CMS Proposes Rule on Medicare’s New Drug Benefit
September 22, 2004
On August 3, 2004, the U.S. Department of Health and Human Services, Centers for Medicare and Medicaid Services (CMS) issued a proposed rulemaking for the implementation of the new Medicare Prescription Drug Benefit (proposed rule) pursuant to Section 101 of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA). The new prescription drug benefit under Medicare represents one of the most significant changes in the Medicare program since its inception almost 40 years ago. The challenges associated with the implementation of this benefit by January 1, 2006 are confirmed by the length of the proposed rule (well over 200 pages in the Federal Register) and the broad range of topics encompassed by it. Comments on the proposed rule are due by October 4, 2004.
Areas addressed in the proposed rule include, but are not limited to, eligibility and enrollment, beneficiary protections, cost control and quality improvement requirements, the Part D plan bid process, premiums and subsidies, coordination with other Part D prescription coverage, grievance and appeals and the retiree drug subsidy. There are certain areas in the proposed rule that may interest a wide cross-section of the health care community. The selected areas include the competitive bid process and drug pricing, the design and operation of formularies, the enrollment process and late enrollment penalties, marketing to Medicare beneficiaries and the retiree drug subsidy.
The Competitive Bid Process and Drug Pricing
The design of the prescription drug program under the MMA is based on a competition model where Prescription Drug Plans (PDPs) and Medicare Advantage Plans with a qualified prescription drug plan (MA-PDs) will compete in the marketplace on the basis of premium bids submitted to CMS. Collectively these plans are referred to as “Part D Plans.” Pursuant to the MMA, there is no schedule established by CMS for what is an appropriate price for a prescription drug covered by Part D.
The proposed rule, reflecting the requirements of the MMA, provides CMS with the authority to negotiate bids and benefit designs with Part D Plans similar to the authority the Office of Personnel Management has under the Federal Employees Health Benefits Program. CMS is to only approve a bid if it determines the portions of the bid attributable to basic and supplemental prescription drug coverage are supported by the actuarial bases provided and “reasonably and equitably” reflect the revenue requirement for the benefits (less the sum of the actuarial value of the reinsurance payments subsidy from CMS for catastrophic coverage provided under Part D). In addition, CMS will not approve a bid if CMS finds the design of the plan and its benefits (including any formulary and tiered formulary structure) are likely to substantially discourage enrollment by certain Part D eligible individuals.
Although CMS is prohibited by the MMA from establishing a price for a particular drug, the preamble provides some insight into those areas where CMS believes it can exercise its negotiating authority with Part D Plan bidders. For example, the agency states “we could exercise our authority to deny a bid if we do not believe that the bid and its underlying prices reflect market rates.” In addition, if CMS found Part D Plan’s data differed significantly from its peers without any indication as to the factors accounting for this result, CMS would ask bidders to provide information about rebates and discounts they are receiving from manufacturers and others in order to ensure “they are negotiating as vigorously as possible.” The preamble also suggests that CMS would be able to inquire as to the net cost of the drugs and could go back to bidders and request they explain their pricing structure, the nature of their arrangements with manufacturers and take further action to ensure there is no conflict of interest leading to higher bids. In addition, although CMS interprets the MMA as prohibiting CMS from setting a regulated price of any particular drug or imposing an average discount in the aggregate on any group of drugs, CMS believes it is allowed to seek a justification of aggregate price levels for groups of drugs. In any event, CMS makes clear it expects to rely principally on the competitive bid process for controlling the price of drugs. Nevertheless, the preamble describes how the agency’s negotiating power may be used to curb unsupported increases in drug prices that become part of a Part D Plan’s bid.
Design and Operation of a Formulary
Although the MMA does not require a Part D Plan to establish a formulary per se, it is clearly envisioned that formularies will be critical cost-management tools to be employed by Part D Plans. The MMA requires the inclusion in the formulary of drugs in each therapeutic category and class of covered Part D drugs, although not necessarily all drugs within such categories and class. The proposed rule interprets this requirement to include at least two drugs within each therapeutic category and class of covered Part D drugs within the formulary (unless there is only one drug in a particular therapeutic class or category).
As required by the MMA, CMS has requested the U.S. Pharmacopoeia (USP) to develop a model set of guidelines that consists of a list of drug categories in a class that may be used by Part D Plans to develop formularies. Part D Plans will still have the flexibility to develop their own classification schemes. The value of using the model guidelines is that CMS could not determine, based on the formulary’s therapeutic classifications, that the Part D Plan violated the MMA prohibition that the formulary substantially discouraged enrollment by certain Part D eligible individuals. However, although the USP model guidelines provide a safe harbor as to classes and categories, the preamble makes it clear even if a Part D Plan’s formulary conforms to the USP classification model, its overall formulary design could still be an issue. The determination would be whether particular drugs selected for inclusion in the formulary and/or a proposed cost-tiering structure discouraged enrollment by certain Part D eligible individuals.
