CMS recently proposed a self-reporting requirement and other significant changes for the Medicare Advantage and prescription drug programs that would affect participating plans as well as their contractors.

The Centers for Medicare and Medicaid Services (CMS) published two proposed rules on May 25, 2007, for the Medicare Advantage and Medicare Prescription Drug Programs (Programs) that would impose significant changes on the legal and operational obligations of participating plans (Plans) as well as their providers and other contractors.

One proposed rule would impose a self-reporting requirement on Plans in addition to streamlining the contract determinations, appeals and intermediate sanctions provisions for the Programs. The second proposed rule would modify the Medicare Prescription Drug Benefit Program (Medicare Part D) to require Part D Plan Sponsors to categorize as "administrative costs" all costs other than those incurred in the purchase of Part D drugs, including any profit or loss incurred by a pharmacy benefit manager (PBM) as a result of lock-in pricing. Additionally, the second proposed rule would codify several existing policies and make other technical changes to Medicare Part D.

Comments to both proposed rules are due to CMS by 5:00 pm EDT on Tuesday, July 24, 2007. The proposed rules are available online:

The following summary addresses some of the key changes proposed by CMS in the two proposed rules.

Proposed Rule to Revise Contract Determinations, Appeals and Intermediate Sanctions Processes

Self-Reporting Obligation

One of the most significant Program changes included in the proposed rule to amend the contract determinations, appeals and intermediate sanctions processes (Program Contracting Proposed Rule) would require Plans to self-report "potential fraud or misconduct."

CMS proposed, but did not finalize, a self-reporting requirement in the Program regulations released in January 2005. CMS states in the Program Contracting Proposed Rule that it believes that this 2005 decision to "eliminate a mandatory self-reporting requirement has contributed to some highly publicized cases in which [CMS] first found out about a major [Medicare Advantage or Part D Programs] organization compliance issue when it appeared in the press." As a result, CMS proposes to impose on Plans the obligation to report "potential fraud or misconduct related to the [Medicare Advantage or Part D Programs] to the appropriate government authority," although the proposed rule does not define "potential fraud or misconduct." CMS offers an implementation date of January 1, 2009, for mandatory self-reporting.

While the proposed self-reporting obligation would certainly affect Plans, as they would be required to report "potential fraud or misconduct" within their own operations, it is unclear how it may affect providers and other contractors, including PBMs, hospitals, physician groups and pharmacies.

Imposition of Intermediate Sanctions and CMPs

Additional important modifications within the Program Contracting Proposed Rule are CMS’s proposals to modify the process for imposing intermediate sanctions and civil money penalties (CMPs). For example, in conjunction with the suggested elimination of the reconsideration process for contract determinations, including contract termination, CMS also proposes to eliminate the existing, informal reconsideration process for decisions to impose intermediate sanctions. In its place, CMS proposes that Plans would have an opportunity "to present information…that may affect [CMS’s] decision to impose an intermediate sanction" in the form of a rebuttal statement that would be due to CMS within 10 calendar days of receipt of a notice of intermediate sanctions. CMS expects that such a notice of intermediate sanctions would be sent via overnight mail and by e-mail or fax.

CMS also clarifies that it has the authority to impose CMPs for certain contract determinations (in addition to other intermediate sanctions, including suspension of marketing, enrollment and payment), while the Office of the Inspector General "has the sole authority to impose CMPs for any determinations concerning…false, fraudulent or abuse activities." CMS proposes to create a new regulation that clarifies it will use certain codified factors for determining the appropriate amount of CMPs that would be assessed on a Plan, including "the nature of the conduct, the degree of culpability, the prior history of offenses, the financial condition of the [Plan] presenting the claims, and other matters as fair administration may require."

These proposed changes would take effect on January 1, 2008.

