New Part D Final Rule: What CMS Still Doesn’t Get about Pharmacies, PBMs, and Preferred Networks

Today, the Centers for Medicare & Medicaid Services (CMS) officially published its Final Rule Part D rule for 2015. Savor the bureaucratese in the aptly-named Contract Year 2015 Policy and Technical Changes to the Medicare Advantage and the Medicare Prescription Drug Benefit Programs.

As I discuss in Run Away: CMS Abandons Part D Preferred Pharmacy Network Changes, CMS strategically retreated from its original Medicare Part D plans to alter preferred networks and Any Willing Provider (AWP).

Below, I highlight a few questionable aspects in CMS’s reasoning. Its self-serving explanations for the turnaround are fascinating. Oscar Wilde once said: “We are never more true to ourselves than when we are inconsistent.” By that standard, CMS is an organization of rare self-awareness.

CMS is proceeding with significant changes to Maximum Allowable Cost (MAC) rules for pharmacy benefit managers (PBMs), continuing an intriguing trend toward so-called MAC transparency. It also explains why the pharmacy industry is especially afraid of the forthcoming Average Manufacturer (AMP) finalization.

GENTLEMEN PREFER NETWORKS

As the Backstreet Boys describe in CMS Wants It That Way: Big Medicare Part D Pharmacy Changes, CMS originally proposed rules that would have effectively stopped the fast-growing Medicare Part D preferred pharmacy phenomenon. For an overview of preferred networks’ popularity, see our exclusive analysis in For 2014, 3 out of 4 Seniors Choose a Narrow Network Medicare Drug Plan—and Humana, UnitedHealthcare Win Big.

In “Preferred Cost Sharing (§§ 423.100 and 423.120)” (on page 29879), CMS explains its reversal, but in a way that leaves the door wide open for further meddling.

I agree with CMS’s underlying premise: A beneficiary’s lower out-of-pocket costs at a preferred pharmacy should not translate to higher costs for me, the taxpayer. CMS states this principle as follows:

“Therefore, we proposed to clarify that preferred cost sharing should signal consistently lower costs. When lower cost sharing correctly signals the best prices on drugs, then choosing pharmacies on the basis of that lower cost sharing lowers not only beneficiary out-of-pocket costs, but also Part D plan and other government subsidy costs.”

Alas, CMS was forced to acknowledge that translating this sentiment into policy is much harder than it seems, writing:

“[M]any dispute our proposal to make this determination based entirely upon negotiated prices. They assert that the reference in the statute to ‘an increase in payments’ does not refer solely to negotiated prices but must also take into consideration the direct subsidy, reinsurance subsidies, end of year reconciliation, and beneficiary premiums.”

In other words, pharmacy prices are not a complete measure of total system costs. CMS can therefore back away from its proposal, noting: “Clearly if some price concessions are not reflected in the negotiated price, a higher negotiated price may not result in increased payments to plans.”

Despite this admission, CMS rejects the reasonable methodological concerns raised about its simplistic preferred network study, described in New CMS Study: Preferred Pharmacy Networks are Cheaper (Except When They’re Not). As published, the CMS study would never pass a peer-review process. Apparently, bureaucrats don’t lose any sleep over such matters, before making national health policy.

Take note of the fact that CMS reiterated its authority to implement these requirements in the future. Its 2015 Final Call Letter states that CMS is studying beneficiary access and network adequacy standards.

I expect a legal challenge when CMS does insert itself between pharmacy-PBM negotiations.

NO ONE IS SPECIAL?

The discussion in “Any Willing Pharmacy Standard Terms & Conditions (§ 423.120(a)(8))” (page 29885) refers to an especially controversial proposed change. CMS claims to have received 4,000 (!) comments on its AWP proposal. While CMS abandoned these changes (for now), its discussion reinforces CMS’s fundamental misunderstanding of economic incentives.

As I explain in Straight From the FTC: Why Any Willing Provider Laws Hike Costs, narrow networks work because pharmacies are willing to accept lower prescription reimbursements to boost store traffic as a “preferred” provider. If there is no business advantage to discounting, then pharmacies won’t compete for a plan’s business. Beyond simple logic, there is extensive economic evidence to support this premise.

Alas, CMS casually disregards the evidence. This statement was especially shocking:

“We agree with many of the commenters who wrote that beneficiaries should be able to choose where they obtain their pharmacy services, and we are very concerned to hear that the current incentives (and potentially current marketing of pharmacies offering preferred cost sharing) lead many beneficiaries to believe that only those pharmacies offering preferred cost sharing can be used.”

In other words, CMS rejects the fundamental premise of narrow networks—which just so happen to be a key element of the Affordable Care Act's health plans! Even the New York Times had to report this reality: “No matter what kind of health plan consumers choose, they will find fewer doctors and hospitals in their network — or pay much more for the privilege of going to any provider they want.” (source)

Apparently CMS disagrees with itself about the value or applicability of narrow networks. Such are the dubious pleasures of reading the Federal Register.

Stay tuned, as CMS will be watching. It warns:

“We will be closely studying preferred cost sharing practices, including the associated point-of-sale drug pricing, going forward. In response to the comments suggesting that CMS use its current authority to respond to plan offerings that we determine to be discriminatory in its proposed availability and access to preferred cost sharing, we will further explore our authority in this area. In addition, we plan to closely monitor beneficiaries' access to preferred cost sharing, as well as drug pricing by pharmacies offering preferred cost sharing, to determine whether future rulemaking in this area is necessary.” (emphasis added)

CMS believes in its legal authority to implement whatever changes it wants. (“We disagree with the comments suggesting that this provision violates the non-interference provision.”) More experienced legal minds disagree. Expect future battles over this subject.

BIG MAC ATTACK

In “Prescription Drug Pricing Standards and Maximum Allowable Cost (§ 423.505(b)(21)” (page 29882), CMS finalized its proposed rules regarding the disclosure and updating of MAC reimbursement limits.

This change is a big win for the pharmacy industry. It brings Medicare Part D closer to many state laws, which were summarized in last week’s guest post, Drug Pricing Transparency Legislation Demands Sound Methodology in Setting MACs.

With the Final rule, CMS defines "prescription drug pricing standard" in regulation, as:

“any methodology or formula for varying the pricing of a drug or drugs during the term of a pharmacy reimbursement contract that is based on the cost of a drug, which includes, but is not limited to, drug pricing references and amounts that are based upon average wholesale price, wholesale acquisition cost, average manufacturer price, average sales price, maximum allowable cost, or other cost, whether publicly available or not."

As a result, MAC prices would be subject to the requirement that they “accurately reflect the market price of acquiring the drug” and be updated “not less frequently than once every 7 days.”

CMS is also requiring Part D sponsors to “disclose all individual drug prices to be updated to the applicable pharmacies in advance of their use for reimbursement of claims, if the source for any prescription drug pricing standard is not publicly available.” Thus, Part D sponsors “have to convey to network pharmacies the actual maximum allowable cost prices to be changed in advance.”

As a small concession to the implementation challenges, CMS is delaying the effective date until January 1, 2016.

Before opening the champagne, the pharmacy industry should consider what alternatives may exist for computing MACs. For example, in July, CMS will allegedly finalize the Average Manufacturer Price (AMP) data, leading to AMP-based Federal Upper Limits (FULs) in Medicaid. See Obamacare Will Squeeze Pharmacy Profits. Could these data, which will likely be negative for the pharmacy industry, emerge as a government-sanctioned MAC standard?

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Please leave your comments and observations below. If you are one of the foolhardy souls who actually read the Federal Register notice, please let me know what I missed.