As to changes in the formulary, plans could not change therapeutic classes of categories other than at the beginning of a plan year or as permitted by CMS to take into account new therapeutic use and newly approved Part D drugs. In addition, Part D Plans would be required to provide “appropriate notice” to CMS, affected enrollees, authorized prescribers, pharmacists and pharmacies regarding any decision to either remove a drug from its formulary or make any change in the preferred or tiered cost sharing status of a drug. Appropriate notice is defined by the Proposed Rule to be at least 30 days prior to the change taking effect during a given contract year. The notice would need to go only to “affected enrollees,” that is, not all enrollees, only those directly affected by the changes with respect to a particular covered Part D drug. Finally, under the proposed rule, a Part D Plan would be prohibited from removing a covered Part D drug or changing its preferred or tiered cost-sharing status between the beginning of the annual coordinated election period (a period identified by the MMA and now defined by the proposed rule) and 30 days subsequent to the beginning of the contract year associated with the annual coordinated election period.
Finally, Part D Plans can transmit information regarding formulary changes to beneficiaries via an internet website, as well as explanations of benefits sent to enrollees who utilize their Part D benefits. CMS acknowledges that other methods will have to be used to provide notice to CMS, all affected enrollees, authorized prescribers, pharmacists and pharmacies about formulary changes.
The proposed rule also identifies an exceptions process to the Part D Plan’s tiered cost-sharing structure. The approach adopted by the proposed rule is one of general guidance in order to allow “flexibility and innovation” while more experience with the program is accumulated. The exceptions process represents a challenge in balancing consumer protections with the need for Part D Plans to insist on adherence to the formulary if drug costs are to be effectively managed. The exceptions process must address three sets of circumstances: when the enrollee is using a drug and the tiered-cost sharing changes mid-year; when the enrollee is using a drug and the tiered cost-sharing changes at the beginning of a new plan year; or when there is no preexisting use of the drug by the enrollee.
The exception criteria set forth in the proposed rule include a description of the criteria used to evaluate a determination made by the enrollee’s prescribing physician; consideration of the cost difference between the preferred drug and the requested drug; consideration of whether the request is the therapeutic equivalent of any other drug on the formulary; and consideration of the number of drugs on the formulary that are in the same class and category as the requested drug.
The proposed rule also creates an exceptions process for nonformulary drugs even though the MMA does not specifically require this process. The exceptions process for non-formulary drugs would include the following: coverage of covered Part D drugs not on a sponsor’s formulary; continued coverage of a drug the sponsor has removed from the formulary; step therapy requirements; and when the drug would not be covered at the prescribed number of doses due to dose limitations.
Since the exceptions process is viewed by the proposed rule as a coverage determination, the enrollee in a Part D Plan has the right to request a redetermination of an unfavorable coverage decision, as well as the right to request a reconsideration by an independent review entity.
The Enrollment Process and Late Enrollment Penalties
One objective of MMA is to encourage enrollment by Medicare beneficiaries in Part D Plans in a way that limits the impact of adverse selection. As a result, there are limits on when an eligible individual can enroll in a Part D Plan. Three enrollment periods are recognized by the MMA: an initial enrollment period, an annual coordinated election period and special enrollment periods. Under the proposed rule, the initial enrollment period and the annual coordinated elections periods are specified. Beyond the initial implementation phase of MMA, the annual coordinated election period would be November 15 through December 31 for coverage beginning January 1 of the next year. Although there is no open enrollment period as is the case with Medicare Advantage Plans, the proposed rule lays out a set of conditions for “Special Enrollment Periods.” These include, but are not limited to, an individual’s involuntary loss of “Creditable Prescription Drug Coverage.”
The proposed rule identifies certain types of drug coverage that are considered to have creditable status. However, such coverage is creditable only if the actuarial value of the coverage equals or exceeds the actuarial value of defined prescription drug coverage. The test that CMS proposes to evaluate the actuarial value of the alternative coverage is whether the expected plan payout on average under the alternative coverage is at least equal to the expected plan payout under the Part D benefit. In addition, under the Proposed Rule, CMS would require entities (other than PDPs and MA-PDs plans) providing drug coverage to disclose to CMS and Part D eligible individuals whether or not the drug coverage is meeting the requirements for actuarial equivalence. CMS, in the Preamble, notes a concern about the administrative burden that these notice requirements may present and requests comments on the format, placement and timing of such notices.
