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Guest Article

(From the February 2, 2009 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

CMS Requests Comments: Proposed Changes to RDS Subsidy Calculation

The Centers for Medicare & Medicaid Services (CMS) is concerned that certain new requirements it has established for Medicare Part D plans (i.e., reporting the pass-through prices instead of lock-in prices, and treating amounts retained by the pharmacy benefit manager or other intermediary contracting organization as administrative costs) will, if applied to the retiree drug subsidy program, induce employers to terminate their programs or place their retirees in a Part D plan because of the reduced subsidy. As a result, CMS has postponed applying these changes to the retiree drug subsidy program and is requesting further comments. 74 Federal Register 1494 & 1550 (January 26, 2009).

Background

On May 16, 2008, CMS proposed various changes to the Medicare Part D and retiree drug subsidy (RDS) program. Among the proposals was a change in the definition of "negotiated prices" by which drug prices are to be reported to CMS. Previously, the sponsor could report either the "pass-through" price or the "lock-in" price. Under a lock-in price, the sponsor agrees to pay a pharmacy benefit manager (PBM) a set rate for a particular drug and the PBM negotiates with pharmacies to purchase the drug at the best possible price. With a lock-in arrangement, the price paid to the PBM is often greater than the price ultimately paid by the PBM to the pharmacy (i.e., the "pass-through" price). As viewed by CMS, this is due to the inclusion of a risk premium that the sponsor pays to mitigate market risk. CMS categorizes this risk premium as an administrative cost incurred by the plan sponsor and, as an administrative cost, it can not be subsidized consistent with the provisions of the Medicare statute. The May 2008 regulations proposed that Part D and RDS programs report drug prices based only on the "pass-through" price. For plans using lock-in pricing, any difference between the price paid to the pharmacy and the price paid to PBM or other intermediary contracting organization would be considered an administrative cost.

CMS received numerous comments on the proposed changes as they were to apply to the RDS program. The comments raised concerns regarding the advisability of making the RDS definitions consistent with those under Part D. As reported by CMS in the preamble to the final regulations:

One of these commenters noted that large employers constitute a majority of RDS sponsors, and that they are sophisticated purchasers with a great amount of leverage, and are in the best negotiating position to decide which pricing structure is most appropriate for them. The other commenter reported that such large employers have been using the lock-in approach for many years. Both of these commenters also believed that many employers seek to keep health benefits the same for active employees and retirees, and that requiring reporting based on pass-through prices only would effectively be imposing this one model on active employee plans as well.

As a result of these concerns, CMS decided to defer finalizing those changes that would have required RDS sponsors to report "pass-through" pricing and to report direct or indirect remuneration retained by a PBM or other intermediary contracting organization. However, the other proposed changes regarding both the Part D and the RDS program were finalized, and are scheduled to become effective on March 13, 2009. 74 Federal Register 1494 & 1550 (January 26, 2009).

As explained in some detail in the final regulations, CMS is examining whether it has the statutory discretion to adopt a different policy for the RDS program than for the Part D program. It has reopened the comment period regarding its proposal to apply the Part D "negotiated price" policy to the RDS program. CMS is specifically inviting comments on whether it has discretion under the statute to retain the existing policy for the RDS program (i.e., allowing either "lock-in" or "pass-through" prices) despite having adopted the new "negotiated price" policy for the Part D program (i.e., allowing only "passthrough" prices).

CMS Options and Request for Comments

Evidencing the scrupulousness with which CMS is approaching this issue, the regulations outline three alternative theories by which CMS may potentially claim the authority to impose a "negotiated price" policy for the RDS program that is different from the policy for the Part D program. CMS specifically requests comment on these theories:

Interpretation of "actually paid" -- The RDS subsidy payment is "an amount equal to 28 percent of the allowable retiree costs ... attributable to such gross covered prescription costs." SSA § 1860D-22(a)(3)(A). The phrase "allowable retiree costs" is defined to mean "with respect to gross covered prescription drug costs ... the part of such costs that are actually paid (net of discounts, chargebacks, and average percentage rebates) by the sponsor." SSA § 1860D-22(a)(3)(C)(i). The phrase "gross covered prescription drug costs" is defined for Part D purposes as, "the costs incurred under the plan, not including administrative costs, but including costs directly related to the dispensing of covered Part D drugs." SSA § 1860D-15(b)(3). Under this theory, payments made to the PBM (excluding discounts, chargebacks, and average percentage rebates) would be costs that are "actually paid" for purposes of calculating the subsidy.
The potential problem is that this interpretation arguably reads out of the statute the phrase, "with respect to gross covered prescription drug costs" -- which does not include administrative costs, and the "lock-in" price may well include administrative costs.
Prohibited interference with employee benefit plan design: The applicable law provides that "[n]othing in this section shall be construed as ... preventing employers to provide for flexibility in benefit design ... so long as the actuarial equivalence requirement ... is met." SSA § 1860D-22(a)(6)(D). Under this theory, requiring that "pass-through" pricing be reported as drug costs would interfere with the benefit design of retiree prescription drug plans. The argument would be that the reporting of "pass-through" pricing would be administratively burdensome, create an incentive for employers to redesign their plans and their contractual arrangements with PBMs, and perhaps opt out of the RDS program altogether.
The potential problem is that this argument rests on the assumption that the contractual relationship between the RDS plan and PBM is a "benefit design," and that requiring the sponsor to report pass-through pricing would "prevent" employers from providing flexibility in the benefit design. The history of this provision indicates that it was intended to prohibit CMS from mandating certain benefit packages, and not to prohibit CMS from mandating certain reporting requirements.
Change in Interpretation of Waiver Authority: The employer group waiver provisions allow CMS to waive or modify the requirements that hinder the design or offering of Part D plans. The Act provides that employer group waiver provisions "shall apply with respect to prescription drug plans in relation to employment based retiree health coverage in a manner similar to the manner in which they apply to an MA-plan in relation to employers." SSA § 1860D-22(b). This provision appears in a section of the Act that is otherwise devoted entirely to provisions that apply to the RDS program. However, a "prescription drug plan" is defined as a Part D plan, and does not include an RDS plan. SSA § 1860D-12(b). An RDS plan is otherwise referred to as a "qualified retiree prescription drug plan." The argument would be, essentially, that the term "prescription drug plan" was intended to encompass both a Part D "prescription drug plan" and a qualified retiree "prescription drug plan." The waiver authority was intended to extend to both as long as the plan is offered "in relation to employment-based retire health coverage."
The potential problem is that CMS has already interpreted the employer waiver authority to apply only to Part D prescription drug plans, and not RDS plans. If, after considering public comment, CMS wishes to adopt this new interpretation it would need to do so through notice and comment rulemaking. To preserve this option, on the same day it published the final regulations, CMS also published a separate notice in the Federal Register seeking public comment on this proposal. 74 Federal Register 1550 (January 26, 2009).

Comment Deadline

CMS has asked for comments no later than March 13, 2009. Employers and others with input regarding the potential impact of pass-though pricing (or of reporting direct or indirect remuneration retained by a PBM or other intermediary contracting organization) on the subsidy or on the RDS program itself, are asked to file their comments either electronically, by regular mail, by express or overnight mail, or by hand or courier, pursuant to the instructions in the regulation.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.

If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Mark Neilio 202.378.5046, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Tom Veal 312.946.2595, Deborah Walker 202.879.4955.

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