Dorsey Health Law

This post is an update from our earlier blog post, available here, on the bellwether federal opioids trial in the Northern District of Ohio.  Just hours prior to the start of the trial in a consolidated case involving two plaintiff counties in Ohio, all of the remaining defendants in the case, except Walgreens, reached a settlement.  In the settlement, distributors, McKesson, Cardinal Health and AmerisourceBergen (distributors of approximately 90% of all prescription medications) will pay $215M to Cuyahoga and Summit Counties in Ohio.  A manufacturer, Teva, will pay $20M in cash over three years and will donate $25M worth of Suboxone, an addiction treatment medication.  Several manufacturers who were originally named defendants in these two consolidated cases previously settled out of the cases.  Judge Polster, the federal judge who has overseen the multi-district litigation (“MDL”), announced that Walgreens would face a separate trial focusing on its role as a dispenser.  There are more than 2,000 cases filed in the MDL by states, counties, cities and tribes which Judge Polster has been overseeing for more than two years.  The remaining cases involve manufacturers, distributors and large pharmacy chains.  Lawyers involved in the cases have expressed hope that the recent settlement could encourage other cases in the MDL to settle as well, although one of the most significant hurdles has been a dispute about how any settlement money would be distributed among the plaintiffs, as well as who would control the use of the settlement funds going forward.

In the last several years, thousands of cities and counties, as well as most states, have sued various combinations of pharmaceutical manufacturers, retailers, and distributors for damages allegedly caused by the opioid epidemic.  Nearly 2,000 of those cases have been consolidated into a multi-district litigation (“MDL”) in the Northern District of Ohio. Until very recently, defendants in the MDL had not revealed how they intended to argue against the charge that they caused or contributed to the opioid crisis.  But with the first trial set to begin on October 21, 2019, the defendants recently submitted their trial briefs, which provide a sneak peek at the factual and legal arguments they intend to raise at trial.  Among other alleged causes, defendants have pointed to corrupt doctors, criminal cartels, and even local governments. For example, one drugmaker stated that it “fully recognizes the opioid crisis that exists in this country” but suggested that alternative causes such as public policy failures and illicit drug use drove the opioid crisis.  More specifically, the defendant stated: [P]ervasive diversion and abuse of oxycodone and hydrocodone pills, unscrupulous doctors and internet pharmacies operating as drug-trafficking organizations, foreign criminal cartels that flooded the country with heroin and fentanyl illegally made in clandestine labs, and state and federal governments that struggled to ensure patients had access to necessary medications while addressing long-known problems of abuse, misuse, diversion, and overdose. (Doc. No. 2633 at 8.) Another drugmaker alleged that rather than blaming defendants, the plaintiffs—i.e., two counties in Ohio—“should be examining their own actions and inaction—which directly contributed to the opioid abuse problem in the United States.”  (Doc. No. 2669 at 9.)  As an example, the defendant argued that “the Counties continue to reimburse for opioid prescriptions for chronic pain today, thereby influencing what gets prescribed and dispensed to patients—and confirming (against their very own foundational theory in this case) that opioid prescriptions may be appropriate for chronic pain.”  (Id.) Similarly, an opioid distributor believes the opioid crisis was caused by “innumerable actors not before the Court, ranging all the way from well-intentioned prescribing doctors to criminal drug dealers and heroin traffickers.”  (Doc. No. 2643 at 4-5.) Another distributor suggested that plaintiffs in the MDL overlook the “role of criminal drug cartels and other actors in the illegal opioid market.”  (Doc. No. 2659 at 4.) Finally, yet another distributor argued that alternative causes of the opioid crisis preclude recovery in the MDL.  This defendant argued that under City of Cleveland v. Ameriquest Mortg. Secs., Inc., 615 F.3d 496 (6th Cir. 2010), the presence of “independent actors between the alleged misconduct and the alleged injury” compel the conclusion that plaintiffs’ claims here are “too indirect to warrant recovery.”  Ameriquest, 615 F.3d at 506.  The defendant attempted to distance itself from defendants occupying other roles in the chain of distribution by stating that it “does not make opioids available to patients,” and instead, a “patient can obtain opioids only after a doctor makes an independent decision to write a prescription and a pharmacist makes the independent decision to fill the prescription.”  (Doc. No. 2667 at 8.) All the finger-pointing between and among plaintiffs and defendants emphasizes what has been increasingly clear as the first MDL cases approach trial; it will take a Herculean effort by the courts (and juries) to sort through the medical, social, political, and economic issues that are intertwined with the opioid crisis.  The breadth of the problem even raises the question of whether jury trials are the right tools to address social crises of this magnitude and complexity.  Indeed, some studies place the national economic burden of the opioid crisis at $78.5 billion, with over 35,000 people dying annually for drug overdoses related to opioids. U.S. District Judge Dan Polster, who presides over the MDL cases, bluntly emphasized these complex challenges in recent comments: [E]veryone shares some of the responsibility, and no one has done enough to abate it.  That includes the manufacturers, the distributors, the pharmacies, the doctors, the federal government and state government, local governments, hospitals, third-party payers and individuals.  Just about everyone we’ve got on both sides of the equation in this case. The federal court is probably the least likely branch of government to try and tackle this, but candidly, the other branches of government, federal and state, have punted.  So it’s here.

