Showdown at Medicare Part D Corral

By Elizabeth Wright
WasteWatcher, April 2014

Medicare Part D is one of the few government-created programs that has consistently cost less than the Congressional Budget Office’s (CBO) original estimates.  Every fall, seniors get to choose from a variety of plans for their drug coverage.  Pharmaceutical companies, pharmaceutical benefit managers (PBM), and pharmacies know this and they compete vigorously for seniors’ business.  A PBM is a third party administrator of prescription drug plans (Well-known PBMs are Catamaran, CVSCaremark, Express Scripts, Humana Pharmacy Solutions and USScript).  PBMs negotiate drug prices, establish formularies, process, and pay prescription drug claims in private insurance, as well as Medicare.  This robust competition among private sector entities is the major reason that Medicare Part D costs less than originally anticipated; rather than employing heavy-handed government edicts or price controls, market forces keep prices low and satisfaction high.  So, why would the Centers for Medicare and Medicaid Services (CMS) suddenly move to “fix something that ain’t broke”?    

On January 11, 2014, the agency publicized a proposed rule to make changes to Medicare Part D that led to the recent “Showdown at the Part D Corral,” a confrontation which involved patients, seniors, members of Congress, providers, and the Council for Citizens Against Government Waste (CCAGW) and resulted in a chastened CMS standing down on some parts of an ill-advised rule, at least for now.  Still, the foray furnishes a window into the meddlesome mindset of CMS.

Since implementation of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), the Secretary of Health and Humans Services (HHS) has been required to follow section 1860D-11(i),  the “noninterference clause.”  It states:  “In order to promote competition under this part and in carrying out this part, the Secretary (1) may not interfere with the negotiations between drug manufacturers and pharmacies and PDP [prescription drug plan] sponsors; and (2) may not require a particular formulary or institute a price structure for the reimbursement of covered part D drugs.”

Because of this prohibition against HHS intrusion, Medicare Part D has worked well both for beneficiaries and taxpayers.

In 2004, the program’s projected cost by 2012 was estimated to be approximately $123 billion; in actuality, it was $55 billion.  In 2012, CBO began to score Medicare Part D as providing an offset in overall Medicare spending.  CBO’s estimate is that a “1 percent increase in the number of prescriptions filled by beneficiaries would cause Medicare’s spending on medical services to fall by roughly one-fifth of 1 percent.”  This makes sense.  If people are taking medications as prescribed to control the harmful effects from their illness, such as diabetes or high blood pressure, they are less likely to be spending time in hospitals or visiting doctors.

Not only has Medicare Part D cost less, it receives a high satisfaction rating from beneficiaries. According to a September 2013 survey conducted by KRC Research, 92 percent of seniors are satisfied, with 58 percent being very satisfied with their drug plan.

But practically since its inception, big-government proponents have attempted to interfere with Medicare Part D’s success.  The free market is anathema to many government bureaucrats and their allies in Congress, who cling to the notion that all evidence to the contrary, government will perform better than the private sector and that government officials know better than consumers what constitutes a good deal.

One policy change that is relentlessly pushed by big-government proponents is to pass laws allowing the Secretary of HHS to “negotiate” drug prices with drug manufacturers, PBMs, and pharmacies.  But, as has been amply demonstrated, the government doesn’t actually negotiate; it simply sets the price for a particular drug and everyone else falls into line. 

Others argue that Medicare Part D should follow the Veterans Affairs (VA) drug benefit model, under which the government fixes drug prices.  But, an October 2013 study by the Lewin Group found that the two Medicare Part D plans with the highest enrollments provided “greater breadth of drug coverage than the VA formulary.”

Lewin compiled a list of the 300 most prescribed drugs in the United States from anticoagulants, to pain and inflammatory medications, to women’s health prescriptions.  The two most popular Part D plans covered 97 and 94 percent of the drugs respectively.  The VA’s formulary was at 87 percent.  The two highest enrollment Part D plans covered 99 and 96 percent respectively of the brand name drugs while the VA only covered 57 percent.

Allowing the government to negotiate drug prices would just be another version of government price controls, a policy that rations access, reduces choice, and stifles innovation, whether the price controls are applied to the price of bread, gas, or housing.

