On April 30, 2010, the Centers for Medicare & Medicaid Services ("CMS") issued a memorandum to all Medicare Part D Plan Sponsors outlining its draft guidance to implement the Medicare Coverage Gap Discount Program, beginning in 2011 ("Draft CGDP Guidance"). CMS will be accepting comments on the Draft CGDP Guidance via e-mail through May 14, 2010.

The Draft CGDP Guidance seeks to implement Section 3301 of the Patient Protection and Affordable Care Act (H.R. 3590) enacted on March 23, 2010, as amended by Section 1101 of the Health Care and Education Reconciliation Act of 2010 (H.R. 4872) enacted on March 30, 2010 (collectively, "PPACA"), otherwise known as the "Health Reform" law. The Part D Coverage Gap Discount Program and the Draft CGDP Guidance affect Part D Plans, drug manufacturers of Part D products, pharmacies, PBMs and all other companies and vendors involved in the chain of arrangements required to support the Part D program. We encourage all companies with Part D business and that contract to provide services to, or for the benefit of, Part D Plans to review the Draft CGDP Guidance and consider submitting comments to CMS by the May 14 deadline.


PPACA adds a new Section 1860D-14A to the Social Security Act that is intended to phase out the Medicare Part D "coverage gap" (the gap between the initial coverage limit and the catastrophic coverage, which typically is not covered by Medicare Part D plans) over the next 10 years. An important component of this phase-out is a program under which pharmaceutical manufacturers of products approved under a 505(b) New Drug Application or a Biologic License Application (generally, "branded" products) will fund a 50-percent point-of-sale discount to Part D beneficiaries as a condition to having such products eligible for Medicare Part D coverage.[1] Such discount would be pursuant to a discount agreement between the manufacturers and the Secretary of the Department of Health and Human Services. However, PPACA does not describe the terms of such agreements or provide more detail regarding how the Coverage Gap Discount Program will be implemented.


The Draft CGDP Guidance describes a proposed operational framework for the Coverage Gap Discount Program. In particular, the Draft CGDP Guidance proposes specific Part D Plan Sponsor obligations, pharmaceutical manufacturer obligations and clarifies CMS's role in implementing the proposed Coverage Gap Discount Program.

This Client Alert is not intended to summarize each proposed feature of the Coverage Gap Discount Program nor does it describe the entire Draft CGDP Guidance. Rather, this Alert highlights below several key features of the proposed guidance that should be considered as Part D Plan Sponsors and manufacturers prepare comments in response to the information proposed by CMS.

