Friday, May 23, 2014

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.


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.


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.


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?


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.


  1. Adam, I'm not sure you really get it....especially surprised after the large # of comments you had on the Any Willing Provider post you wrote a couple months back.

    For providers, this is NOT only about price. This is about access to a program which these same providers are actually funding. It's about having the ability to fill Rx's for your parents and grandparents, as long as you're willing to meet the terms.

    And again, it's about giving ALL providers an opportunity to participate in the entire process, from notice to bidding to possibly and eventually caring for their needs. No different than any other public bidding process. Give folks the right to participate in the process....and that was not done.

  2. Bruce,

    I understand that some pharmacies do not feel that the network bidding process is/was fair. However, the situation doesn't seem much different than the selective contracting that occurs for healthcare providers. (That's why the President's keep-your-doctor promise was never realistic.)

    As I note, CMS is going further by effectively arguing that preferred networks shouldn't be a feature of pharmacy networks, even as such networks proliferate throughout the healthcare system.

    Everyone now knows that preferred networks are here to stay. PSAOs, chains, and everyone else should be pounding the pavement to get in the door with payers. Remember, the payers want to pay pharmacies lower rates, so they will want more competition and more bidders.

    If the winning bidders are forced to share their prize, then they will bid less aggressively next time and preferred networks will vanish. That's why the FTC considers AWP to be anti-competitive.


    P.S. I disagree with your premise that pharmacy providers are somehow uniquely "funding" the Part D program. Given the government's role in healthcare, we are ALL—as taxpayers, workers, and consumers—funding healthcare. See Public Funds and Exchanges Will Soon Overtake Employer-Sponsored Insurance

  3. Adam
    Agreed with your analysis on AWP being anti-competive, BUT I wish it were the case that many pharmacies even had the chance to compete. I fail to see this as anything less than crony capitalism at work. (For the record, I am very pro-free market). My pharmacies are not even allowed the abilty to "bid" or contract at the lower prices afforded by the "big guys." Our Part D contracts are nothing more than a take-it-or-leave-it proposition-considering our market share position, I would gladly take a little less to improve our market share. From my perspective and that of many others, I think we would welcome any willing provider. And, do you really think that they guys who have been in the preferred drivers seat would be willing to give up market share by "opting out" of the preferred status if opened up?

  4. MAC transparency is not just about reimbursement being too low for medications reimbursed by PBMs but has its roots in not knowing until you submit a claim how much you will be reimbursed for the medication. I don't think a doctor will conduct surgery or a store sell an item if they do not know what they will be paid for it until after the transaction is done. Lately, and you wrote about the increasing prices of generics a couple of months ago, pharmacies do not have any idea if the reimbursement will cover their costs for these generic products. Many PBMs change their MAC rates on daily or hourly basis. Many PBMs will not raise their MAC pricing on skyrocketing generics for two to three months causing the pharmacy to lose money each time the dispense the medication. Pharmacies take care of patients - they don't sell widgets - so not dispensing the medications to patients because you are losing money is not an option in most cases. Yes, healthcare and pharmacy are businesses but at the same time they have patients to take care of and protect.

  5. Exactly. Pharmacists are funding Part D program along with all other taxpaying citizens. Nothing further to read into it.

    But again, everyone should have the chance to compete.

    Probably need to spend more time sharing info on the specialty space rather than beat this to death. Many folks have huge concerns on where the dollars will come from in 3 - 5 years to pay for this stuff. Great products. Saves lives. Yet very few can afford....including gov, groups, and individuals.

  6. Yes. Keep up the great work! I’m so glad that a 5% cost “discount” translates into 75-100% discounted copays in preferred networks!

    And I’m so happy that copays keep going up in standard networks, and down in preferred networks!!! It’s like...... standard network members will soon pay for 100% of their drugs!!! Oh wait... that’s already happening!!! Yea!!!!!

    Really great ideas here! Just make sure to keep ALLLLL that plan sponsor money for the preferred and mail order scripts!!!!!!

    And yes, let’s make sure only the largest and most financially privileged players get to make these “discounts”. Also, make sure to allow your mail pharmacies to gauge the s**t out of the programs! Remember mail copays are free! but who cares if the costs are higher!!!! Those silly seniors won’t know the difference!

    I loooooove submitting claims to PartD in standard networks.... it’s like the only thing we get from their plans are letters telling our clients they should use the mail & preferred networks!
    Annnnnnnd we’re at the bottom of the patent cliff!!! But that’s not why your premiums are decreasing!!!!! No it’s the fantastically-super-duper-innovative “preferred networks”