Thursday, January 09, 2014

CMS Wants It That Way: Big Medicare Part D Pharmacy Changes

This week, the Centers for Medicare & Medicaid Services (CMS) followed through on its 2014 Call Letter threats with 157 pages (!) of proposed Medicare rules: Contract Year 2015 Policy and Technical Changes to the Medicare Advantage and the Medicare Prescription Drug Benefit Programs.

CMS is proposing major changes to Part D’s pharmacy regulations. Most notably, CMS wants to shake up the current model for preferred pharmacy networks, which would be required to explicitly save money for both the government and the Part D beneficiaries. CMS also wants to open up these networks to any pharmacy willing to cut prices.

Under the proposed rules, plan sponsors and pharmacy benefit managers (PBMs) would face intense scrutiny over cost savings, pharmacy network design, and generic prescription reimbursement using Maximum Allowable Cost (MAC). CMS also wants to remove certain cost sharing advantages for mail pharmacies, which would be another big negative for PBMs.

Below, I summarize the key issues. Comments are due by March 7, 2014, so you better start reading!


CMS wants to slow the growing Medicare Part D preferred pharmacy phenomenon.

CMS argues that that preferred networks are not always providing lower costs, per the study that I describe in New CMS Study: Preferred Pharmacy Networks are Cheaper (Except When They’re Not). CMS writes:
“Our findings -- that a few sponsors have actually offered little or no savings in aggregate in their preferred pharmacy pricing, particularly in mail-order claims for generic drugs -- are troubling. Instead of passing through lower costs available through economies of scale or steeper discounts, a few sponsors are actually charging the program higher negotiated prices.”
To eliminate ambiguity and ensure that preferred networks actually deliver lower costs to the government and the Part D enrollees, CMS proposes the following new definition:
Preferred cost-sharing in network pharmacies. A Part D sponsor offering a Part D plan that provides coverage other than defined standard coverage may reduce copayments or coinsurance for covered Part D drugs obtained through a subset of network pharmacies, as long as such preferred cost sharing is offered in accordance with the requirements of § 423.120(a)(8) and for Part D drugs with consistently lower negotiated prices than the same drugs when obtained in the rest of the pharmacy network."
Consistent with this language, CMS also wants to ditch the somewhat pejorative term “preferred pharmacies” in favor of the more descriptive term “preferred cost savings.”

CMS solicited comments on many related questions, including:
  • Should CMS establish standards on how much lower drug costs should be in return for preferred cost sharing?
  • Should Medicare require a minimum level of savings, such as 10 percent or 15 percent, over the costs available at retail cost-sharing rates?
  • How broadly should preferred cost sharing be applied to drugs on a sponsor's formulary? (CMS asks: “For instance, is it reasonable to offer cost sharing as low as $0 for only the least expensive generics on formulary? Or should preferred cost sharing have to apply to a minimum percentage of formulary products to be a meaningful benefit instead? Or should preferred cost sharing have to apply to all drugs available at pharmacies offering preferred cost sharing?” Reasonable questions, IMHO.)
Starting on page 260, CMS also proposes significant changes to its interpretation of Part D’s “Any Willing Provider” language. As CMS sees it, any pharmacy that meets a plan's lowest (“preferred cost-sharing”) prices should be able to join the network.

CMS blithely disregards the fundamental economic question: With Any Willing Provider, why would any pharmacy now want to offer a “preferred cost-sharing” deal to a Part D sponsor? If these proposals are adopted, we could see preferred networks shrink substantially.


For pharmacy industry lobbyists, CMS granted a big win regarding Maximum Allowable Cost (MAC) reimbursement. See Section 28, starting on page 254.

As Drug Channels readers probably know, a MAC establishes the reimbursement limit for a particular strength and dosage of a generic drug that is available from multiple manufacturers with potentially different list prices, i.e., a multiple-source drug.

There is no standardized definition for MAC, so generic drug reimbursement to a pharmacy can vary significantly among payers. Since MAC limits directly affect a pharmacy’s revenues and profitability, they are intensely disliked by pharmacy owners.

CMS proposes defining "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 average cost, average manufacturer price, average sales price, maximum allowable cost (MAC), 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.” This change has become more relevant in an era of skyrocketing prices for some generics, as I describe in Retail Generic Drug Costs Go Up, Up, and Away.

In addition, Part D sponsors would have to disclose all individual drug prices (including MAC prices) in advance of a pharmacy’s reimbursement. The CMS proposal echoes so-called “MAC transparency” laws in Arkansas, Kentucky, North Dakota, Oregon, and Texas. These laws typically require disclosure of sources and computation of a third-party payer’s MAC limits. For instance, Oregon H.B. 2123, which became effective on January 1, 2014, requires PBMs to disclose the sources utilized to determine the MAC pricing, update MAC lists every seven business days, and exclude dispensing fees from the MAC calculation.


Starting here, CMS takes aim at “mail order cost sharing,” by proposing to remove copayment incentives that favor mail pharmacies.

CMS proposes three levels for cost sharing:
  • Standard (prescriptions for 34 days or less)
  • Preferred (prescriptions for 34 days or less offered dispensed by “preferred cost sharing” pharmacies)
  • Extended day’s supplies (prescriptions of more than 34 days)
CMS wants to eliminate certain economic advantages for mail pharmacies, by requiring that:
  • Mail order pharmacies cannot have cost sharing lower than a comparable one month supply filled at retail
  • For extended days’ supplies, mail cost sharing can’t be less than the standard cost sharing at retail pharmacies.
Looks like CMS really likes CVS Caremark’s Maintenance Choice program.


