Health: Key Issues Under Medicare’s Final Prescription Drug Rule
March 7, 2005
On January 28, 2005, the Department of Health and Human Services, Centers for Medicare and Medicaid Services (CMS) issued its final rulemaking for the implementation of the new Medicare Prescription Drug Benefit (the Final Rule) pursuant to Section 101 of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA). Although the Final Rule follows much of the pattern, structure and policies of the Proposed Rule issued on August 3, 2004 (the Proposed Rule), the approximately 400 pages in the Federal Register devoted to the Final Rule underscores the complexity and challenges associated with the implementation of a Medicare prescription drug benefit by January 1, 2006. Moreover, despite the Final Rule’s length, many key issues (over 40) are left to the issuance of separate guidance or information documents to be issued by CMS.
Areas addressed in the Final Rule include, but are not limited to, eligibility and enrollment, beneficiary protections, cost control and quality improvement requirements, coordination of Part D with other prescription drug coverage, application procedures and contracts, and appeals and sanctions. This summary is designed to highlight areas that reflect key changes from the Proposed Rule to the Final Rule that may be of interest to a wide cross section of the health care community. The selected areas relate to the formulary, the pharmacy network, the bid and payment process, the dual eligibles and subsidy eligible individuals, the tracking of TrOOP costs and the employer retiree plan subsidy.
The Formulary
Scope of Formulary
Although Part D Plans are not required to have a formulary or designated list of prescription drugs, the formulary will be an essential cost management tool for Part D Plans (“Part D Plan” or "Plan" as used herein may include both a Prescription Drug Plan, Medicare Advantage Plan, a PACE organization, and a cost plan, that offer qualified prescription drug coverage under Part D). The Final Rule reflects increased sensitivity to a Plan’s use of a formulary by generally expanding certain consumer protections. CMS has established a number of requirements in order to ensure that beneficiaries have sufficient access to prescription drugs. As required by the MMA, the United States Pharmacopoeia (USP) has developed a list of Part D formulary categories and classes. A formulary must have at least two drugs in each category and class and this requirement must be met with two drugs that are not therapeutically equivalent and bioequivalent. A Part D Plan that follows the USP guidelines as to classes and categories will have a “safe harbor” that the classes and categories used in its formulary will not be found by CMS to be discriminatory. The USP also provides a list of “Formulary Key Drug Types,” and the absence of at least one drug in each of these categories from a Plan’s formulary may require clinical justification.
The Final Rule establishes certain exceptions to the two drug requirement in each category and class referenced above. For example, Part D Plans can request an exemption from the requirement where there are only two drugs in a USP category or class and one drug is clinically superior to the other drug. In addition, the two drug requirement does not mandate that the formulary include all strengths and dosages of each drug. However, a Plan cannot satisfy the requirement by including in its formulary a brand name drug and a generic equivalent.
CMS also made it clear that it will analyze not only the content of the formulary but also the plan benefit design and cost management programs to determine whether the operation of the formulary will discriminate against certain classes of beneficiaries. For example, although Part D Plans may use a tiered copayment approach for generic, preferred brand and non-preferred brand drugs, tiers will be reviewed by CMS to ensure that there is sufficient access. (That is, a Part D Plan could not have a particular drug in a third tier without a first and second tier equivalent.)
Apart from the scope and content of the Part D Plan’s formulary, the Final Rule outlines a number of additional beneficiary protections. First, under the Final Rule, a Plan must have an appropriate transition process for new enrollees for prescribed Part D drugs that are not on the Plan’s formulary. Second, Part D Plans that change their formulary must give affected enrollees at least 60 days prior notice. The notice must contain the reason why the Part D Plan is removing the covered Part D drug from the formulary or changing its preferred or cost-sharing status. In addition, the notice must identify the therapeutic alternatives and the means by which the enrollee may obtain an exception.
The P & T Committee
The Final Rule also clarifies the requirements related to the composition and operation of the Plan’s Pharmaceutical & Therapeutic (P & T) committee. The P & T Committee must include at least one practicing physician and one practicing pharmacist who are free from any conflicts of interest with the Part D Plan and pharmaceutical manufacturers. Conflicts of interest as defined by the Final Rule include any direct or indirect investment in a Part D Plan or pharmaceutical manufacturer that would benefit from formulary decisions made by the Part D Plan. While the role of the P & T Committee is to be binding on the Part D Plan as to clinical matters, it may be advisory in such areas as plan design and related financial matters. CMS has indicated that it will issue further guidance about how a Part D Plan and its P & T Committee should consider cost in formulary decisions, giving due consideration to total health care costs and not just the cost of a particular drug.
