Tuesday, November 27, 2012

Prescription Drugs in CMS' New Essential Health Benefits Proposed Rule

While you were brining your turkey last week, the Center for Medicare and Medicaid Services (CMS) published a flock of proposed rules for implementing the Patient Protection and Affordable Care Act (PPACA), including new proposed rules for Essential Health Benefits (EHB): Patient Protection and Affordable Care Act; Standards Related to Essential Health Benefits, Actuarial Value, and Accreditation. It’s a sprightly 119 pages.

In this article, I look at the proposed EHB regulations for prescription drugs. These requirements will apply to plans within health insurance exchanges as well as non-grandfathered private health insurance options in the individual and small group markets. Here are a few highlights:
  • States have some flexibility in defining the “typical employer plan” chosen as the EHB benchmark for pharmacy benefit design.
  • Unlike Medicare Part D, there will be no protected drug classes.
  • Plans can cover as few as one drug per therapeutic category, but will probably end up covering more.
Compared with Medicare Part D, this proposal gives pharmacy benefit managers (PBMs) and health plans greater negotiating leverage over brand-name pharmaceutical manufacturers. Depending on each state’s benchmark plan, the downside could be a loss of patient and prescriber choice.

Read on for a brief review of EHB, the proposed rule, and a few discussion questions for the managed markets team at a pharmaceutical manufacturer.


Section 1302 of the Patient Protection and Affordable Care Act (PPACA) requires that health plans offer a core package of items and services, known as “essential health benefits” (EHB). The legislation identifies the following 10 statutory benefit categories:
  1. Ambulatory patient services
  2. Emergency services
  3. Hospitalization
  4. Maternity and newborn care
  5. Mental health and substance use disorder services, including behavioral health treatment
  6. Prescription drugs
  7. Rehabilitative and habilitative services and devices
  8. Laboratory services
  9. Preventive and wellness services and chronic disease management
  10. Pediatric services, including oral and vision care
Note that EHB requirements apply to health plans in the individual and small group markets, both inside and outside of health insurance exchanges.


The Affordable Care Act established that that EHB be equal in scope to benefits offered by a “typical employer plan.” In the new proposed rule, CMS provides some state-specific flexibility on this base benchmark plan, including:
  1. the largest plan by enrollment in any of the three largest products in the state’s small group market;
  2. any of the largest three state employee health benefit plans options by enrollment;
  3. any of the largest three national Federal Employees Health Benefits Program (FEHBP) plan options by enrollment; or
  4. the largest insured commercial HMO in the state.
Here is precisely what CMS proposes for prescription drugs:
§156.120 Prescription drug benefits.
(a) A health plan does not provide essential health benefits unless it:
(1) Subject to the exception in paragraph (b) of this section, covers at least the greater of:
(i) One drug in every United States Pharmacopeia (USP) category and class; or
(ii) The same number of prescription drugs in each category and class as the EHB benchmark plan; and
(2) Submits its drug list to the Exchange, the state, or OPM.
(b) A health plan does not fail to provide EHB prescription drug benefits solely because it does not offer drugs for services described in §156.280(d) of this subchapter.
(c) A health plan providing essential health benefits must have procedures in place that allow an enrollee to request clinically appropriate drugs not covered by the health plan.
Pay attention to §156.120(a)(1). To comply with EHB requirements, a plan would have to cover at most the same number of drugs in the benchmark plan. At minimum, the plans can cover just a single drug in a category.

Put another way, pharmacy benefit design will be linked to each state’s definition of its benchmark plan. If that benchmark has a very tight formulary, then that plan’s benefit design will ripple through the small group and individual markets.

Note that each EHB plan could cover different drugs than those covered by the EHB-benchmark plan. The requirement only specifies the *number* of drugs within a single USP class.

Is this a reasonable standard? On page 33 of its proposed rule, CMS cites an Avalere Health study of 9 USP classes. The study found that plans typically cover plans covered at least 50 percent of both brand-name and generic products available in each USP class. In large classes, such as antidiabetic agents, small group plans cover more than 30 products. See Drug Coverage in Essential Health Benefits Benchmark Plans: Formulary Analysis.


Contrast the EHB approach to Medicare Part D prescription drug plans (PDPs), which are required to cover "substantially all" drugs in the following protected classes of drugs: anti-cancer; anti-psychotic; anti-convulsant, anti-depressants, anti-psychotic, immunosuppressant, and HIV and AIDS drugs.

PBMs and health plans have long argued that this requirement “raises costs,” i.e., it gives payers less bargaining power against manufacturers.

Why? Recall that a PBM can use the formulary to extract price concessions and rebates from manufacturers of brand-name drugs. PBMs force manufacturers of therapeutically comparable, brand-name drugs to compete for placement on the plan sponsor’s formulary. A PBM will recommend preferred status on the formulary for those products that offer the most competitive pricing and rebates (along with efficacy and safety). But by protecting certain drug classes, a threat of formulary exclusion becomes less potent.

Consider the views of the Essential Health Benefits Coalition (EHBC), an advocacy group “representing large and small employers from various sectors of the U.S. economy, pharmacy benefit managers, and health plans operating in every state.” Due in large part to the protected class issue, they lobbied specifically for CMS to reference commercial benefit design, rather than Medicare Part D, in establishing EHB for prescription drugs. (Read their letter.) Looks like they will get their wish.

The downside to this approach is that patients and prescribers could lose access to valuable therapies if the benchmark plan’s formulary is very narrow or has few drugs in certain categories. Key questions for manufacturers:
  • What are the likely benchmark plan candidates in each state?
  • How many products are on the formulary on each USP class at the benchmark plan(s)?
  • What is your formulary position in each of these plans?
  • Will the benchmark plans end up being more or less generous?
You can follow state progress on exchanges at Kaiser’s State Health Exchange Profiles page. If Obamacare disrupts small group and individual insurance markets, then all bets are off.


  1. Adam:  I like the new format!

    Mike Winkelman

  2. Our drug program is start'n to look a little more like our friends to the north!

  3. What about drug categories long considered elective or cosmetic? There might be large plans in some states that offer coverage on these categories. Could result in expanded coverage in some categories.

  4. I think the essential health benefit should be less comprehensive.  Formularies should be up to consumer and payer demand.  Since individuals are shopping for plans in these exchanges, they should be able to buy a plan that has as few or as many drugs as they want covered.  I don't like the idea of the formulary being tied in anyway to a benchmark plan that can be influenced by special interests.

  5. Your post is in this week's Health Wonk Review:


    Please let your readers know.