Testimony Before the United States Senate Special Committee on Aging 
 
 
   
The Complex Web of Prescription Drug Prices, Part III: 
Examining Agency Efforts to Further Competition 
and Increase Affordability 
 
 
  Testimony of:   
  Vicki L. Robinson  
  Senior Counselor for Policy 
 
Office of Inspector General  
Department of Health and Human Services 
 
 
 
 
June 19, 2019 
9:00 a.m. 
Dirksen Senate Office Building, Room 562 
   
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Chairman Collins, Ranking Member Casey, and other distinguished members of the Committee, 
I am Vicki L. Robinson, Senior Counselor for Policy at the Department of Health and Human 
Services (HHS), Office of Inspector General (OIG).  Thank you for the invitation to testify today 
about the Departments recent proposed rule addressing rebates and other price reductions on 
prescription drugs.  
Introduction 
My testimony will describe the Departments proposal to change the safe harbor framework 
under the Federal anti-kickback statute as it applies to certain rebates and other price reductions 
on prescription pharmaceutical products from manufacturers to Part D plan sponsors and 
Medicaid managed care organizations (MCOs).1  
Specifically, the proposed rule would: 
1.  remove existing protection from anti-kickback statute liability under the discount safe 
harbor (42 CFR 1001.952(h)) for rebates and other reductions in price on prescription 
drugs from a manufacturer to a Part D plan sponsor, Medicaid MCO, or pharmacy 
benefits manager (PBM) under contract with them; 
2.  add new safe harbor protection for point-of-sale discounts that are completely applied to 
the price of the prescription drug at the time the pharmacy dispenses it to the beneficiary; 
and  
3.  add new safe harbor protection for fixed fees paid by manufacturers to PBMs for 
services the PBMs perform for the manufacturers. 
As stated in the proposed rule, the Secretary is concerned that existing rebate arrangements have 
proven to be ineffective at, and counterproductive to, putting downward pressure on drug prices 
and that rebates may be harming Federal healthcare programs by increasing list prices, 
preventing competition to lower drug prices, discouraging the use of lower-cost brand or generic 
drugs, and skewing formularies.  The proposed rule further explains concerns about PBMs 
favoring drugs with higher rebates over drugs with lower costs and basing formulary decisions 
on rebate potential rather than the quality or effectiveness of the drug.  The Departments goals 
for the proposed rule are to curb list price increases, reduce financial burden on beneficiaries, 
improve transparency, and reduce the risks associated with rebates inappropriately influencing 
formulary placement or inducing business payable by Medicare Part D or Medicaid.  
Because we are in active rulemaking, my testimony is limited to what the Department proposed 
in the Notice of Proposed Rulemaking published in the Federal Register on February 6, 2019 (84 
FR 2340) and the public comments we received in response.  My testimony is not intended to 
predict, and should not be viewed or interpreted as predicting, what might be in a final rule.  A 
final rule is currently pending review at the Office of Management and Budget. 
                                                           
1 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, 84 Fed. Reg. 2,340 (Feb. 6, 2019), available 
at https://www.govinfo.gov/content/pkg/FR-2019-02-06/pdf/2019-01026.pdf. 
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Legal Background  
1.  The Federal Anti-Kickback Statute and Safe Harbors   
The Federal anti-kickback statute, section 1128B(b) of the Social Security Act, serves an 
important role in ensuring that medical decision-making is not improperly influenced by 
financial interests.  Broadly speaking, the statute provides for criminal penalties for whoever 
knowingly and willfully offers, pays, solicits, or receives remuneration (generally, anything of 
value) to induce or reward the referral of business reimbursable under any of the Federal 
healthcare programs (as defined in section 1128B(f) of the Act).  Among other things, the statute 
applies to remuneration offered or paid in return for arranging for or recommending the purchase 
of products. 
The statute contains certain exceptions describing payment practices that are not violations of the 
law, including one that protects discounts or other reductions in price.  Given the broad reach of 
the anti-kickback statute, Congress enacted legislation that required the Secretary to develop and 
promulgate regulations, the so-called safe harbor regulations, that would specify various 
payment and business practices that are not 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 healthcare program.2  The safe harbor regulations are evolving 
rules intended to be updated periodically to reflect changing business practices and technologies 
in the healthcare industry.  In crafting safe harbors, the Secretary may consider a variety of 
factors, including increases or decreases in access to healthcare services, increases or decreases 
in the cost to Federal healthcare programs, and increases or decreases in competition among 
healthcare providers.3  Congress gave the responsibility for the development of safe harbors to 
the Secretary, and the Secretary has further delegated the authority to OIG.   
Healthcare 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 statute 
enforcement action.  The fact that a business practice does not fit in a safe harbor does not mean 
it is necessarily unlawful.  Rather, it would be examined for compliance under the anti-kickback 
statute on the basis of its facts and circumstances, including the intent of the parties.     
2.  The Discount Safe Harbor 
The original discount safe harbor regulation at 42 CFR 1001.952(h) was promulgated in 1991 
and amended in 1999 and 2002.4  The discount safe harbor recognizes that a price reduction is an 
                                                           