The Exceptions Process
The Final Rule lays out an exceptions process to a Part D Plan’s tiered cost-sharing structure, as well as for requests to include a non-formulary Part D drug. Exception decisions are considered coverage determinations and are therefore subject to appeal under the Final Rule. In both cases, an exception is considered to be granted whenever the Part D Plan determines that the non-preferred drug or non-formulary drug is medically necessary, consistent with a physician’s statement as required under the Final Rule. However, a physician’s supporting statement will not automatically result in a favorable determination.
The Final Rule also accelerates the timeframes for exception requests and standard coverage determinations. When a party makes a request for a drug benefit, a determination must be made as expeditiously as the enrollee’s health condition requires, but not later than 72 hours after receipt of the request (or the physician’s supporting statement in an exceptions request). When a Part D Plan does not make a timely decision, the failure constitutes an adverse determination and the Part D Plan must forward the enrollee’s request to an independent review entity within 24 hours. Finally, Part D Plans must require their network pharmacies to notify enrollees of their right to receive a detailed written notice from the Part D Plan regarding the enrollee’s prescription drug coverage that includes information about the exceptions process.
The Pharmacy Network
A key issue under the MMA is the degree and extent of a Part D Plan’s network of contracted pharmacies. The Final Rule adds more precision as to the geographic areas by which access to the network will be measured. In urban areas, 90 percent of Medicare beneficiaries must live within two miles of a network pharmacy, while in suburban areas, 90 percent of Medicare beneficiaries must live within five miles of a network pharmacy. In rural areas, at least 70 percent of Medicare beneficiaries must live within 15 miles of a network pharmacy. The Final Rule makes it clear that these access standards will be determined on a statewide basis for regional plans, even if the Part D Plan’s region is larger than the state.
Access to retail pharmacies may be supplemented by non-retail pharmacies, including mail order and institutional pharmacies, but only I/T/U pharmacies (pharmacies operated by the Indian Health Service or an Indian tribe) and pharmacies operated by Federally Qualified Health Centers and Rural Health Centers will count toward the standards for convenient access. In addition, a Part D Plan’s contracted network must provide adequate access to home infusion pharmacies, as well as to long-term care pharmacies and I/T/U pharmacies who are to be offered the Part D Plan’s standard terms and conditions.
Under the “any willing pharmacy” requirement of the MMA, CMS attempts to achieve a balance in the Final Rule between a Part D Plan’s obligation to contract with any pharmacy that meets the Part D Plan’s standard terms and conditions and the ability of the Part D Plan to secure favorable payment terms. For example, the Part D Plan may reduce copayments or coinsurance for covered Part D drugs obtained through certain “Preferred Pharmacies.” As for leveling the playing field between mail order and network pharmacies, a Part D Plan must permit its enrollees to receive benefits, which may include a 90-day supply of covered Part D drugs at any of its network pharmacies including its retail pharmacies. However, the Part D Plan can again require higher cost-sharing when the drug is obtained from the retail pharmacy than when it is obtained from a mail order pharmacy. CMS will permit the Part D Plan to include both preferred and non-preferred pharmacies in the determination of whether the access standards described above have been met. Finally, “any willing pharmacy” laws under state laws are preempted by Part D to the extent those laws are applied to Part D business.
Bid Submissions/Negotiated Pricing/Payments
Bid Submissions
The Final Rule establishes the criteria by which bid submissions will be reviewed and negotiated. CMS will approve a bid only if it determines that 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 requirements for benefits provided under the plan, less the sum of the actuarial value of the reinsurance payments. The terms “reasonably and equitably” are similar to terms used by the Federal Employees Health Benefits Program, and the Final Rule, like the MMA, confirms that CMS has authority similar to that of the Director of the Office of Personnel Management in negotiating terms with Federal Employee Health Benefits Plans contractors. Although CMS reserves the right to engage in detailed bid negotiations with Part D Plans, the agency’s stated preferred approach under the Final Rule is an actuarial review. The expectation is that the competitive market will drive Part D Plans to submit bids that reasonably and equitably reflect the revenue requirements for plan benefits. However, unlike other disputes involving payment methodologies between CMS and its Part D Plan contractors, the Final Rule makes it clear that a failure to reach an agreement on the terms of a bid submission is not an issue that is subject to an administrative appeal.
