VIA ELECTRONIC SUBMISSION
March 21, 2019
Office of Inspector General
U.S. Department of Health and Human Services
Room 5527, Cohen Building
330 Independence Avenue SW
Washington D.C 20201
Re:

Comments to OIG-0936-P
Proposed Rule: 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

Dear Sir or Madam:
The Center for Children and Families (CCF), part of the Health Policy Institute at the
McCourt School of Public Policy at Georgetown University, is an independent, nonpartisan
policy and research center that conducts research, develops strategies and offers policy
solutions to improve the health of America’s children and families, particularly those with
low- and moderate-incomes. Thank you for this opportunity to make the following
comments to the HHS OIG proposed rule, which focus on the likely impact of the rule on the
Medicaid program.
We welcome the Administration’s overall focus on the problem of prescription drug costs
and we particularly appreciate that the Administration’s fiscal year 2020 budget proposes
three sound improvements to the highly effective Medicaid Drug Rebate Program1 —
eliminating the cap on total Medicaid drug rebate amounts, preventing manufacturer
misclassification of drugs to lower their rebate obligations, and preventing manufacturers
from using authorized generics to reduce rebate amounts — which can help state Medicaid
programs better address drug cost growth and ensure continued access to needed
prescription drugs for low-income Medicaid beneficiaries including children and families.2
Edwin Park, “How to Strengthen the Medicaid Drug Rebate Program to Address Rising Medicaid
Prescription Drug Costs,” Georgetown University Center for Children and Families, January 2019,
https://ccf.georgetown.edu/wp-content/uploads/2019/01/Medicaid-Rx-Policy-Options-v4.pdf.
1

Edwin Park, “Trump Budget Includes Harmful Medicaid Drug Rebate Proposal, Several Sound
Improvements,” Say Ahhh! Blog, Georgetown University Center for Children and Families, March 14, 2019,
2

Box 57144 3300 Whitehaven Street, N.W. Suite 5000 Washington, DC 20057
T 202.687.0880 F 202.687.3110 E Childhealth@georgetown.edu

 2

As explained below, however, the proposed rule raises serious concerns because it would
likely harm the Medicaid program, raise federal and state Medicaid costs and could lead to
states making cuts to their Medicaid programs that adversely affect low-income
beneficiaries including children and families. Moreover, the policy rationales cited in
support of the proposed rule do not support the application of the proposed rule’s safe
harbor changes related to the federal anti-kickback law to Medicaid.
We therefore strongly recommend that OIG leave in place the existing safe harbor for
rebates negotiated between drug manufacturers and pharmacy benefit managers (PBMs)
contracting with Medicaid managed care plans. In addition, consistent with the proposed
rule, in any final rule, OIG should reiterate that supplemental rebates directly negotiated by
states with drug manufacturers and the mandatory rebates required under the Medicaid
Drug Rebate Program would be wholly unaffected by any anti-kickback law safe harbor
changes.
1. Medicaid Drug Rebate Program Is Highly Effective and Ensures Beneficiary Access
Under the Medicaid Drug Rebate Program (MDRP), all drug manufacturers must provide
rebates to the federal government and states as a condition of having their drugs covered
by Medicaid. In the case of brand-name drugs, manufacturers must pay a base rebate 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. (The AMP is generally the
average price paid by wholesalers for drugs distributed to retail community pharmacies.)
For generic drugs, the base rebate equals 13 percent of the AMP. Manufacturers must also
pay additional inflation-related rebates for both brand-name and generic drugs if their
prices rise faster than general inflation. Nearly all states also negotiate directly with
manufacturers and/or have managed care plans negotiate for voluntary supplemental
rebates on top of these federally required rebates, with many states directly negotiating for
some supplemental rebates together as part of a multi-state purchasing pool.
These rebates are substantial. According to the Medicaid and CHIP Payment and Access
Commission (MACPAC), in federal fiscal year 2016, drug manufacturers paid $31.2 billion
in rebates to the federal government and the states, lowering Medicaid prescription drug
costs by 51.3 percent.3 In contrast, data from the 2018 Medicare Trustees report shows
that the rebates negotiated between private insurers and drug manufacturers lowered
Medicare Part D costs by only 19.9 percent in 2016.4 (Unlike under the MDRP, there are no