Additional Proposed Changes

The Program Contracting Proposed Rule also contains several other potential Program modifications that affect Plans as well as their contracting entities, including the following:

  • "Expedited" contract termination: The Program Contracting Proposed Rule would amend the regulation providing for "immediate" termination, replacing it with a revised provision for "expedited" contract termination. Under the existing provision, CMS’s immediate termination of a Plan’s contract takes effect on the date of CMS’s notice to the Plan, and the Plan’s members are automatically dis-enrolled effective that same day. CMS proposes to make such terminations "expedited," rather than immediate, with an effective date at some future point selected by CMS, thereby providing a transition period for ensuring the Plan’s members are enrolled in another Plan.
  • CMS also proposes to modify the grounds for such expedited termination under the Medicare Advantage Program to include false, fraudulent or abusive activities (in addition to financial difficulties creating potential for imminent and serious risk to the health of enrollees), thereby making the expedited termination provision consistent with that of Medicare Part D.
  • Compliance plans: Regulations for both Programs would require that the elements of an effective compliance plan relating to training and education as well as effective communication must be applied to the Plan’s employees, managers and directors as well as first-tier, downstream and related entities, which includes contracted providers. CMS also proposes to eliminate the eighth element for Part D Plan Sponsors’ compliance plans, relating to maintenance of a program to combat fraud, waste and abuse. Rather, such measures to combat fraud, waste and abuse would have to be reflected throughout the other seven elements of compliance plans of both Medicare Advantage Organizations and Part D Plan Sponsors.
  • Access to records of plans and contractors: CMS proposes to amend the Part D regulation requiring government access to books, records and other documents of Part D Plan Sponsors and their contractors. Specifically, the Program Contracting Proposed Rule would expand the list of mandatory contract provisions in a Part D Plan Sponsor’s agreement with any first-tier, downstream or related entity to include a specific requirement that such entity must produce any pertinent records relating to Medicare Part D to CMS or its designee upon request. The contract provision could specify that the documents be provided by the entity to CMS directly or could provide that the documents be provided via the Part D Plan Sponsor. CMS also reiterates its position that Part D Plan Sponsors remain responsible for their contractors’ compliance with the applicable regulatory requirements, and a first-tier, downstream or related entity’s failure to provide CMS or its designee with access to such records is grounds for the imposition of intermediate sanctions or CMPs against the Part D Plan Sponsor.
  • CMS also clarifies in the Program Contracting Proposed Rule that it and other federal government entities have the authority to request from Part D Plan Sponsors as well as their first-tier, downstream and related entities records relating to Part D rebate and any other price concession information. "These records would include, for example, copies of rebate agreements between PBMs and [pharmaceutical] manufacturers" as well as any other records reflecting discounts, price concessions and other similar arrangements that may impact payment to Part D Plan Sponsors. CMS does note that, consistent with various provisions of the Social Security Act regarding the confidentiality of rebate and other payment information, any such information used to verify payment would be subject to restrictions limiting use to that necessary for carrying out the payment provisions of Medicare Part D.
  • Contract renewal: CMS proposes to amend the regulatory provisions relating to contract renewal so that contract renewal is automatic unless CMS or the Plan decides not to renew the contract. CMS would only provide notice to a Plan upon the event of non-renewal by CMS, and such notice would be provided on or before September 1, rather than the by the current May 1 deadline.
  • Corrective action plans: The Program Contracting Proposed Rule would revise the use of corrective action plans (CAPs) for contract determinations, terminations and non-renewal. Specifically, CMS proposes to implement a "more structured process" by which Plans would have 45 calendar days to submit a CAP to CMS for review and approval. An additional 30 days would be provided if CMS determines the initial proposal must be revised and resubmitted. Once accepted by CMS, a CAP would have to be implemented according to a pre-determined schedule, and the failure to do so would result in CMS issuing a notice of termination or non-renewal. Once CMS issues a notice, however, the Plan would no longer have an opportunity to submit a CAP.
  • Contract determinations and appeals: CMS proposes several substantive and procedural changes to Plans’ ability to appeal contract determinations, including eliminating the reconsideration process, imposing the burden of proof on the Plan and revising the role of the Administrator in the review of hearing decisions.

Proposed Rule to Modify Medicare Part D

As expected, CMS’s proposed rule to modify the Medicare Prescription Drug Program (Part D Proposed Rule) would amend the bid submission and payment reconciliation processes to exclude from the calculation of "allowable drug costs" those costs not incurred in the purchase of Part D drugs. This change, which would take effect with the 2009 benefit year, would require Part D Plan Sponsors to categorize as "administrative costs" any such non-drug costs, including any profit or loss incurred by a PBM relating to the so-called "lock-in pricing" methodology.