To the extent that an individual enrolls in a Part D Plan outside of the above enrollment periods, there is a late penalty amount that is to be charged to the individual. The MMA provides for a late enrollment penalty for those beneficiaries who fail to maintain creditable prescription drug coverage for a period of 63 days following the last day of an individual’s enrollment period. The proposed rule establishes the penalty as the greater of an amount that CMS determines is actuarially sound for each uncovered month in the same continuous period of eligibility, or one percent of the base beneficiary premium for each uncovered month in the period. The objective of the proposed rule’s late penalty feature is to encourage immediate, widespread participation and to limit the potential for adverse selection.
Marketing to Medicare Beneficiaries
Similar to the manner in which CMS operates the Medicare Advantage Program, CMS would use the same marketing guidelines for reviewing materials under Part D. In addition, a “File and Use” process would be implemented to facilitate the expedited review and approval of marketing materials (file and use within 45 days if not disapproved or 10 days if using materials that use, without modification, proposed model language specified by CMS). In addition, Part D Plans deemed by CMS to meet certain performance requirements may distribute designated marketing materials five days after submission to CMS.
CMS also recognizes in the proposed rule that there may be distinct marketing considerations for Part D Plans where Medicare Advantage marketing restrictions are not appropriate. For example, CMS asks for input as to the advisability of allowing Part D Plans to provide additional products (such as financial services) in conjunction with prescription drug plan services. There is a suggestion in the preamble that having this capacity would be a key incentive for entities to participate as Part D Plan sponsors. In addition, although CMS prohibits enrollment forms from being accepted in provider offices under the Medicare Advantage marketing rules, CMS states that it may not be appropriate to extend this prohibition to the relationship between PDP sponsors and pharmacies with respect to marketing a prescription drug plan under Part D.
It should be noted that the MMA authorizes CMS to provide plans with information about Part D eligible individuals to facilitate the plans’ marketing and enrollment of beneficiaries in the Part D program. There is no specific proposed rule for implementing this authority, although CMS acknowledges in the preamble that it has a number of operational questions on how this should be implemented. These questions include whether beneficiaries have an opt-out right, whether Part D Plans can contact beneficiaries in writing or by phone, what specific information should be provided to the Part D Plan and if there should be different standards for permitted contacts with prospective enrollees given that enrollment in Part D is voluntary.
Retiree Drug Subsidy
Under the MMA, a retiree drug subsidy payment (28 percent of allowable drug costs) is to be made to sponsors of qualified retiree prescription drug plans. The preamble refers to four goals in adopting the retiree drug subsidy including the following:
-
maximize the number of retirees who retain employer-based coverage
-
avoid creating “windfalls” to employers
-
minimize the administrative burdens on beneficiaries, employers and unions
-
minimize the cost to the government of providing drug coverage
In order to be a qualified retiree prescription drug plan, the employer’s plan must be at least actuarially equivalent to the Part D benefit. However, the proposed rule does not define what is meant by actuarial equivalence for these purposes. Instead, the preamble identifies three alternatives that are under consideration and requests comments.
The proposed rule would also require employers requesting the subsidy to submit an annual actuarial attestation to CMS. The attestation is to be signed under the penalty of perjury and would contain an acknowledgement that the information being provided is being used to obtain federal funds. Clearly the final definition of actuarial equivalence will be a key concern to employer sponsors of retiree drug coverage, particularly in light of the potential False Claims Act exposure employers and their administrators may have under MMA.
The above summary provides a review of selected provisions of the proposed rule. Other key areas that will have a material impact on Part D Plans include the bid submission process, risk sharing corridors and reinsurance subsidy calculations, all of which represent potential False Claims Act concerns. In addition, the administration of the low income subsidy program authorized by the MMA will be a major challenge given the complex exchange of information and payments that is to occur between Part D Plans and government agencies at both the federal and state levels. Finally, coordination of benefits will also be an area for Part D Plans to closely monitor, particularly in the area of tracking true out-of-pocket expenditures (TROOP) of Part D enrollees under MMA. Under MMA other prescription drug coverages will impact the $3,600 catastrophic coverage protection provided to a Part D enrollee under MMA. The process as to who bears primary responsibility for tracking TROOP costs and how an effective exchange of data can be accomplished for these costs are areas that CMS acknowledges require further thought and development.