https://ccf.georgetown.edu/2019/03/14/trump-budget-includes-harmful-medicaid-drug-rebate-proposalseveral-sound-rebate-improvements/.
Medicaid and CHIP Payment and Access Commission, “MACStats: Exhibit 28 Medicaid Gross Spending and
Rebates for Drugs by Delivery System, FY 2016,” December 2017,
https://www.macpac.gov/publication/medicaid-gross-spending-and-rebates-for-drugs-by-delivery-system/.
3

“2018 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal
Supplementary Medical Insurance Trust Funds,” June 2018 (see Table IV.B8),
4

 3

mandatory rebates required in Medicare Part D. All rebates are the result of negotiation
between manufacturers and Part D plans and the PBMs with which they contract.) In fiscal
year 2017, manufacturers paid $34.9 billion in rebates, lowering Medicaid prescription
drug costs by 54.5 percent.5 Other analysis has similarly found that the drug rebates
manufacturers pay in Medicaid are far larger than what Medicare Part D plans or private
insurance plans receive.6
In exchange for these rebates, except for a very limited set of drug classes, state Medicaid
programs cannot outright deny coverage of drugs produced by manufacturers participating
in the drug rebate program. In addition, children enrolled in Medicaid receive the Early
and Periodic Screening, Diagnostic, and Treatment (EPSDT) benefit which ensures that
children can obtain any drugs their practitioners determine they need as the result of a
screening and diagnosis. Medicaid also limits co-payments that may be charged on each
prescription to nominal amounts, and for most children on Medicaid, co-payments and
other cost-sharing are prohibited entirely. Together, these protections help ensure that
low-income Medicaid beneficiaries including children and families have access to the
prescription drugs they need.7
2. Safe Harbor Changes Would Likely Harm the Medicaid Program
The proposed rule would amend 42 C.F.R. § 1001.952(h) and essentially eliminate the
existing “discount” safe harbor in the federal anti-kickback law for prescription drug
rebates provided by drug manufacturers to Medicare Part D plans and Medicaid managed
care plans. The proposed rule would then amend 42 C.F.R. § 1001.952 to add
subparagraphs (cc) and (dd) to establish new safe harbors for “point-of-sale” discounts
(rebates or chargebacks which are fully passed on to the retail level) and for certain fixed
payment PBM service fees paid by manufacturers.8

https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-andReports/ReportsTrustFunds/Downloads/TR2018.pdf
Medicaid and CHIP Payment and Access Commission, “MACStats: Exhibit 28 Medicaid Gross Spending and
Rebates for Drugs by Delivery System, FY 2017,” op cit.
5

See Office of Inspector General, U.S. Department of Health and Human Services, “Medicaid Rebates for
Brand-Name Drugs Exceeded Part D Rebates by a Substantial Margin,” April 2015,
https://oig.hhs.gov/oei/reports/oei-03-13-00650.pdf; Charles Roehrig, “The Impact of Prescription Drug
Rebates on Health Plans and Consumers,” Altarum, April 2018,
https://altarum.org/sites/default/files/uploaded-publication-files/Altarum-Prescription-Drug-RebateReport_April-2018.pdf; and Anna Anderson-Cook, Jared Maeda and Lyle Nelson, “Prices for and Spending on
Specialty Drugs in Medicare Part D and Medicaid,” Congressional Budget Office, June 11, 2018,
https://www.cbo.gov/system/files/115th-congress-2017-2018/presentation/53929presentation.pdf.
6

Jack Hoadley and Joan Alker, “How Medicaid and CHIP Shield Children from the Rising Costs of Prescription
Drugs,” Georgetown University Center for Children and Families, July 2017, https://ccf.georgetown.edu/wpcontent/uploads/2017/07/Prescription-drugs-v3-link-fix.pdf.
7

Office of Inspector General, U.S. Department of Health and Human Services, “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
8

