CMS Issues Proposal to Amend Medicare Parts C and D

by King & Spalding

On November 26, 2018, CMS published a proposed rule (the Proposed Rule) to amend the Medicare Advantage (MA) program and Medicare Part D with the goal of allowing health and drug plans to negotiate for lower drug prices and reducing out-of-pocket costs for Part C and D enrollees.  The deadline for submitting comments on the Proposed Rule is January 25, 2019.  The Proposed Rule is the latest effort in the implementation of the Trump Administration’s Blueprint to Lower Drug Prices and Reduce Out-of-Pocket Costs (Drug Pricing Blueprint), which was released in May 2018.

The Drug Pricing Blueprint outlined the following four strategies to lower drug prices and reduce out-of-pocket costs: 1) improve competition, 2) allow for better negotiation, 3) create incentives for lower list prices, and 4) lower out-of-pocket costs.  CMS touts the Proposed Rule as a means to “remove administrative hurdles to offer lower cost options to seniors and provide support for private sector partners by providing them the tools to lower the cost of prescription drugs.”  CMS several weeks ago issued a proposed rule related to Part B, and this newest rulemaking is one of several expected rulemakings that follows.

Major Proposed Provisions

Providing Plan Flexibility to Manage Protected Classes

Under the current regulations, Part D sponsors have the power to create their own prescription drug formularies provided they cover at least two drugs per “therapeutic class,” but are required to include in their formularies the following six protected classes: 1) antidepressants; 2) antipsychotics, 3) anticonvulsants; 4) immunosuppressants for treatment of transplant rejection; 5) antiretovirals; and 6) antineoplastics.  Part D plan formularies must include all drugs in these “protected classes” unless the Secretary has provided otherwise through “established exceptions.”  See 42 U.S.C. § 1395w-104(b)(3).  Prior to this Proposed Rule, CMS has not established any exceptions or otherwise changed the six classes.

The Proposed Rule purports to give Part D sponsors greater flexibility to negotiate discounts for drugs in the protected classes, and to reduce the leverage drug manufacturers have in negotiating rebates.  The Proposed Rule seeks to add exceptions to allow Part D sponsors to do the following:

  • Broaden the use of prior authorization (PA) and step therapy for protected class drugs;
  • Exclude from the formulary protected class drugs that are a new formation of a protected class Part D drug, even if the older formulation is removed from the market; and
  • Exclude from the formulary any protected class drug when an increase to its list price outpaces inflation (proposed to be measured by the consumer price index).
  • E-Prescribing and the Part D Prescription Drug Program; Updating Part D E-Prescribing Standards

Under the Proposed Rule, sponsors will be required to implement an electronic real-time benefit tool (RTBT) that is capable of integrating with prescribers’ e-prescribing and electronic medical record (EMR) systems on or before January 1, 2020.  The Proposed Rule states that RTBT tools have the capability to inform prescribers when lower-cost alternative therapies are available and allow prescribers access to “complete, accurate, timely, clinically appropriate and patient-specific real-time formulary and benefit information.”  Additionally, CMS states that evidence suggests that reducing medication costs also yields benefits in patients’ medication adherence.

Medicare Advantage and Step Therapy for Part B Drugs

The Proposed Rule memorializes a previously issued policy issued by CMS allowing MA plans to apply step therapy as a recognized utilization management (UM) tool for Part B drugs.  The Proposed Rule reaffirms MA plans’ authority to implement appropriate UM and PA programs to reduce costs to both beneficiaries and the Medicare program.  CMS believes that allowing plans to use UM tools, such as step therapy, will enhance the ability of MA plans to negotiate Part B drug costs and thus reduce costs for MA beneficiaries overall or per unit for Part B drugs.  The Proposed Rule will place the following limitations on the use of step therapy: step therapy requirements may only apply to new starts of medication; step therapy must be reviewed and approved by the plan’s pharmacy and therapeutics committee; and, coverage requests related to Part B drugs will be subject to short adjudication timeframes that mirror the current rules in Part D.

Pharmacy Price Concessions to Drug Prices at the Point of Sale

According to 42 U.S.C. § 1395w-102(d)(1)(B), “negotiated prices shall take into account negotiated price concessions, such as discounts, direct or indirect subsidies, rebates, and direct or indirect remunerations, for covered Part D drugs, and include any dispensing fees for such drugs.”  Additionally, under the current regulations, the “negotiated prices” of drugs must include all price concessions from network pharmacies except those that cannot reasonably be determined at the point of sale.  Sponsors “are allowed, but generally not required, to apply rebates and other price concessions at the point of sale to lower the price upon which beneficiary cost-sharing is calculated.” 