As reported here in February, the Department of Health and Human Services (HHS) Office of Inspector General (OIG) released two new significant proposed regulations that would have had a transformative effect on the drug discount and rebate arrangements that are commonplace between pharmaceutical manufacturers and Medicare Part D Plans and Medicaid Managed Care Organizations (and the pharmacy benefit managers (PBMs) acting on their behalf). The Administration’s goal with these proposed regulations was to reduce prescription drug prices.  However, in July, the Administration abandoned these proposed regulations (as shown on the Office of Management and Budget website) out of concern that they would actually have the opposite effect and result in increased drug prices.  President Trump reportedly became concerned after the proposals received significant support from the pharmaceutical companies. The proposals would have eliminated the current federal anti-kickback statute (AKS) safe harbor protection relied upon by manufacturers and PBMs for the rebates paid by manufacturers to PBMs for certain drugs.  In its place, the OIG proposed a much more narrow safe harbor that would have only applied if the reduced price from the manufacturer was fixed in advance and disclosed to the plan, the full value of the price reduction was disclosed to the pharmacy through a chargeback to ensure that the total payment to the pharmacy for the drug was no less than what the health plan (or PBM on its behalf) paid to the manufacturer for the drug, and the reduction in the drug’s price was completely applied to the price charged to the patient at the point of sale. At the same time, the OIG also proposed a new PBM service fee AKS safe harbor that would have protected payments by manufacturers to PBMs for certain services provided by PBMs, but with strict requirements for the manufacturer and PBM to have a written agreement for the services which set the compensation for the services in advance at a rate that is consistent with fair market value and not based on the volume or value of any referrals or other business generated between the parties or the health plan.  The proposed service fee safe harbor would have also required the PBM to annually disclose such arrangements, services and compensation to the health plans and to the Secretary of HHS upon request. The Administration has been vocal about its goal of reducing drug prices for patients.  So, we expect alternative action in the future which could take the form of legislation rather than the rule-making process. We are continuing to closely monitor changes in the area.

In a much anticipated decision, a federal judge ruled this week that the Trump Administration’s rule requiring drug manufacturers to list drug prices in television advertisements exceeds the agency’s authority. Back in May 2018, the Trump administration spoke on drug pricing and published its “Blueprint to Lower Drug Prices and Reduce Out-of-Pocket Costs”. One of the specific strategies outlined in the President’s speech at the time included requiring drug manufacturers to state the drug list price in television advertisements (read our previous article on this topic here). Since the President’s speech in 2018, the U.S. Department of Health and Human Services (“HHS”) published a final rule that required drug manufacturers to disclose, in any television advertisement, the list price of a thirty day supply (or a typical course of treatment) of prescription drugs and biological products (excluding prescription drugs or biological products that have a list price of less than $35 per month for a thirty day supply or typical course of treatment). See 84 Fed. Reg. 20,732 (May 10, 2019) (“Final Rule”). Commenters to the Final Rule raised concern that the proposal was “beyond the authority of CMS to promulgate these regulations under a reasonable interpretation of sections 1102 and 1871 of the Social Security Act.” 84 Fed. Reg. 20,735-36 (May 10, 2019). HHS stated that it disagreed with the commenters because these two provisions “confer broad discretion upon the Secretary to determine the regulations that are necessary to the efficient administration of the functions with which he or she is charged under the Social Security Act (in the case of section 1102), and the administration of Medicare (in the case of section 1871”. Shortly thereafter, a lawsuit was brought by three pharmaceutical companies and a marketing association. In the lawsuit, the industry not only opposed CMS’ authority to promulgate the Final Rule, but also argued that it violated the First Amendment, as the disclosure of the list price was compelled speech that did not pass the intermediate scrutiny standard outlined in various U.S. Supreme Court Cases. See Merck & Co, Inc v. United States Department of Health and Human Services, Case No. 19-cv-01738 (AMP) (U.S. Dist. Columbia, July 8, 2019) (available here). In its decision published on July 8, 2019, U.S. District Judge Amit Mehta ruled that the Final Rule exceeds the rulemaking authority Congress granted HHS under the Social Security Act. Id. at 12. The Court found that “the basic power that Congress gave to the