Since the inception of the Medicare prescription drug (Part D) program in 2006, both sponsors of Part D prescription drug plans (Part D plan sponsors) and employers sponsoring retiree prescription drug plans eligible for federal subsidy payments (RDS-plan employers) have been permitted to report to the Centers for Medicare and Medicaid Services (CMS) either the “lock-in” price they pay to their pharmacy benefit managers (PBMs) for dispensed Part D drugs or the “pass-through” price that their PBMs pay to pharmacies for dispensed Part D drugs.

CMS’s Concern with “Lock-In” Price Reporting. Because the “pass-through” price is often less than the “lock-in” price, CMS has repeatedly expressed concern that allowing the reporting of “lock-in” prices inflates the true cost of Part D drugs. Those higher drug costs speed Medicare beneficiaries reaching their coverage gap (i.e., “doughnut hole”), boost federal subsidy payments to RDS-plan employers, and increase federal reinsurance costs.

Part D Rule Amendments. On January 12, CMS published in 74 Federal Register 1493 amendments to the Part D Rule that mandate for plan year 2010 that Part D plan sponsors report to CMS only “pass-through” prices for dispensed Part D drugs.[1] These amendments do not require RDS-plan employers to report “pass-through” prices for dispensed Part D drugs in 2010. These amendments are scheduled to become effective on March 13, 2009.

The effective and compliance dates of these amendments may change, however. On January 20, 2009, the Obama Administration White House Chief of Staff issued a directive to the heads of all executive departments and agencies to, inter alia, “[c]onsider extending for 60 days the effective date of regulations that have been published in the Federal Register but not yet taken effect.” 74 Fed. Reg. 4435 (Jan. 26, 2009). Because of their March 13, 2009 effective date, the Part D Rule amendments published January 12 may be impacted by the directive. Consequently, the effective and compliance dates for these amendments that are set out in this Alert may change.

RDS Plan Exception. CMS excepts RDS-plan employers from reporting “pass-through” prices to try to avoid spurring RDS-plan employers to abandon the RDS program. CMS fears that RDS-plan employers may believe that “pass-through” price reporting would lead to less advantageous PBM contract terms for their retiree prescription drug plans and increased administrative burdens to qualify for the federal subsidy payments. CMS wants to keep employers in the RDS program so that Medicare-eligible retirees now in RDS-plans will not be forced to shift to Part D plans for prescription drug coverage, which could cause the retirees to lose eligibility for employer group medical benefits.

Authority to Except RDS Plans. Until now, CMS has read the Medicare Modernization Act (MMA), which established the Part D program, to require CMS to treat the Part D drug price reporting obligations of RDS-plan employers and Part D plan sponsors the same. Consequently, unless CMS finds a basis for a different interpretation of MMA, CMS is uncertain that it can except RDS-plan employers from the mandate of the Part D Rule amendments that Part D plan sponsors report only “pass-through” prices starting in 2010.

Comments Requested. CMS is soliciting public comment regarding whether it has the authority under MMA to allow RDS-plan employers to continue to have the option to report “lock-in” prices for dispensed Part D drugs, notwithstanding that Part D plan sponsors will be required to report only “pass-through” prices beginning in plan year 2010. The public comment period expires March 13, 2009, unless extended by CMS pursuant to the January 20 White House Chief of Staff’s directive.