 4

A large majority of states currently rely on Medicaid managed care plans to negotiate
voluntary supplemental prescription drug rebates on behalf of their enrollees, in addition
to the rebates required under the MDRP.9 (The preamble to the proposed rule makes clear
that the safe harbor changes would not affect the federally-required base rebate and
inflation-related rebate under the MDRP or supplemental rebates negotiated directly by
states under so-called “sidebar” agreements.) These managed care supplemental rebates
are either passed on to state Medicaid programs in the form of lower managed care
capitation payments or are collected by states. While these rebates are modest relative to
the size of the federally-required rebates under the MDRP, the supplemental rebates
obtained by Medicaid managed care plans (and the PBMs with which they contract) help
lower overall federal and state Medicaid prescription drug costs. As a result, ending the
existing safe harbor for these rebates could have a significant adverse effect on state
Medicaid programs.
The supplemental material in the docket for the proposed rule includes an actuarial
analysis from the Office of the Actuary (OACT) at the Centers for Medicare and Medicaid
Services. The OACT analysis estimates that the proposed rule would increase total
Medicaid spending by $1.9 billion over the next 10 years, with $1.7 billion in increased
federal Medicaid spending and $200 million in increased state Medicaid spending.10 (The
supplemental docket material includes two other two actuarial studies. The study
conducted by the Wakely Consulting Group did not examine the Medicaid impact. The
study conducted by Milliman did not provide any specific Medicaid impact estimates but
did include a limited qualitative discussion of the effects on Medicaid.) OACT expects that
85 percent of current Medicaid managed care drug rebates would no longer be negotiated
between manufacturers and PBMs on behalf of Medicaid managed care plans. As a result,
Medicaid managed care plans would see higher net pharmacy costs under the proposed
rule and in turn, states would have to increase their capitation payments to Medicaid
managed care plans to account for those higher costs. As noted, states would still be
permitted to directly negotiate supplemental rebates in managed care (as 20 states
currently do for certain drugs, drug classes or in a few states, the entire outpatient drug
benefit in Medicaid managed care11). But OACT expects only half of the existing rebates
that would no longer be provided to Medicaid managed care plans would be replaced by
directly negotiated supplemental rebates.

Pharmacy Benefit Manager Service Fees,” 84 Fed. Reg. 2340 (February 6, 2019),
https://www.regulations.gov/contentStreamer?documentId=HHSIG-2019-0001-0001&contentType=pdf.
9

Park, op cit.

Office of the Actuary, Centers for Medicare and Medicaid Services, “Proposed Safe Harbor Regulation,”
August 30, 2018, https://www.cms.gov/Research-Statistics-Data-andSystems/Research/ActuarialStudies/Downloads/ProposedSafeHarborRegulationImpact.pdf. The OACT
analysis notes that states would accrue savings outside of Medicaid, with reduced drug spending in their state
employee health plans if list prices decline as assumed.
10

11

Park, op cit.

