In January of 2005, the Centers for Medicare and Medicaid Services (“CMS”) finalized its regulation permitting Medicare Part D plans to establish networks of “preferred” and “non-preferred pharmacies,” meaning that the plans may offer lower cost-sharing to enrolled Medicare beneficiaries who receive items or services from a preferred pharmacy.  70 Fed. Reg. 4194 (Jan. 28, 2005).  This rule was highly contested by pharmacies and their associations leading up to the final rule and has remained so, spawning a couple of legal challenges in 2011 and 2012.  These legal challenges argued that a preferred pharmacy network is inconsistent with another rule that requires a Part D plan to permit any pharmacy to participate in its network if the pharmacy is willing to agree to the plan’s standard terms and conditions.  This other rule is commonly referred to as the “Any Willing Pharmacy Requirement.”

 Until CMS issued its annual Final Call Letter on April 1, 2013, CMS had not appeared interested in challenging preferred pharmacy network arrangements.  In the case of the Any Willing Pharmacy Requirement, CMS stated in Chapter 5 of its Prescription Drug Benefit (“PDB”) Manual that whether a Part D sponsor has permitted a pharmacy an opportunity to participate in its network, or whether a pharmacy can meet or has met contract terms in compliance with the law and CMS’ regulations at 42 CFR 423.120(a)(8)(i) are fact-specific questions that are generally best left between the parties.

 CMS has stated elsewhere, “Ultimately, however, it is at Part D plans’ discretion how they will establish pharmacy networks – including …the establishment of preferred pharmacies provided they meet our pharmacy access standards, non-discrimination provisions and other applicable requirements under Part D.”  70 Fed. Reg. at 4250.  CMS explained its preference not to interfere with “private negotiations between Part D plans and pharmacies” as being consistent with Congressional intent.  Id.  This preference has seemed unshakeable, particularly as CMS has been able to shake off the legal challenges to the preferred pharmacy rule.

However, as announced in the Final Call Letter, CMS warned, “We have begun to scrutinize Part D drug costs in PDPs [i.e., Prescription Drug Plans] with preferred networks, and comparing these to costs in the non-preferred networks, as well as to costs in PDPs without preferred networks.”  CMS further revealed that it has begun contacting plan sponsors identified in its analysis to validate its findings that suggest certain preferred pharmacy network arrangements are improperly increasing costs to Medicare.

This review by CMS alone is not much of a surprise.  Even at the time CMS published the final preferred pharmacy rule, CMS was adamant in the rule that “such tiered cost-sharing arrangements [must] in no way increase [CMS’] payments to Part D sponsors.  70 Fed. Reg. at 4254.  CMS has been equally adamant in the PDB Manual.  So, it is no surprise that CMS would at some point review whether preferred pharmacy networks have been designed in such a way as to increase costs to the Medicare Program.

What is a bit more surprising is another statement by CMS in its Final Call Letter.  In response to complaints from pharmacies regarding barriers to participation in preferred networks, CMS stated, “We strongly believe that including any pharmacy that can meet the terms and conditions of the preferred arrangements in the sponsor’s preferred network is the best way to encourage price competition and lower costs in the Part D program.”  CMS concluded that “mandating this policy is beyond the scope of this call letter.”  Therefore, rather than reaffirm its long-standing position that Congressional intent supports its policy of non-interference in the establishment of preferred pharmacy networks, CMS appears to be suggesting that it is considering means other than its annual call letter guidance to lower barriers for pharmacies to participate in preferred pharmacy networks.

While CMS is silent on when or if it intends to mandate such a policy, it appears to be attacking one of the primary means by which plans have avoided increasing costs to CMS, through “post point-of-sale per claim administrative fees.”  As described by CMS, these fees are “levied by Part D sponsors or their intermediaries on pharmacies” by charging a pharmacy $1.00 per claim to participate in the sponsor’s preferred pharmacy network or chargeback of the dispensing fee.  CMS confirmed that current law permits this practice which allows plans to exclude these fees from their reported negotiated prices with pharmacies.  However, in CMS’ view, these arrangements are inconsistent with the intent of the regulations and result in the reported prices being overstated.  CMS believes that “notice and comment rulemaking would be necessary in order to require sponsors to consider these fees as part of the negotiated price” and will consider “revising the definition of negotiated price” so as to require the inclusion of these fees in the reporting of such prices.

If CMS revises the preferred pharmacy rule to lower participation barriers for all pharmacies while eliminating the post point-of-sale per claim administrative fees that make many preferred pharmacy network arrangements feasible, CMS would appear to be undermining its own long-standing support for preferred pharmacy networks and its policy of non-interference in the private contract negotiations between plans and their network pharmacies.