Secretary was to establish the rules and regulations for ‘running’ or ‘managing’ the federal public health insurance programs through CMS [, but that] HHS seeks to do more than that here. It has adopted a rule that regulates the conduct of market actors that are not direct participants in the Medicare or Medicaid program.” Id. at 13. Given that the Court found HHS’ rulemaking authority was exceeded, it did not decide the Plaintiff’s First Amendment challenge. Id. at 2. The New York Times reported that Caitlin Oakley, a spokeswomen for HHS said that “the administration was disappointed and consulting with the Justice Department on what to do next.” Katie Thomas and Katie Rogers, Judge Blocks Trump Rule Requiring Drug Companies to List Prices in TV Ads, N.Y. Times, July 8, 2019, available at https://www.nytimes.com/2019/07/08/health/drug-prices-tv-ads-trump.html. Given the Trump Administration’s continued focus and action on drug pricing, including news last week that the Administration was preparing an executive order that would declare a “favored nations clause” for drug prices, it is safe to expect many more legal challenges and appeals with respect to these issues in the near future, although the long-term impact to the industry is still questionable. Stephanie Armour, Trump Plans Order to Tie Drug Prices to Other Nations’ Cost, Wall St. J., July 5, 2019, available at https://www.wsj.com/articles/trump-plans-order-to-tie-drug-prices-to-other-nations-costs-11562348629.

The Office of Inspector General of the Department of Health and Human Services (“OIG”) released a proposed rule to eliminate safe harbor protection under the anti-kickback statute for drug price reductions that pharmaceutical manufacturers pay to Medicare and Medicaid plan sponsors and their pharmacy benefit managers (“PBMs”). The OIG proposed replacing the current safe harbor protection for drug price discounts and rebates with a new safe harbor to protect only those drug price reductions that are set in advance and are applied fully to the price of the product charged to the Medicare or Medicaid beneficiary at the point of sale. In addition, the OIG proposed a new safe harbor to protect compensation from pharmaceutical manufacturers to PBMs for services provided to the manufacturer, but only if those payments are fixed, fair market value payments not tied to volume or value, and the PBM discloses such payments to its health plan customers. The OIG’s proposals could have a significant impact on the drug discount and rebate arrangements that are commonly in place between manufacturers and Medicare Part D plans/Medicaid managed care organizations (and PBMs acting on behalf of these plans). The OIG’s proposals would also impact Medicare and Medicaid beneficiaries who would be entitled to receive any such discounts directly at the point of sale. The proposed rule release can be found here and is expected to be published in the Federal Register on February 6. The proposed effective date of the new rules is January 1, 2020, with an earlier effective date of 60 days after the final rule is published, for the new point of sale safe harbor.           I.        Discount Safe Harbor – Changes to Focus on Point-of-Sale Reductions in Drug Prices   The federal anti-kickback statute (Social Security Act § 1128B(b)) makes it a criminal offense for anyone knowingly and willfully to pay, solicit, or receive anything of value to induce referrals of items or services that are reimbursable under any federal health care program. Violation of the statute is a felony, and can carry civil fines, imprisonment, exclusion from federal health care programs, and be the basis for liability under the False Claims Act. An existing safe harbor protects from anti-kickback statute liability discounts and rebates on drug prices that pharmaceutical manufacturers pay to health plans or their PBMs. The OIG’s proposal would revise the discount safe harbor to exclude from protection any reduction in price or other compensation in any form paid from a pharmaceutical manufacturer to a Medicare Part D or Medicaid managed care organization or their PBM in connection with the sale or purchase of a prescription drug. The proposal reflects OIG’s concern that the current manner in which drug price discounts and rebates are structured does not result in lower drug costs to federal programs and federal program beneficiaries, and in fact may be a cause of rising drug costs, and may be contrary to the purposes of the anti-kickback statute. In its place, the OIG proposes to add a new safe harbor focused narrowly on point-of-sale reductions in prescription drug prices. That safe harbor would protect reductions in the price charged by a manufacturer for drug products that are payable by a Medicare Part D or Medicaid managed care organization or their PBM, but only if that price reduction meets three conditions (the “Point of Sale Safe Harbor”): First, the reduced price must be set in advance. OIG intends this to mean that the terms of the price reduction are fixed and disclosed in writing to the plan sponsor by the time of the initial purchase. Second, the sale may not involve a rebate unless the full value