Tuesday, February 24, 2015

CMS to Part D Preferred Pharmacy Networks: We’ll Be Watching You

This past Friday, the Centers for Medicaid & Medicare Services (CMS) released its thoroughly-titled Advance Notice of Methodological Changes for Calendar Year (CY) 2016 for Medicare Advantage (MA) Capitation Rates, Part C and Part D Payment Policies and 2016 Call Letter. Most people refer to this 172-page ode to healthcare bureaucracy as the 2016 Call Letter.

CMS’s proposed changes to Part D’s pharmacy networks will not sting as much as they did last year. In the Call Letter, CMS outlines its concerns about preferred cost-sharing pharmacy networks and proposes policing them more closely. Read my analysis below.

If you want to comment, you have every single day until March 6, 2015.


A preferred network gives consumers a choice of pharmacy. It also provides them with financial incentives to use the pharmacies that offer lower costs or greater control to the payer. A consumer with a preferred network benefit design retains the option of using any pharmacy in the network. However, a consumer’s out-of-pocket expenses will be higher at a non-preferred pharmacy.

Preferred network models have grown most rapidly within the Medicare Part D program, where they are now called preferred cost-sharing networks. CMS refers to the pharmacies in such a network as preferred cost-sharing pharmacies (PCSP).

Here are links to our 2015 program analyses:
For more on narrow network models, see section 8.3 of our new 2014-15 Economic Report on Retail, Mail, and Specialty Pharmacies.


Preferred network plans are controversial (and generally disliked) among pharmacy owners. That’s because reduced pharmacy profits are the biggest source of cost savings from these networks.

Last year, CMS proposed major changes to Part D’s pharmacy regulations that would have eliminated many preferred network benefits. After many outside stakeholders sharply criticized the proposed changes, CMS withdrew them. I reviewed the key issues in May 2014’s New Part D Final Rule: What CMS Still Doesn’t Get about Pharmacies, PBMs, and Preferred Networks.

Pharmacy owners channeled their displeasure with preferred networks into complaints about beneficiary access. In the 2016 Call Letter, CMS states:
”In the CY 2015 Call Letter, CMS announced that we had received complaints from interested parties that some Part D plan sponsors were not providing their enrollees with reasonable access to network pharmacies that offered preferred cost sharing. CMS noted that we were concerned that beneficiaries might be misled into selecting plans based on advertised low preferred cost sharing only to find later that no preferred cost sharing pharmacies (PCSPs) were located within a reasonable distance from their residence.”(page 148)
CMS evaluates networks using the TRICARE network access standards:
  • Urban areas: At least 90% of beneficiaries reside within 2 miles of a network retail pharmacy
  • Suburban areas: At least 90% of beneficiaries reside within 5 miles of a network retail pharmacy
  • Rural areas: At least 70% of beneficiaries reside within 15 miles of a network retail pharmacy.

CMS truly dislikes preferred networks, as illustrated by its selective presentation of data from a recent CMS-sponsored study.

This study found that nearly all beneficiaries in suburban and rural plans had convenient access to a preferred pharmacy. However, some beneficiaries in urban plans did not on average have convenient access. (Click here to download the summary slide deck.) Here’s the study’s key chart showing the average percentage of beneficiaries with convenient access to plans in different areas.

[Click to Enlarge]

In its 2016 Call Letter, CMS ignored these results regarding the percentage of beneficiaries with convenient access. Instead, CMS cited the percentage of plans that did not meet the access standard. This artificially makes the situation looks worse than it really is. Why would seniors choose plans with inconvenient access?

The CMS study also ignores the presence of Low Income Subsidy (LIS) beneficiaries, whose low cost sharing would not be greatly influenced by the presence or absence of preferred pharmacies.

Note that the CMS data are based on the 2014 Part D plan year. Given last year’s controversy over these plans, I believe that preferred pharmacy networks were broader and more inclusive in 2015. That’s why pharmacy owners’ poor hearts ache with every DIR fee they pay.


CMS has looked around, but it’s preferred plans that CMS can’t replace. Despite its apparent dislike of preferred networks, CMS proposes fairly limited actions in 2016.
  • CMS will publish information on preferred cost-sharing pharmacy access levels for each plan offering a preferred cost-sharing benefit structure. (This seems reasonable.)
  • During bid review and negotiation, CMS will work with plans whose PCSP networks are outliers (i.e., the bottom 10th percentile compared to all Part D plans in given geographic type). CMS will work with them to either (1) increase access to PCSPs in those areas or (2) prevent plans from marketing themselves as offering preferred cost sharing in areas where the benefit is not meaningfully available.
CMS closes its discussion with these explicit warnings:
”Where necessary, CMS will use our authority to negotiate bids (under §1860D-11(d) of the Social Security Act and our authority at 42 C.F.R. §423.2264(d)) to prohibit marketing that misleads beneficiaries concerning a benefit to which they will not have meaningful access. CMS will continue to monitor access levels to PCSPs subsequent to the bidding process, and we may consider broadening our outlier review to include additional plans in the future.” (page 150)
Yup, that’s our CMS: linked to the invisible, almost imperceptible. But this year, it won’t make a PDP’s poor heart ache.


  1. Adam, Adam, Adam....
    "Why would seniors choose a plans with limited access?" Lets see....cheap premium and deductible, the sales rep from the Plan came to the senior center and told them it was awesome, a friend down the road really likes this plan, brand recognition...to name a few. You have consistently derided those of us who complain about the preferred networks, yet you ask the question above? How odd. Maybe when NCPA, etc tell the stories about the senior who chooses the Humana plan because it's cheap and has brand recognition, but then finds out that they have to us a WalMart that is 30 miles away explains this phenomenon, no? That's how seniors choose a plan with limited access. I think politicians like to call that "kitchen table economics." No Ph.D. required. By the way, I know that couple above that is now driving 30 miles to WalMart in the winter. They used to be my patient, but my pharmacy wasn't even OFFERED the chance to participate in the "preferred patient-buying" network. And the slick sales rep from Humana sold them on the plan.

  2. Excellent write-up, particularly about the preferred pharmacy network access study.

  3. What an evil statement!

    "I believe that preferred pharmacy networks were broader and more inclusive in 2015. That’s why pharmacy owners’ poor hearts ache with every DIR fee they pay."

    There is no crying in pharmacy. Thanks for the motivation Adam.

  4. The facts and analysis are presented well as usual. Your business model is stale and vulnerable. Nervous histrionics won't keep your doors open.

  5. Preferred networks

    You start with an incorrect statement. "A preferred network gives consumers a choice of pharmacy." A choice of one (especially if it's Walmart) isn't a choice. A preferred network by definition gives consumers a limited choice of pharmacies.

    You seem to think preferred network plans are generally disliked by pharmacy owners because "...pharmacy profits are the biggest source of cost savings from these networks." How about the ONLY source of cost savings. The PBMs certainly aren't cutting their profits. If being called "preferred" was a more equitable arrangement between a pharmacy and a PBM it might be less universally hated. DIR's are simply a way for the PBMs to hide what is actually being paid for a prescription. (Sure, we're losing money on every (preferred) script, but we're making it up in volume!)

    Finally you ask, "why would seniors choose plans with inconvenient access?" You obviously haven't dealt with seniors year after year that sign up based on CMS idiot rules allowing insurance salesmen to tell them how great any piece of crap they have is.

    Other than that, not a bad analysis.

  6. If you are spending your own money, then by all means choose your own pharmacy.

    But if you ask someone else—the American taxpayer, your employer, a health plan—to pay for your drugs, don’t be surprised if they want you to save them money.