Sponsors have historically been able to successfully negotiate price concessions from network pharmacies, known as “DIR Fees,” which are often applied after the point-of-sale.  Thus, sponsors generally may choose whether or not to include those concessions when calculating negotiated price.  And as the share of pharmacy remuneration contingent on performance grows, “the negotiated price is rendered less transparent at the individual prescription level and less representative of the actual cost” to the insurer.  According to CMS, these price concessions have made it “increasingly difficult for consumers to know at the point of sale what share, or approximate share, they are paying of the costs of their prescription drugs to the plan.”  As a result, consumers cannot minimize their own costs, or the costs to the government. 

Under the Proposed Rule, in a future plan year, which may be as early as 2020, CMS would redefine “negotiated price” to eliminate the “reasonably determined” exception and thus capture the price concession information just described at the point of sale.  Additionally, the Proposed Rule contemplates adding a definition of “price concession,” which will include all forms of discounts and direct or indirect subsidies or rebates that serve to reduce the costs incurred by Part D sponsors.  The Part D sponsor will also be allowed to account for dispensing fees paid to pharmacies in the calculation of price concessions.

Other Proposed Provisions

Prohibition Against Gag Clauses in Pharmacy Contracts  –  The Medicare statute prohibits Part D sponsors from prohibiting a pharmacy from, or penalizing a pharmacy for, informing a Part D enrollee of the availability at that pharmacy of a prescribed medication at a cash price lower than the amount the enrollee would be charged to obtain the same medication through the enrollee’s Part D plan.  Under the Proposed Rule, CMS intends to implement this prohibition in the regulations.

Part D Explanation of Benefits  –  Part D sponsors must provide enrollees with a written explanation of benefits (EOB) no later than the end of the month following any month in which the enrollee utilized their prescription drug benefit.  The EOB must include the following information:

  • The item or service for which payment was made and the amount of said payment;
  • Notice of an individual’s right to an itemized statement;
  • Cumulative, year-to-date total amount of benefits provided (including the deductible, initial coverage limit, and the annual out-of-pocket threshold for the current benefit year);
  • The cumulative, year-to-date total of incurred costs; and
  • Any applicable formulary changes.

The Proposed Rule will require sponsors to include information about negotiated price changes and lower-cost therapeutic alternatives.  CMS’s goal with this proposal is to inform enrollees about possible ways to lower out-of-pocket costs by taking lower cost medications.

Anticipated Impact

Under the Proposed Rule, CMS estimates that MA enrollees will reduce their spending on cost sharing by $754 million over 10 years and the Medicare Trust Fund will reduce its spending by $3.8 billion over 10 years.  CMS anticipates the various provisions will have the following individual impact:



Providing Plan Flexibility to Manage Protected Classes

The estimated savings to the Trust Fund are $141-$180.5 million in 2020-2024, increasing to $195-$240 million in 2025-2029.  The governments saves $1.85 billion.  Enrollees save $692 million in cost sharing.

E-Prescribing and the Part D Prescription Drug Program; Updating Part D E-Prescribing Standards

The scoring of this provision is complex.  While there is potential for savings to the Trust Fund arising from substitution of lower cost-sharing tier drugs, we have no way of quantifying this.  Also, we are uncertain at this point of the cost to industry to implement this provision.  The implementation would most likely involve plans building their own software or use of 3rd party vendors.  Both these options are very expensive and might outweigh the savings.

Part D Explanation of Benefits

There is an estimated cost of $0.2 million in the first year of implementation.

Medicare Advantage and Step Therapy for Part B Drugs

The estimated savings to enrollees due to reduced out-of-pocket costs are between $5 and $7 million for 2020-2024 and are between $7 and $10 million for 2025-2029.  The savings to the Trust Fund are between $145 and $185 million for 2020-2024 and between $195 and $240 million for 2025-2029.  There is a modest cost to the government and its contractors of $1 to $1.3 million in 2020-2029 due to a projected increased in appeals.  These estimates reflect use of step therapy for which CMS announced authority for MA organizations beginning 2019; that is, estimates reflect impact on the Medicare Trust Fund if plans start using step therapy in


Pharmacy Price Concessions in the Negotiated Price

If this policy were adopted for 2020 or a future year, there would be an impact on beneficiaries, the government, and manufacturers.  Beneficiaries would save $7.1 to $9.2 billion over 10 years (2020 to 2029), resulting from reduced cost-sharing, offset by slightly higher premiums.  However, the provision would be estimated to cost the government $13.6 to $16.6 billion over that span.  Manufacturers would also save, about $4.9 to $5.8 billion from 2020 to 2029.  Part D sponsors would incur a first year cost of $0.1 million in additional administrative activities related to submission of PDE data.


The Proposed Rule was published in the Federal Register on November 30, 2018, and is available here.  The CMS fact sheet is available here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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