 5

The $1.9 billion estimate likely reflects states also seeing some offsetting savings in gross
pharmacy costs for their beneficiaries in managed care (and thus lower capitation
payments) if drug manufacturers lower their list prices due to the elimination of the
existing rebate safe harbor. The actuaries assume that manufacturers would retain only 15
percent of the rebates they now provide to Medicare Part D and Medicaid managed care
plans if the safe harbor is eliminated, with the remainder of the current rebates converted
to lower list prices. But if manufacturers keep a greater share than 15 percent and do not
lower list prices to the extent assumed by OACT, the estimated increase of $1.9 billion in
total Medicaid costs could end up considerably larger. In other words, state Medicaid
programs would face even higher costs related to capitation payments to managed care
plans because the loss of supplemental managed care rebates would be offset to a lesser
degree by reduced managed care pharmacy costs, if list prices do not decline or by as much
as assumed.
Furthermore, lower list prices, including both reduced launch prices and smaller annual
price increases, would also result in lower mandatory base and inflation-related rebates
under the MDRP, which would offset the effect of lower list prices on overall Medicaid
prescription drug costs (including in fee-for-service). OACT expects as part of its overall
Medicaid estimate that Medicaid cost increases from lower rebates would exceed by $500
million over ten years the Medicaid savings from lower list prices. While Milliman did not
conduct any Medicaid-specific estimates, it clearly states that the reduction in rebates
provided to state Medicaid programs would more than offset any list price savings and
“would result in an increase in total government costs for the Medicaid program.12”
In addition, the proposed effective date for the rule’s safe harbor changes is January 1,
2020. Considering that the comment period to this proposed rule ends on April 8, 2019
and OIG will need sufficient time to review comments and finalize the rule, states intending
to substitute directly negotiated supplemental rebates for current Medicaid managed care
rebates would have little or no time to do so before the safe harbor changes are scheduled
to take effect. It is very likely that at least initially, states would be able to replace much
less than half of current rebates, as assumed by OACT.
Moreover, some states would face disproportionately higher increases in net Medicaid drug
costs under the proposed rule. For example, the handful of states that already fully carve
out the outpatient drug benefit from Medicaid managed care plans and directly negotiate
their own supplemental rebates for both fee-for-service and managed care should largely
be unaffected by the rule. But several states have no directly negotiated supplemental
rebates at all and rely wholly on Medicaid managed care plans to obtain any supplemental
rebates. Most other states only directly negotiate supplemental rebates for beneficiaries in
fee-for-service and/or for a limited number of drugs or drug classes in managed care.
Medicaid programs in such states would face the largest drug cost increases under the
proposed rule.13
Milliman, “Impact of Potential Changes to the Treatment of Manufacturer Rebates,” January 31, 2019,
https://www.regulations.gov/contentStreamer?documentId=HHSIG-2019-0001-0002&contentType=pdf.
12

13

Park, op cit.

 6

Finally, it is unclear how the proposed rule could indirectly affect Medicaid in other ways.
For example, if the proposed rule eventually results in some reduction in the rebates now
provided by manufacturers to private insurance (including in employer-sponsored
insurance) but without a significant reduction in list prices, that could also affect the “best
price” requirement in Medicaid under which the MDRP base rebate is set at the higher of
23.1 percent of the Average Manufacturer Price (AMP) or the “best price” discount
provided to most other payers including in private insurance. (Rebates negotiated by
Medicare Part D plans are currently exempt from best price.) That could result in smaller
rebates paid to state Medicaid programs and higher net drug costs. While the OACT
analysis examines the impact on private insurance from potentially lower list prices, it does
not examine how possible changes in private insurance rebates could affect Medicaid.
3. Primary Policy Rationale for Safe Harbor Changes Does Not Apply to Medicaid
The proposed rule’s preamble focuses almost exclusively on the merits of the rule relative
to Medicare Part D. For example, the primary rationale for elimination of the existing
rebate safe harbor is that the current system of negotiated rebates harms beneficiaries.
The preamble devotes much of its discussion to explaining that if drug rebates do not flow
through to consumers at the pharmacy counter, consumers can face higher out-of-pocket
costs if their deductible and co-insurance amounts are based on list prices, rather than
prices net of rebates. The preamble argues that if existing rebates were fully converted to
point-of-sale rebates, the proposed rule would lower out-of-pocket costs for Medicare Part
D beneficiaries.
While this may be true of Medicare Part D in the case of some beneficiaries, that is not how
Medicaid works. Low-income Medicaid beneficiaries generally pay only nominal copayments irrespective of the price of individual drugs, although those nominal co-payment
amounts may vary if the drugs are brand-name or generic. In fact, the preamble separately
admits that patients “with fixed co-payments may not see changes in their cost-sharing at
the point of sale…” under the proposed rule. That is why the OACT analysis expects zero
impact on Medicaid beneficiaries’ out-of-pocket costs under the proposed rule. Similarly,
Milliman states that “most of these effects do not apply in the Medicaid market” as point-ofsale rebates would not affect beneficiaries’ out-of-pocket costs and would not affect
beneficiary utilization patterns.
Moreover, another policy rationale cited in the preamble is that the proposed rule would
help address the problem of rising list prices which harms federal health programs. But as
the OACT estimate finds, the proposed rule is actually expected to increase total Medicaid
costs by $1.9 billion over the next ten years, relative to current law. And as discussed
above, if the proposed rule does not lower list prices as intended (and as OACT assumes)
and manufacturers retain a significant share of the rebates they now provide, the net cost
to Medicaid could be even larger.
The preamble cites only two Medicaid-specific arguments in favor of the proposed rule.
First, the preamble notes that some rebates now provided by drug manufacturers to PBMs

