sponsors. This means criminal penalties under the Anti-Kick Statute will apply to whoever knowingly and willingly offers, pays, solicits, or receives remuneration to induce or reward the referral of business to one of these federal programs
  2. It creates a new safe harbor protecting point-of-sale discounts or price reductions to Medicaid managed care organizations and Medicare Part D plan sponsors if:
    • the discount is set in advance, i.e., disclosed in writing at the time of purchase;
    • it does not include a rebate unless its full value is given to the dispensing pharmacy; and
    • the patient’s cost reflects the discount at the point-of-sale
  3. It provides safe harbor protection for manufacturer’s fixed fees paid to PBMs for services where:
    • the two parties have a written agreement identifying the arrangement and services;
    • the PBM’s compensation reflects a fixed, fair market value in an arm’s length arrangement; and
    • it does not incorporate volume or value into payment arrangements under a federal health care program
    • PBM’s must annually disclose, to the Secretary of HHS and to each health plan, their services to each manufacturer in writing


Comments are due April 8, 2019. An interim or final rule will follow addressing all comments and making any necessary modification.

Upon finalization of the rule, the modification to the current safe harbor, item 1 above, becomes effective January 1, 2020. The two new safe harbors, items 2 and 3 above, become effective 60 days after the date of the final rule.

Employer Focus

Employers should remain vigilant. While the direct effect is on Medicare Part D and Medicaid managed care organizations, it has implications to employer-sponsored plans and the overall market.

  • All employers should watch for the next version of the rule and seek to understand implications of the new version
  • Employers with self-funded plans, or who sponsor retiree plans, especially those providing plans in place of Medicare Part D for whom they receive a subsidy, should begin discussions with their PBMs to understand the potential implications to their plan and contracts
  • Others should monitor communications from their carriers and brokers to determine any cost shifting that may transfer over to the private market 
  • Watch for corresponding Congressional action to lower drug costs more directly in the commercial market

To stay current on the latest ACA updates and changes, visit OneDigital's ACA Watch page or contact your OneDigital Consultant.


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