2 Specifically, section 1128B(b)(3) 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.   
3 See Section 205 of the Health Insurance Portability and Accountability Act of 1996. 
4 Medicare and State Health Care Programs: Fraud and Abuse; OIG Anti-Kickback Provisions, 56 Fed. Reg. 35952 
(July 29, 1991), available at https://oig.hhs.gov/fraud/docs/safeharborregulations/072991.htm; 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 Fed. Reg. 63518 (Nov. 19, 1999), 
available at https://www.govinfo.gov/content/pkg/FR-1999-11-19/pdf/99-29989.pdf; Medicare and Federal Health 
 
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inducement to purchase a product and therefore implicates the anti-kickback statute.  In its 
current form, the discount safe harborwhich is available broadly across the healthcare 
industryprotects discounts and other reductions in price to a buyer, including rebates, provided 
that all conditions of the safe harbor are satisfied. 
Summary of the Proposed Rule 
To address the Departments concerns with the current rebate system in the pharmaceutical 
supply chain, the Department proposed and solicited comments on revisions to the safe harbor 
regulations.  The stated intent of the proposed rule is to eliminate rebates from manufacturers to 
plan sponsors under Part D, Medicaid MCOs, and PBMs operating on their behalf, and replace 
them with discounts that would benefit beneficiaries at the point of sale.  In addition, the 
Department proposed a new safe harbor to protect certain fixed fees that pharmaceutical 
manufacturers pay to PBMs for certain services rendered to the manufacturers. 
1.  Proposed Amendment to the Discount Safe Harbor to Remove Protection for Discounts 
to Part D Plans and Medicaid MCOs 
First, the Department proposed to amend the current discount safe harbor to exclude from the 
definition of discount at paragraph 1001.952(h)(5) all price reductions (including rebates) from 
manufacturers on prescription pharmaceutical products in connection with their sale to or 
purchase by plan sponsors under Medicare Part D, Medicaid MCOs, directly or through 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).  
This change would have the effect of removing safe harbor protection under the anti-kickback 
statute for these price reductions.5  The proposed effective date of this change is January 1, 2020.  
The proposed rule solicited comments on the proposed exclusion and the proposed establishment 
of a new safe harbor for point-of-sale price reductions, including impact on beneficiaries, states, 
pharmacies, commercial markets, and others.   
2.  Proposed Safe Harbor for Point-of-Sale Reductions in Price for Prescription 
Pharmaceutical Products  
Second, the Department proposed to add a new safe harbor at 42 CFR 1001.952(cc) to protect 
certain point-of-sale price reductions that benefit patients when they fill prescriptions at the 
pharmacy counter.  Three proposed criteria would apply.  The reduction in price would need to 
be set in advance in writing; the reduction in price could not be a rebate unless the full value of 
the reduction in price is provided to the dispensing pharmacy through a chargeback, or the rebate 
is required by law; and the reduction in price would need to be completely applied to the price 
the pharmacy charges to the beneficiary at the point of sale.  The proposed rule solicited 
comments on how best to frame the new safe harbor to foster point-of-sale price reductions while 
minimizing any fraud or abuse risks to programs and patients.   
                                                           
Care Programs: Fraud and Abuse; Revisions and Technical Corrections, 67 Fed. Reg. 11928 (March 18, 2002), 
available at http://www.federalregister.com/Browse/AuxData/9F5C6DD8-FF39-4FB6-85C0-DBC24659C3B2.   
5 The proposed rule would not alter any rules or obligations under the Part D or Medicaid programs. 
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3.  Proposed Safe Harbor for Pharmacy Benefit Manager Service Fees 
Third, the Department proposed to add a new safe harbor at 42 CFR 1001.952(dd) specifically 
designed to protect certain fees a pharmaceutical manufacturer pays to a PBM.  These fees would 
pay for services rendered by the PBM to the manufacturer that relate to the PBMs arrangements 
to provide pharmacy benefit management services to health plans.  Among other conditions, 
protected fees would need to be fixed (i.e., not based on a percentage of sales); be set out in 
advance in writing; be fair market value for the service rendered; and not be determined in a 
manner that takes into account the volume or value of referrals or business generated between 
the parties).  The services rendered would be disclosed to plans.  The proposed rule recognized 
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 using another safe harbor.  
However, the proposed safe harbor would provide a pathway, specific to PBMs, to protect 
certain low risk service fee arrangements.  The proposed rule solicited comments on the 
proposed criteria and specifically highlighted as goals for the proposed criteria the importance of 
furthering transparency and avoiding risks connected with waste, fraud, and abuse.   
4.  Estimated Impacts of the Proposed Regulation 
 