There is no limit on the number of full risk plans that CMS will approve. Otherwise, priority will be given to limited risk plans that bear a greater degree of risk. Of course, if there are no risk takers in a given region, the MMA and the Final Rule provide for the selection of “fallback” plans which are not at risk. The process for selection of these plans will take place after the risk plan solicitation process, and these awards will be subject to the Federal Acquisition Regulations related to government contracts. CMS will use the Average Wholesale Price (AWP) as the price reference point for fallback plans and as a measure of their performance under a fallback contract.
Negotiated Prices
As to the issue of “negotiated drug prices,” there are two aspects of this provision that are noteworthy. First, and as required by the MMA, the negotiated price of a drug will be the basis on which the Part D Plan’s coinsurance features will be calculated as well as the basis for the price paid by the enrollee. This negotiated price is also a factor in the subsidy payments made by CMS to the Part D Plan. Yet under the Final Rule, Part D Plans may pass onto enrollees some, but not necessarily all, of the price concessions a Part D Plan receives from a drug manufacturer. Part D Plans must nevertheless set forth in their plan bids all aggregate rebates and price concessions they receive, and not just the proportion of these concessions that are passed onto the enrollees. However, reporting of rebates for payment purposes is to be done at the product level and is to occur on a quarterly basis. Of course, fallback plans must pass through the full amount of any price concessions they receive from manufacturers.
Payments to Part D Plans under the Final Rule incorporate a number of complex reconciliation mechanisms. The primary payment is a direct subsidy which is equal to the Part D Plan’s standardized bid – risk adjusted for health status – minus the base beneficiary premium. Additional payments include the reinsurance subsidy, risk corridor payment adjustments, and payments to cover certain premium and cost-sharing for low-income subsidy eligible individuals. As required by the MMA, the base beneficiary premium is adjusted (either up or down) to reflect differences between the amount of the standardized bid and the adjusted national average monthly bid amount. According to the Final Rule, if the amount of the adjusted national average monthly bid amount exceeds the standardized bid amount by an amount so great that a negative premium results, then the beneficiary premium is zero and the excess amount is applied to supplemental benefits.
In connection with the reinsurance subsidies and the risk corridor payment adjustments, the Final Rule requires Part D Plans to submit 100 percent of their prescription drug claims with specific information on the beneficiary’s identification, prescription, and drug payment and cost amounts. In making the reinsurance subsidy calculation, CMS will remove any payments for which the Part D Plan lacked documentation. Similarly, CMS will adjust the risk corridor calculation for missing documentation by assuming that the entity’s allowable risk corridor costs are 50 percent of the target amount. Documentation must be maintained for a period of 10 years, consistent with the statute of limitations requirements under the False Claims Act. These Final Rule provisions serve as an implicit warning as to the potential problems of submitting incomplete or inaccurate documentation in what is a very complex payment reconciliation environment.
TrOOP Costs
A key element of coverage under Part D is the calculation of a beneficiary’s true out-of-pocket limit or TrOOP costs. According to the MMA, once a beneficiary satisfies the TrOOP expenditure requirements, Part D will pay for 95 percent of the enrollee’s incurred drug costs. By excluding the contributions or payments of private and government insurance plans “or otherwise” from the calculation of an enrollee’s incurred TrOOP costs, employers, unions and other government programs have an incentive to continue providing these drug coverage programs at their existing cost-sharing and benefits levels. Specifically included in the enrollee’s calculation of incurred costs are Part D low-income subsidies and State Pharmaceutical Assistance Program payments.
Difficulty in calculating and tracking TrOOP costs will arise when an enrollee has both Part D and other third-party drug coverage. If a Part D Plan learns that it has made an erroneous payment due to inaccurate or incomplete information about an enrollee’s out-of-pocket spending limit, the Final Rule authorizes the Part D Plan to recover the erroneous payment directly from the Part D enrollee on whose behalf the costs were incurred. The Final Rule also provides for disenrollment of an enrollee from the Part D Plan if CMS determines that the individual materially misrepresented to the Part D Plan that the individual has or expects to receive reimbursement for third party coverage.