Currently, a Part D Plan Sponsor may use in its bid submission an estimate of allowable drug costs that is based on the contracted amount—the "locked-in" amount—that the Part D Plan Sponsor pays to its PBM, regardless of the amount the PBM pays to the pharmacies dispensing the medications. This estimated amount of allowable drug costs automatically is included in the calculation of the Part D Plan Sponsor’s direct subsidy payment and the Target Amount used to determine risk corridor payments. In order to maintain consistency between the bid submission process and the payment reconciliation process, CMS has indicated that Part D Plan Sponsors that estimate allowable drug costs in their bid submission based on locked-in drug prices via their PBM contract may report the same contractual rate when reporting prescription drug event data throughout the benefit year and when calculating allowable reinsurance costs and allowable risk corridor costs as part of the payment reconciliation process.

Defining "Administrative Costs"

CMS proposes to adopt a new defined term, "administrative costs," which are a Part D Plan Sponsor’s costs other than those incurred to purchase or reimburse the purchase of Part D drugs under the Part D Plan. Included within this definition are "costs incurred by Part D plans that exceed the price charged by a dispensing entity for covered Part D drugs." In other words, beginning with the bid submission process for the 2009 benefit year, Part D Plan Sponsors must estimate allowed drug costs based on the amount actually paid to the dispensing pharmacy. All non-drug charges, including PBM charges for administrative services and profit, must be included in the Part D Plan Sponsor’s administrative cost estimate, rather than the allowable drug cost estimate. Corresponding changes to the definitions of gross prescription drug costs, allowable reinsurance costs and allowable risk corridor costs also would be made.

Consistent with this modification, CMS also proposes to amend the definition of "negotiated price" to require that, effective with the 2009 benefit year, beneficiary cost-sharing for prescription drugs be based on the price ultimately paid by the dispensing pharmacy (or other provider), rather than the amount paid by the Part D Plan Sponsor to a PBM or other intermediary. Additionally, CMS states that it recognizes that the "negotiated prices" that a Part D Plan Sponsor must make available to beneficiaries at the point-of-sale would not include discounts, rebates and other price concessions that the Part D Plan Sponsor does not elect to pass through to beneficiaries at the point-of-sale.

Clarifying Other Part D Provisions

In addition, the Part D Proposed Rule would codify several current policies that have been adopted since the January 2005 rule implementing Medicare Part D and would make other technical changes, including the following:

  • Provider marketing: CMS clarifies its expectation that providers, including pharmacists, may not "market" Plans to Medicare beneficiaries, meaning providers may not steer or attempt to steer an undecided beneficiary toward a Plan when the provider expects compensation. However, providers may educate beneficiaries on the Programs, assist with enrollment and participate in various provider promotional activities consistent with the Medicare Marketing Guidelines. CMS also proposes to modify the marketing regulation to clarify that providers may distribute printed information comparing Plans, so long as the provider displays information comparing the benefits of different Part D Plans with which the provider contracts as required by the Medicare Marketing Guidelines.
  • Access to home infusion therapy: CMS proposes to modify Part D Plan Sponsors’ pharmacy access requirements to mandate that Plan Sponsors provide beneficiaries with access to covered home infusion drugs within 24 hours of discharge from an acute care facility. The Part D Proposed Rule also would codify requirements from previously issued guidance relating to access to home infusion drugs, including maintenance of a pharmacy network that is capable of providing home infused drugs in a form that can be administered in a clinically appropriate fashion; is capable of providing infusible Part D drugs for both short-term acute care and long-term chronic care therapies; and ensures professional services and ancillary supplies necessary for home infusion therapy are in place.
  • Definition of Part Drug: CMS proposes to expand the definition of "Part D drug" to include inhaled insulin, which was recently approved by the Food and Drug Administration, and related supplies. CMS believes this policy is consistent with Congress’s intent to provide coverage for insulin and medical supplies associated with the administration of insulin regardless of the method of administration.

Additionally, although no change to the regulatory text is required, CMS clarifies its position that drugs for erectile dysfunction and morbid obesity are excluded from the definition of Part D drug by virtue of their exclusion from Section 1927 of the Social Security Act. Part D Plan Sponsors, however, may cover such drugs as a supplemental benefit.

  • Other proposed modifications would address the coordination-of-benefits requirements, low-income subsidy payments, grievances and appeals requirements, and the Retiree Drug Subsidy.