  • The Draft CGDP Guidance would require Part D Plan Sponsors, starting in 2011, to provide the "applicable discounts" to pharmacies at the time of initial claim adjudication, which would then be passed through to the beneficiaries at the point of sale, with payment to the pharmacies at the discounted amount being made within contractual prompt-pay timeframes consistent with 42 C.F.R. § 423.520. CMS indicates that it believes that Part D Plan Sponsors have the data necessary to properly adjudicate the claims. CMS stated that it considered utilizing a third-party administrator ("TPA") model to implement the program, but determined that such a model would not be instituted "for the foreseeable future." The Draft CGDP Guidance sets forth specific formulae for determining how the discounts will be calculated under different circumstances.
  • CMS proposes to pay Part D Plan Sponsors for manufacturer discounts made available to plan members based on a monthly prospective payment system, calculated using the bid projections submitted by Part D Plan Sponsors and current enrollment, with an annual reconciliation based on prescription drug event ("PDE") records. The costs associated with administering the program would be accounted for by Part D Plan Sponsors in the administrative expense component of the bids. The manufacturer payments under the program would not be considered "direct and indirect remuneration" ("DIR") or considered in the Bid Pricing Tool rebate amounts because they do not decrease the drug costs incurred by the Part D Plan Sponsor. CMS proposes to add several new data elements to the PDE records and states that it will issue "additional guidance" regarding such fields for contract year 2011. Additionally, to provide transparency to the beneficiaries, the model explanation of benefits ("EOB") form would be revised to reflect the manufacturer-funded discounts.
  • The actual dollar amount of the discounts would vary based on many factors, including the "negotiated price" between the Part D Plan Sponsor and the pharmacy, and whether the beneficiary has any supplemental coverage that applies during the Part D coverage gap period. Additionally, the discount is, to some extent, proposed to be frozen in time based on the "date of dispensing" and would not be affected by retroactive changes in eligibility or other factors, given that CMS has not proposed any retroactive adjustment mechanisms in the Draft CGDP Guidance. Part D Plan Sponsors would be required to permit beneficiaries to access the plan's current coverage determination process regarding the availability and amount of discounts under the program.
  • The discount for compounded drugs would be provided with respect to the product in the compound that is submitted to CMS on the PDE (even if there is another product compounded).
  • CMS would coordinate the interaction between pharmaceutical manufacturers and Part D Plan Sponsors, utilizing a CMS contractor to invoice manufacturers. Manufacturers would be required to pay the invoiced discounts directly to Part D Plan Sponsors pursuant to a "standard process for invoicing." Manufacturers would receive an aggregate quarterly invoice for discounts, itemized at "either" the NDC-9 or NDC-11 level. CMS proposes to utilize an independent, third-party contractor to verify the accuracy of the manufacturer discounts reported by Part D Plan Sponsors in the new "Reported Gap Discount" field of the PDE reports. The Draft CGDP Guidance does not propose to permit manufacturers to directly audit the data and requires that manufacturers pay all invoiced amounts, including any amounts in dispute, within 15 days of receipt of the invoice. There also does not appear to be a formal dispute resolution process established for manufacturers. CMS "specifically requests comments on this proposed approach for manufacturer payments."
  • CMS states that it intends to issue a proposed Model Manufacturer Agreement for public comment "in the June/July timeframe" (presumably in 2010). The agreements will be labeler-code specific. Notably, CMS has stated that for the 2011 plan year, there are "extenuating circumstances" that will prevent its conditioning 2011 Part D drug eligibility on the existence of a manufacturer agreement to participate in the Coverage Gap Discount Program. Therefore, coverage for 2011 should not be impacted by a manufacturer's decision to participate in the program. CMS will issue "clear public guidance" as to why some products are not available for 2011 discounts. However, for 2012 and forward, there will be no Medicare Part D coverage available for "applicable drugs," unless their labelers have a signed agreement in place with CMS to participate in the discount program. There will be no "transition" available for non-participating products (whereby Part D Plans otherwise may have been required to "grandfather" coverage for drugs deleted from formularies).
  • The discounts under the Coverage Gap Discount Program are distinct and apart from any separate rebate or discount relationship that the manufacturer has established with the Part D Plan Sponsor. The discounts under the Coverage Gap Discount Program would be applied before the application of any other coverage or financial assistance on behalf of the beneficiary, raising potential implications for certain manufacturer patient assistance programs. This also may have implications for state pharmaceutical assistance programs that "wrap-around" Medicare Part D.
  • The discounts are proposed to be applied after the application of any supplemental coverage offered by the plans. Among other things, CMS specifically requests comments regarding employer group health and waiver plans' ("EGHPs" and "EGWPs") participation in the discount program, as many provide supplemental coverage that currently "fills" the coverage gap.


In addition to the two areas that CMS specifically requested comments on – the proposed approach for manufacturer payments and the EGHPs' and EGWPs' participation – there are several other areas that Part D Plan Sponsors and manufacturers should consider commenting on, including those areas that may create potential operational and/or implementation challenges to the organization. In addition, there are areas that may impact legal requirements or hinder compliance efforts. The success of the Coverage Gap Discount Program depends on the industry making its comments and concerns known to CMS, so that CMS can respond to those comments/concerns in implementing the program.