It is not clear at this time who is ultimately responsible for tracking enrollee TrOOP costs. The MMA does not give CMS an enforcement mechanism to impose mandatory reporting on third-party payers. CMS has suggested that Part D Plans will be responsible for working with the enrollee’s other drug coverage insurers to ensure that the enrollee’s benefits are coordinated and that out-of-pocket drug costs are accurately tracked. CMS, however, is also to play a role in ensuring that benefits are coordinated and TrOOP costs are tracked, although the engagement of a TrOOP facilitator to handle these data exchanges is not reflected in the Final Rule as many potential contractors had hoped.
Dual Eligibles and Subsidy Eligible Individuals
As of January 1, 2006, the obligation to provide drug benefits for dual eligibles (approximately six million individuals) moves from State Medicaid programs to Part D Plans. As of this date, there will be no Medicaid matching funds available for Part D drugs provided for full-benefit dual eligible individuals. States will be required to make a contribution through the “claw back” provisions of the MMA.
Under the Final Rule, CMS will automatically enroll full-benefit dual eligible Medicare beneficiaries into a Part D Plan if the individual has not chosen a Part D Plan by December 31, 2005. Once enrolled, dual eligible beneficiaries will be able to opt out of their Part D Plan and select an alternative Part D Plan. Under the Final Rule, all Part D Plans are required to have a transition policy that details how they will meet the drug needs of dual eligibles and other vulnerable populations during the initial period of their enrollment.
CMS will also “facilitate” the enrollment of beneficiaries eligible for low-income assistance. The Final Rule requires the Social Security Administration and State Medicaid programs to make low income subsidy eligibility determinations, but CMS will notify the Part D Plan of the individuals eligible for subsidy and the amount of the subsidy. The Final Rule also confirms that Part D Plans will be required to reimburse subsidy eligible individuals for out-of-pocket expenses incurred after the effective date of the individual’s subsidy eligibility. The Part D Plan must also track the application of these subsidies in order to be applied to the out-of pocket threshold for TrOOP purposes. In light of the MMA’s provision for “risk adjusted” direct subsidy payments to Part D Plans, CMS recognizes that the enrollment of low-income subsidy individuals may have a material impact on any risk adjustment payment methodology due to the higher anticipated expenditures for this population. CMS indicates that additional details will be forthcoming with its release of the risk adjustment factors.
Employer Retiree Plans
The Final Rule provides employer and union retiree drug plans with a number of options to qualify for the retiree subsidy provided under the MMA. The overall objective is to slow the decline in employer-sponsored retiree health plans by having the government pay an employer a tax-free subsidy equal to 28 percent of the qualifying enrollee’s allowable annual prescription drug costs between $250 and $5,000. As one of the conditions to qualify for the subsidy, the employer plan must provide coverage that is at least “actuarially equivalent” to the Medicare Part D benefit. In this regard, the Final Rule liberalizes the tests for actuarial equivalence through a two pronged test.
The first prong (the gross value test) evaluates the overall value of the benefits offered by the employer’s plan. The gross value of the employer plan (based on actual claims experience and without regard to retiree contributions) must be at least of equivalent value to the standard Medicare Part D Plan. The second prong is a “net value” test. This test evaluates the employer’s contribution to financing the drug benefit, and then subtracts beneficiary premiums and other contributions from the overall value of the benefit for comparison to the Medicare Part D Plan.
Another issue addressed in the Final Rule is how actuarial equivalence is determined in an insured product context. Sponsors of group health plans may elect to determine gross covered plan-related retiree prescription drug costs based on a portion of the premium costs paid by the sponsor (or by the qualifying covered retirees) for coverage of the covered retirees under the group health plan. Premium costs may be attributable to the gross prescription drug costs incurred by the health insurance issuer for the covered retirees, except that administrative costs and risk charges must be subtracted from the premium.
In summary, the Final Rule underscores the potential complexity in the implementation of a Medicare drug benefit by January 1, 2006. For many Part D Plans, a number of key financial and administrative exchange issues are not addressed in the Final Rule and will be the subject of separate operational guidances published by CMS. In the interim, an aggressive submission schedule is already in place for potential Part D Plan sponsors who will need to weigh carefully the risks and benefits of administering Medicare’s new drug benefit.
