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Does HHS’s Elimination of the Safe Harbor for Manufacturer Rebates Leave Manufacturers with Increased Antitrust Risk?

On November 20, 2020, the U.S. Department of Health & Human Services (HHS) finalized a rule to take effect in 2022, which eliminates the safe harbor under the federal anti-kickback statute for manufacturer rebates to Medicare Part D plan sponsors.  Under the current statutory scheme, drug manufacturers may negotiate rebates with providers of pharmacy benefits—either directly or through a pharmacy benefit manager (PBM)—in exchange for preferential placement or avoiding being disadvantaged on a PBM’s or provider’s drug formulary.  The safe harbor permits such payments by confirming that rebates do not constitute illegal kickbacks under the federal statute.  HHS’s new rule eliminates that safe harbor, but creates a safe harbor for negotiated discounts on the “list price” of the drug. 

According to HHS, the rule “addresses a practice that has increased patient costs at the pharmacy counter and will create incentives for drug companies to lower the list prices of their drugs.”  HHS reasoned that because patients’ out-of-pocket costs are often based on a drug’s pre-rebate list price, patients may pay a higher cost for drugs with rebates than they would if the price reductions were taken on the list price. 

There are differing views on whether this rule would actually reduce prices.  Some commenters have also questioned whether the rule’s contemplated negotiations over list-price discounts raise potential antitrust issues under the Robinson-Patnam Act (RPA).  As these commenters previewed, the specter of protracted litigation from the 1990s hangs over the new rule, particularly with respect to price discrimination claims involving prescription drugs.

Manufacturer Rebates and Private Antitrust Litigation in the 1990s

Manufacturer rebates to so-called “favored purchasers” were challenged in the mid-1990s in a large class action under the Sherman Act and in opt-out plaintiffs’ claims brought under the RPA.  See In re Brand Name Prescription Drugs Antitrust Litigation (“BNPD”), MDL 997 (N.D. Ill.).  By the 1990s, managed care organizations, including PBMs, were extracting rebates from manufacturers by using formularies to influence utilization of competing drugs and therefore impacting their respective sales.  Hospitals and mail order pharmacies, the latter often controlled by a PBM, were also able to extract discounts based on their ability to influence utilization of a given brand name drug based on formulary controls.  Retail pharmacies, on the other hand, typically did not receive discounts or rebates on brand name drugs because, in the view of manufacturers, retail pharmacies generally stocked and dispensed the drugs physicians prescribed.  They did not influence demand for any given brand name drug; they responded to that demand by stocking and supplying competing drugs.  Retailers sued, claiming that brand name manufacturers had conspired to deny them discounts and rebates.  Retailers that opted out of the class action alleged that offering lower prices to favored purchasers was unlawful price discrimination under the RPA. 

Before the trial on the Sherman Act conspiracy claim, a number of defendants settled with the class.  In its 1996 approval of that settlement, the court noted two “commitments” by the settling defendants it felt were central going forward:  that manufacturers would not refuse to offer discounts based solely on the status of the buying entity, and that pharmacies would be entitled to the same level and type of discounts offered to managed care organizations but only if the pharmacies could demonstrate an ability to affect market share.  BNPD, 1996 U.S. Dist. LEXIS 8817, at *9-10 (N.D. Ill. June 21, 1996).  Unable to make such a showing, retail pharmacies continued to purchase brand name drugs without receiving discounts or rebates.  The remaining manufacturer defendants prevailed on the Sherman Act claims at trial in 1998 and on appeal, BNPD, 1999 U.S. Dist. LEXIS 550 (N.D. Ill. Jan. 19, 1999), aff’d in part, 186 F.3d 781 (7th Cir. 1999), and on a subsequent summary judgment motion, BNPD, 2000 U.S. Dist. LEXIS 1750 (N.D. Ill. Feb. 9, 2000).  The RPA claims went through many years of litigation, but were eventually dismissed in 2012 for failure to show that the plaintiff retailers were actually losing customers to the “favored purchasers” as a result of the manufacturers’ pricing.  Drug Mart Pharm. Corp. v. Am. Home Prods. Corp., 2012 U.S. Dist. LEXIS 115882 (E.D.N.Y. Aug. 16 2012), aff’d sub nom. Cash & Henderson Drugs, Inc. v. Johnson & Johnson, 799 F.3d 202 (2d Cir. 2015).   

The RPA claims in the BNPD cases left largely untested many of the brand name drug manufacturers’ defenses:  that rebates to managed care organizations were better thought of as functional discounts, as opposed to price discrimination, in exchange for preferential treatment by entities that could actually influence utilization of a manufacturer’s product; that manufacturers were merely “meeting the competition” by offering lower prices to those who could affect prescribing choices; and that the ability of those “favored purchasers” to create what plaintiffs claimed was price discrimination was procompetitive.   In the retail class plaintiffs’ appeal of their loss at trial on the conspiracy claim, the Seventh Circuit, in an opinion by Judge Posner, noted the procompetitive nature of the existing system, provided that retail pharmacies were not unfairly excluded from any benefits to which they were entitled.  See BNPD, 288 F.3d 1028, 1034-35 (7th Cir. 2002) (existing system was “supported by commercial reasons independent of any desire to prevent arbitrage, let alone to facilitate collusive pricing”).

HHS Proposes Rule Eliminating Safe Harbor for Manufacturer Rebates

Fast forward to January 2019 when HHS proposed its rule and began taking public comment.  Some commenters have opposed the proposed rule, suggesting that the risk of liability under the RPA might undermine manufacturers’ willingness to negotiate discounts with PBMs and pharmacy benefit providers.  Implicit in this concern is the fear that, if manufacturers are hesitant to continue to offer discounts to certain purchasers because of RPA concerns, the rule could actually raise patients’ out-of-pocket costs.

Still other commenters have disagreed, arguing that the RPA does not distinguish between up-front discounts and after-the-fact rebates.  Some have argued that BNPD does not prohibit PBMs from offering favorable formulary positioning in return for price concessions that can be passed on to patients.  In their view, it’s not relevant to RPA analysis whether those price concessions are offered against the list price or offered through after the fact rebates. 

Looking Ahead

Under the current system, in exchange for rebates manufacturers generally require PBMs or pharmacy benefit providers to agree contractually to take certain steps to advantage or avoid disadvantaging a manufacturer’s product relative to competing drugs.  This ensures, among other things, manufacturers are able to treat like customers alike for purposes of avoiding risk of RPA liability.  The elimination of the safe harbor for after-the-fact rebates, while creating a safe harbor for negotiated discounts on a drug’s list price, should not by itself create additional risk of RPA liability.  Whether manufacturers structure discounts as after-the-fact rebates or discounts on the list price, customers are paying prices determined by their ability to affect demand for the manufacturer’s product.

Of course, it still remains to be seen whether manufacturers will offer more conservative discounts, or no discounts at all to avoid a claim that it has unlawfully favored certain entities versus others.  Because the rule is not set to go into effect until January 2022, we will be watching for signals from the incoming administration regarding whether the new rule will be left as is.