 7

(in private insurance) may be excluded from the determination of best price under the
MDRP. Second, the preamble highlights the fact that the current statutory cap on total
Medicaid drug rebate amounts (equal to 100 percent of AMP) limits the effectiveness of the
MDRP’s inflation-related rebate in discouraging excessive annual price increases. The
preamble correctly states that both result in lower rebates and higher net Medicaid drug
costs.
But it is hard to see how these two issues in any way necessitate the proposed rule’s
elimination of the current safe harbor for rebates negotiated by Medicaid managed care
plans. Instead, these issues can be addressed successfully through simple, direct remedies.
As we have previously written, the Centers for Medicare and Medicaid Services (CMS)
could amend current Medicaid rebate regulations to clarify that the definition of best price
includes all rebates negotiated between manufacturers and PBMs contracting with private
insurance plans (including in employer-sponsored insurance).14 Similarly, as we have
written, Congress could also enact legislation to eliminate the 100 percent of AMP cap to
ensure that state Medicaid receive rebates equal to the full amount of price increases in
excess of general inflation.15 As noted above, in a welcome move, the President’s fiscal year
2020 budget proposes to eliminate the rebate cap. A proposal to eliminate the rebate cap
will also likely be formally recommended by MACPAC in an upcoming report to Congress.16
4. Safe Harbor Changes Should Not Extend to Medicaid
We thus strongly recommend that in the final rule, OIG should not apply the proposed safe
harbor changes to Medicaid managed care — that is, OIG should retain the existing safe
harbor for rebates negotiated by Medicaid managed care plans — irrespective of whatever
safe harbor changes are applied to Medicare Part D. (Notably, the anti-kickback law applies
to all Federal health care programs. But OIG has already elected in the proposed rule to
limit safe harbor changes under the proposed rule to Medicare Part D and Medicaid
managed care. In the final rule, OIG could further limit the scope of any safe harbor
changes by excluding application of such changes to rebates negotiated by Medicaid
managed care plans. In addition, as discussed above, the supplemental rebates negotiated
by managed care plans — which are in addition to mandatory rebates under the MDRP —
are substantially different than the rebates negotiated by Medicare Part D plans and the
policy rationales cited in support of the proposed rule do not apply to Medicaid.)
Moreover, as under the proposed rule, OIG should reiterate that any safe harbor changes in
the final rule would have no effect on federally-required rebates under the MDRP or
14

Park, op cit.

15

Park, op cit.

U.S. Department of Health and Human Services, “Fiscal Year 2020 Budget-in-Brief,” March 11, 2019,
https://www.hhs.gov/sites/default/files/fy-2020-budget-in-brief.pdf and Medicaid and CHIP Payment and
Access Commission, “Potential Recommendations on Coverage Grace Period and Rebate Cap,” March 7, 2019,
https://www.macpac.gov/wp-content/uploads/2019/03/Potential-Recommendations-on-Coverage-GracePeriod-and-Rebate-Cap.pdf.
16

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voluntary supplemental rebates directly negotiated between states and drug
manufacturers under so-called “sidebar” agreements.
Otherwise, state Medicaid programs would be at significant risk of facing higher net
prescription drug costs. States, in turn, would either have to contribute more of their
funding to their Medicaid programs or as is more likely, respond by instituting
programmatic cuts harming low-income beneficiaries including children and families, such
as cuts to Medicaid eligibility, benefits and provider payments that reduce access to needed
care including to prescription drugs.
***
Thank you again for the opportunity to make the above comments to the proposed rule.
Please contact me at Edwin.Park@georgetown.edu if you have any questions or if we can
be of further assistance.
Respectfully submitted,
Edwin Park
Research Professor
Center for Children and Families
McCourt School of Public Policy
Georgetown University