As described more fully in the proposed rule, due to the complexity and uncertainly of 
stakeholder response, it is difficult to accurately quantify the potential benefit of the proposed 
regulation. The Department engaged the Centers for Medicare & Medicaid Services (CMSs) 
Office of the Actuary (OACT) and two independent actuarial firms (Milliman and Wakely)6 with 
experience working with Part D plan bid preparation to assess the potential effects on both 
premiums and out-of-pocket expenses.  As described in the proposed rule, certain behavioral 
responses to the regulation by industry actors and beneficiaries would potentially affect benefit 
design, plan bids and, ultimately, beneficiary and government spending.  The proposed rule 
presented six scenarios analyzed by OACT, Wakely, and Milliman.  The scenarios made 
different assumptions about how plans might change benefit offerings or how manufacturers 
might change pricing processes. 
      
Broadly speaking, the analyses show potential for beneficiaries, on average, to experience lower 
costs (combined premiums and out-of-pocket drug spending), although the impact on individual 
beneficiaries would vary greatly.  Some beneficiaries, such as sicker beneficiaries with high drug 
costs, would see savings, while others would experience increases in out-of-pocket spending, 
such as increased plan premiums.  Similarly, the analyses show variation in potential impact on 
Federal spending, with one scenario that assumed behavioral changes predicting potential 
decreased Federal spending, while other scenarios show substantial increases.  The proposed rule 
solicited comments on the estimated impacts. 
 
                                                           
6 These analyses are available at https://aspe.hhs.gov/pdf-report/prescription-drug-pricing-aspe-resources-related-
safe-harbor-rule. 
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Overview of Public Comments  
The public comment period for the proposed rule closed on April 8, 2019.  We received 
approximately 26,000 comments from a wide range of stakeholders, including PBMs, 
pharmaceutical manufacturers, Part D plan sponsors, pharmacies, wholesalers, Medicaid MCOs, 
states, consumers, and trade associations representing various individuals and entities.  We 
received extensive, thoughtful comments, and we appreciate the engagement of the public in this 
rulemaking process.  We have read, and are continuing to consider closely, all comments 
received.  We are also coordinating closely with CMS, the HHS agency that administers the Part 
D and Medicaid MCO programs. 
The comments address a broad range of topics and issues, from legal concerns to policy goals to 
practical implementation.  Key themes in the public comments include:  
  Beneficiary Out-of-Pocket Spending on Drugs.  Comments reflected broad support across 
stakeholders for reducing beneficiaries out-of-pocket spending on drugs.  
  Formularies.  Commenters made suggestions related to ensuring beneficiary access to 
drugs, raised concerns about plans using more restrictive formularies to keep premiums 
down, and supported eliminating rebates as an incentive for preferred formulary 
placement of brand name drugs over less costly, equally effective drugs (e.g., generics or 
biosimilar products). 
  Implementation.  Stakeholders raised both concerns about and support for the proposed 
implementation timeframe, as well as concerns about needed infrastructure to 
operationalize point-of-sale discounts and chargebacks. 
  Additional Guidance.  Commenters requested additional guidance and clarity regarding 
key terms and provisions, including how the chargeback process would work in the 
proposed point-of-sale price reductions safe harbor. 
  Medicaid MCOs.  Commenters requested we remove Medicaid MCOs from the 
amendments to the discount safe harbor given that most patients in these programs have 
nominal, if any, cost-sharing obligations. 
  Impacts.  Commenters offered feedback on the estimated impacts of the proposed rule on 
programs and beneficiaries. 
Conclusion 
I appreciate the opportunity to testify about the Departments proposed rule and would be happy 
to discuss the issues raised more fully after completion of the rulemaking process.   
Since 1976, OIG has provided objective, independent, credible oversight to drive positive change 
for the Department of Health and Human Services programs and the people they serve.  OIG is 
at the forefront in preventing and detecting fraud, waste, and abuse in health and human services 
programs and, where necessary, enforcement to address violations of law.  OIG carries out its 
mission through audits, evaluations, inspections, investigations, and legal actions in accordance 
with established professional standards.   
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OIGs past and current work speaks to the integrity and effectiveness of critically important 
benefits on which senior citizens depend and that taxpayers fund, such as prescription drugs, 
hospice, and nursing homes.  OIG has a rich body of work focused on ensuring that HHS 
prescription drug programs work as intended.  Protecting the integrity of prescription drug 
programs, fostering prudent payments for prescription drugs, and ensuring appropriate access to 
prescription drugs drive our efforts in this space.  Our goal is to identify opportunities to limit the 
impact of high drug prices on Federal programs and senior citizens, while protecting access to 
medically necessary drugs.  OIG will continue to work diligently to promote the effective and 
efficient operation and fiscal soundness of HHSs programs and to protect the health and welfare 
of the people they serve. 
OIG greatly appreciates the support of this Committee for its oversight and program integrity 
work.  Thank you again for the invitation to testify.  I would be happy to take your questions.   
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