The Evidence Base

Informing Policy in Health, Economics & Well-Being
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Will the Rebate Rule need Extra Innings?

Now that the Trump Administration has finalized its rule banning rebates on prescription drugs in the Medicare Part D program, what happens next?  Should we assume that the pharmaceutical supply chain will begin re-wiring itself?

First, the rule will almost certainly face legal challenges from impacted stakeholders, especially pharmacy benefits managers (PBMs). As is typical in regulatory matters, there will often be both process challenges as well as substantive challenges regarding the scope or appropriateness of the authority exercised by the Department of Health and Human Services (HHS).

The process challenges would likely focus on the unusual path the rule took towards finalization. In order to conduct rulemaking, HHS must comply with the requirements of the Administrative Procedure Act (APA), particularly the requirement to provide the public with adequate notice and a meaningful opportunity to comment on the rule’s content prior to its enactment. HHS did take comment from the public on the originally proposed version of the rebate rule. However, the White House and HHS then announced that the final version of the rule had been withdrawn from consideration. Often, the withdrawal of a proposed rule from the APA process would be noticed in the federal register, but that did not happen here. We discussed this in July, and our former Office of Management and Budget (OMB) colleague Bridget Dooling recently offered a different opinion here.

Second, the rule could also encounter opposition from the incoming Biden Administration. The new safe harbor for point-of-sale reductions in price is set to take effect 60 days from the date of publication in the Federal Register, or January 29, 2021.[1] The more significant changes to the discount safe harbor will not take effect until January 1, 2022.  Assuming the rule survives legal challenges, and with plan bids due in early June of 2021, the Biden Administration would need to act quickly if it wants to change any aspects of the final rule. Such changes would likely need to go through notice and comment rulemaking.

Other Avenues Exist for the New Administration or Congress to Delay or Even Undo the Final Rule

If what’s past is prologue, we can expect an inauguration day memorandum from the new White House Chief of Staff to all heads of executive departments and agencies, instructing these officials to extend the effective date of any regulations that have been published in the Federal Register but that have not yet taken effect. This extension period would allow the new administration to review questions of law and policy. These inauguration day suspensions have been motivated by the flurry of “midnight rulemaking” by outgoing administrations. In the past 20 years, the chiefs of staff for George W. Bush, Barack Obama, and Donald Trump all issued such memoranda.[2]

Under the APA, such delays cannot be open-ended, since that would be a de facto substantive change to a duly enacted regulation. To lawfully make a change to a rule, the APA demands that agencies go through notice and comment rulemaking. Presumably in recognition of this fact, to evade judicial review, inauguration day memoranda have historically directed agencies to limit any suspensions to 60 days.[3]

If as expected the Biden Administration postpones the effective dates of recently issued final regulations, any changes in the rebate rule, including a longer-term suspension of its effective date, would have to be done through notice and comment rulemaking under the APA.

Another tool used, albeit less frequently, to veto midnight rules is the Congressional Review Act (CRA).  As the name suggests, this law provides Congress with an opportunity to review certain “major” rules prior to them becoming operative. Congress can attempt to invalidate a rule through a joint resolution of disapproval. If such a resolution is approved by both Houses of Congress and signed by the President, the rule at issue cannot go into effect, and cannot be re-issued. Importantly, Congress cannot re-write a rule to better reflect its desired policy.  The CRA can be used only to invalidate an agency final rule in its entirety.

Per the CRA, any major rule should not take effect until the later of (a) 60 days from when the rule is submitted to both Houses of Congress and the Comptroller General or (b) 60 days from the date the rule is published in the Federal Register.  Once the rule is received by Congress, a joint resolution of approval must be introduced within 60 “days of continuous session.” If Congress adjourns its annual session prior to the expiration of the 60-day clock, the clock resets in the next session of Congress.

The rebate rule is designated as a major rule, meaning it is subject to Congressional review.  With fewer than 60 days left in this annual session, the 117th Congress will have a new 60-day period to review the rebate rule and take action. In the 115th Congress (January 3, 2017 – January 3, 2019), the CRA was successfully invoked 16 times to overturn Obama-era regulations. Prior to that, use of the CRA process was rarely attempted, and even when it was, such attempts were rarely successful. Even if there was an appetite to legislatively overturn the rebate rule, for such a resolution to succeed, it would require the support of least one or two Senate Republicans, assuming Republican control of the Senate following the Georgia runoff elections in January. While this does not eliminate this tool altogether, it likely narrows the scope of regulations Democrats would seek to address through this process. There is also a question of legislative strategy to consider, with some Hill experts mentioning the $177 billion increase in federal spending projected by the Congressional Budget Office could be used to pay for many other spending priorities.

The publication of the final rebate rule is an important milestone in this administration’s drug pricing journey. However, many challenges remain including the procedural issues described above. There are also questions about how the Biden administration and incoming Congress will view the role of PBM-negotiated rebates and prioritize out-of-pocket costs through the lens of competing premium estimates. While all eyes are on the umpires for now, continue to watch this blog for future discussions about recent—and future—drug pricing policy!

[1] The final rule is scheduled to be published in the Federal Register on November 30, 2020.

[2] Memorandum from Andrew Card to the Heads and Acting Heads of Executive Departments and Agencies (Jan. 20, 2001) (the Card Memorandum); Memorandum from Rahm Emanuel to the Heads of Executive Departments and Agencies (Jan. 20, 2009) (the Emanuel Memorandum); Memorandum from Reince Priebus to the Heads of Executive Departments and Agencies (Jan. 20, 2017) (the Priebus Memorandum).

[3] Courts have invalidated attempts to delay regulatory effective dates outside of this 60-day window.  See, e.g., Nat. Res. Def. Council v. Abraham, 355 F.3d 179 (2d Cir. 2004) (invalidating a rule, issued by the Department of Energy pursuant to the Card Memorandum, that indefinitely delayed the effective date of a regulation because it was a substantive change that had not been issued in accordance with the APA); Nat’l Venture Capital Assn v. Duke, 291 F. Supp. 3d 5 (D.D.C. 2017) (holding that the Department of Homeland Security had inappropriately delayed the effective date of a final rule when it waited 6 months from the date of the Priebus Memorandum to act, and did not have good cause to waive notice-and-comment requirements under the APA).

John O’Brien is a senior fellow at the USC Schaeffer Center for Health Policy & Economics and partner at South Capitol, and served as Senior Advisor to the Secretary and Deputy Assistant Secretary for Health Policy at the U.S. Department of Health & Human Services (HHS) under the Trump Administration 2017 to 2019. He is also a consultant to leading pharmaceutical manufacturers, health insurers, pharmacies, technology companies, and investment firms.

Kelly Cleary is a Partner at Akin Gump Strauss Hauer & Feld LLP, and served as Deputy General Counsel at HHS and Chief Legal Officer for the Centers for Medicare & Medicaid Services (CMS) under the Trump Administration from 2017-2020. She represents a diverse array of health care and life sciences participants —including hospitals, academic medical centers, cancer centers, health IT companies, and pharmaceutical and device manufacturers—on health care policy, regulatory and enforcement matters.

John Brooks is a partner at South Capitol, and served as Senior Advisor to the Secretary, Principal Deputy Director for the Center for Medicare at the Centers for Medicare and Medicaid Services, and health policy advisor at the White House Domestic Policy Council under the Trump Administration from 2017 to 2020. He is also a consultant to leading pharmaceutical manufacturers, health insurers, pharmacies, technology companies, and investment firms.