of the price reduction is provided to the dispensing pharmacy through chargebacks. This means that when a pharmacy dispenses a drug to a beneficiary, the total payment to the pharmacy (including the beneficiary co-payment, payment from the health plan, and any chargeback payment from the manufacturer) must be no less than the drug price agreed between the manufacturer and the health plan sponsor or their PBM. Lastly, the reduction in price must be completely applied to the price charged to the beneficiary at the time of sale. This means that the drug price to which the beneficiary’s cost-sharing obligations apply at the point of sale must be the same price (taking into account all discounts) that the manufacturer charges to the plan sponsor or their PBM. The OIG also noted that the discount safe harbor would continue to not apply if a manufacturer offered a price reduction to payors other than Medicare and Medicaid payors (i.e., situations in which parties “carve out” referrals of federal health care program beneficiaries or business from otherwise “questionable” financial arrangements). The OIG is especially concerned with these “carve out” arrangements if the offer of a discount on products would serve as an inducement for the purchase of products that are reimbursable by federal healthcare programs (e.g., offering a discount to a private health plan that is conditioned, even implicitly, on a product’s favorable formulary placement in the health payor’s Part D plans).            II.        New PBM Service Fee Safe Harbor   In addition, the OIG proposed a new safe harbor to protect compensation from pharmaceutical manufacturers to PBMs for services rendered to the manufacturers that relate to PBMs’ arrangements to provide PBM services to health plans (the “PBM Service Fee Safe Harbor”). The OIG did propose three specific conditions that must be met in order for compensation to be protected under the PBM Services Fee Safe Harbor. The first proposed condition of the safe harbor would require the PBM and the pharmaceutical manufacturer to have a written agreement 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 for such services. Notably, the OIG declined to propose a specific definition for PBM services but did provide a list of examples of services that it generally considers to be PBM services, including: 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. The second proposed condition requires 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. 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. Other than the proposed revisions to the discount safe harbor, and the new PBM Service Fee Safe Harbor, the OIG did not propose to modify any other existing safe harbors which PBMs may use to protect payments from manufacturers. The OIG specifically noted the possibility that certain types of remuneration that manufacturers might pay to PBMs could continue to be protected under another existing safe harbor. For example, PBMs could presumably continue to rely on the Group Purchasing Organization (GPO) safe harbor to protect certain administrative fees paid by drug manufacturers to PBMs for GPO services, even if those fees are based on the total prescription volumes of health plans on behalf of which the PBM contracts with the manufacturers.          III.        Conclusion   The OIG proposal reflects a clear intent to substantially alter many of the current drug discount and services compensation practices among pharmaceutical manufacturers and Part D/Medicaid MCO payers and their PBMs. The proposal also reflects the OIG’s skepticism that current drug discount and compensation practices among manufacturers and PBMs are sufficiently transparent to health plans to ensure that all appropriate cost reductions and value is passed through to health plans and reflected in lower health plans costs and lower premiums for beneficiaries. The proposal to exclude drug price reductions to Part D and Medicaid MCO health plan sponsors and PBMs is proposed to be effective on January 1, 2020. The OIG is also proposing that the new Point-of-Sale Safe Harbor will take effect in a shorter time frame of sixty (60) days after the rule is finalized. Comments to the proposed rule may be submitted 60 days after publication in the Federal Register. There are a number of steps that parties to the type of arrangements covered by the proposed rule should take, including reviewing their current discount and rebate agreements to determine whether there will need to be amendments to these contracts in order to comply with the proposed rule, if it is finalized. Parties will also need to evaluate what compliance measures are needed in order to operationalize the changes in these arrangements to ensure compliance with the new safe harbor requirements. Finally, in light of the attention OIG is giving to these type of arrangements, now would be an opportune time to review arrangements for compliance with the current safe harbor restrictions, such as the carve out restriction described above. If you have further questions about this proposed rule, please contact the authors or any other health care transaction and regulatory attorneys at Dorsey & Whitney.