Bottom line: On almost all issues, CMS granted the wishes of independent pharmacy owners. The NCPA’s lobbying efforts paid off handsomely. Now, let the commenting games begin!

I never want to hear you say...that you can't see the video of the CMS press conference below. Click here if you can't see the video.


  1. Pharmacists United for Truth and Transparency applauds CMS' decision. One simply cannot argue nor ignore the data that has been pouring in that illustrates what Independent Pharmacists have known all along. First, Consumers overwhelmingly prefer Independent Pharmacists. Second, Mail-Order Pharmacy does not save Employers, Plan Sponsors, Patients, or the Government Money. In fact, it's quite the opposite, despite PCMA's repeated attempts to skew the data, it speaks for itself. Lastly, preferred-networks are simply wrong. It all started with Humana allowing Wal-Mart to print it's name on the very first MeD-D card and has been bastardized ever since. Consumers demanded choice and now they will have it. BRAVO CMS! If you want to learn more facts, visit

  2. Re your CMS blog post today – just wanted to make sure I’m on the same wavelength as you.

    Is your final sentence re CVS Maintenance Choice to be taken literally or is it your typical (and appreciated) sarcastic wit? Wasn’t entirely clear to me…


  3. I agree with everything that CMS concluded and I agree with
    you that it was lobbying that turned the tide away from mail order and preferred networks.

    However it was not the lobbying of NCPA that turned the waters, it was the lobbing dollars of PCMA themselves.

    PBM lobbying has convinced and led payers for over 20 years
    with the statement ….. Our next year’s Flux Capacitors will save you Hundreds of Billions of dollars. Oh, you don’t understand our Flux Capacitor; well we will have it create a spread sheet that definitively shows that next year you will save Hundreds Billions of dollars maybe more, a Trillion dollars is not out of the question.

    After 2 decades of believing in Flux Capacitors, and experiencing
    ever increasing prices for medications, payer like CMS, stoped listening and started verifying and came up with a new found concept for cost analysis of medications……………. looking at the bottom line, year to year cost, not a spread sheet created by a non-existent Flux Capacitor…………….a cost analysis enabled by true transparency between the different distribution channels not reliant upon
    PBM information only.

    And remember if you liked your PBM saving of the past you
    can keep them. Period.

  4. Self insured employers would do well to stay on top of what CMS is doing in response to PBMs cost RAISING activities. If It is happening in Part D, where there is the possibility (usually lacking) of CMS oversight, you can be sure it is happening on a larger scale in the commercial space. "

    Our findings -- that a few sponsors have actually offered little or no
    savings in aggregate in their preferred pharmacy pricing, particularly
    in mail-order claims for generic drugs -- are troubling. Instead of
    passing through lower costs available through economies of scale or
    steeper discounts, a few sponsors are actually charging the program
    higher negotiated prices.” (page 249)" DUH!!

    Pharmacies have been providing employers examples of this for YEARS! Economies of scale only exist when the end payer is knowledgeable of the true acquisition cost (which employers, part D recipients are not). Kudos to CMS of actually doing their job on this one, and getting it right.

    That sound of jets you hear is PCMA and their merry band of pranksters descending on DC to begin their misinformation lobbying campaign to undo these overdue changes. If CMS gets it right, maybe then the FTC will feel compelled to do the same....and that is PCMA's worst fear!

  5. Sarcastic? Me?!? Never! ;S

    But seriously, CMS wants a level playing field for retail vs. mail prescriptions, similar to the 90-day at retail model within CVS Caremark's Maintenance Choice or the anti-mail order legislation from NY and PA. More plans now have 90-day at retail programs, but not all have exactly equal reimbursements and copayments.

  6. Wait a minute, Jim. Are you telling me that you built a PBM... out of a DeLorean?

  7. Tell me why-eye. How can they do it?!? Well it's not exactly sorcery, but some may consider it a black art. It's because when you drive a lot of volume through the mail channel and you exert control over every aspect of that channel (esp. Purchasing) you can do some really interesting "strategic buying" of NDCs and show a better-than-your-average -bear AWP discount and yet be at plan pay price parity or even more expensive than a similar retail Rx (at a GPI 14 level). At the end of the day they are just gaming the system, as any shareholder-value driven capitalist would. That said, I'm fearful what tricks might be up the sleeves of PBMs given the partnerships with wholesalers we've seen recently. Could it make all the shenanigans of the past look like child's play?!?

  8. Excellent article to understand this rule

  9. Dr. Fein,

    I just wanted to say I appreciate the informative articles regarding Part D pharmacy reimbursement problems. I work in a family-owned independent pharmacy and have seen nothing but attacks from PBM’s aimed directly at the independent stores - everything from the preferred networks and mail order stealing our customers, to MAC updates being delayed 2 or even 3 months following a huge price increase. It is great to find a source that can summarize lengthy legislative documents into an informative, yet concise, narrative on the current state of pharmacy and upcoming (hopefully) regulatory implementation. After years of nothing but bad news and backstabbing by CMS (I still can’t deliver a box of test strips to a house-bound senior???), it is quite a good feeling to hear they might actually fix some of their broken machinery.

    Jonathan P. Taylor, PharmD
    Taylor Drug

  10. Dr. Fain,
    Any idea when CMS would announce these changes? What do you think are the chances of passing ANY new regulations?

  11. CMS will likely issue the final regulations sometime after the comment period. Since they want to influence the 2015 plan year, perhaps by mid-year?


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