CMS’s proposed regulation would have allowed the agency to eliminate numerous drugs plans, weaken the use of mail-order pharmacies (even though CMS’s data shows the service saves an average of 16 percent in costs compared to retail stores while being a convenience to many consumers), and interfere in Part D pricing negotiations.  CMS states in their proposal that “within the limits of our authority we should seek to encourage certain features of the market that promote more perfect competition.”

Leave it to government officials to think they can find perfection in the private marketplace.  After all, CMS has done such a “good” job managing health insurance competition with Obamacare.

In order to “avoid creating undue confusion for beneficiaries as they consider various plan offerings,” CMS’s proposed regulation would have limited each Part D plan sponsor to only two drug plans per Medicare Part D service region, down from three.  In other words, CMS thinks seniors become confused when they have choices.  Currently there are 34 regions in the United States that offer a total of 1,169 stand-alone drug plans.  In 2014, most seniors have a choice of 35 prescription drug plans in each region but CMS’s proposal would have significantly reduced those numbers.  A February 2014 Avalere study found the proposal would have limited each PBM to one basic and one enhanced plan per region.  This change would have required 214 of the current 552 enhanced prescription drug plans to be terminated or consolidated with an existing plan.  These 214 plans represent products sold by nine carriers that currently offer two enhanced PDPs in the same region.  The change would “impact 7.4 million of the 7.9 million (94 percent) Medicare beneficiaries who are currently enrolled in an enhanced plan.”  (Fortunately, at least for now, this portion of the proposal is not going forward.)

CMS made a similarly arbitrary decision in 2011 by restricting the number of plans a PBM could offer to only three.  Yet, PBMs, beginning in 2008, had already begun responding voluntarily to consumer preferences and market forces, reducing the number of prescription drug plans available based upon the plans’ performance, as a chart from Kaiser Family Foundation clearly shows.  Instead of allowing the PBMs to adjust organically based upon performance, CMS’s ham-fisted interference in 2011 ensured that seniors instantly lost access to 467 plans regardless of quality.    

Since rewriting the law by administrative fiat has become routine in the Obama administration, CMS apparently also decided that the non-interference clause did not apply to the negotiations between PBMs and pharmacies.  In the January proposed rule, CMS made a stab at interfering with contract negotiations between PBMs and pharmacies, an area that was previously off-limits.

CMS wanted to require that PBMs publicly disclose the terms and conditions for pharmacies to participate in the network, including proprietary pricing negotiations and to mandate that any pharmacy could participate in a network.  But a preferred pharmacy network plan is specifically created by the PBM in order to get more competitive pricing from its contracted pharmacies; by promising increased volume in exchange for lower drug costs from the pharmacies, the PBM can pass along the savings to the consumer in the form of lower co-pays and coinsurance.  According to an October 2013 study by Milliman, “the largest two-year decrease in federal direct subsidies in the history of the Medicare Part D program has coincided with the rapid adoption of preferred pharmacy network plans and the increased use of generic drugs.”

By taking these actions, the agency completely ignored a July 2008 letter written by the HHS Office of Inspector General to Acting CMS Administrator Kerry Weems, which stated, “We agree that the Act prohibits the Government from interfering with negotiations between PDP sponsors and pharmacies and from instituting a price structure for the reimbursement of covered Part D drugs.”

CMS also ignored its own final rule, published in the April 15, 2011 Federal Register.  When CMS was asked to provide assurances about monitoring certain pharmacy dispensing fees to ensure they were adequate, the agency responded, “As provided in section 1860D–11(i) of the Act, we are prohibited from interfering with negotiations between Part D plans and pharmacies.”

Paul Howard and Yevgeniy Feyman pointed out in a February 1, 2014 Forbes article that even though preferred pharmacy networks are only three years old, approximately 75 percent of Medicare Part D beneficiaries are utilizing them this year.  In other words, beneficiaries like the preferred networks because of the choices and prices.  The authors also point out that the independent community pharmacists have been pushing the government to force PBMs to accept all pharmacies in the preferred networks “because they are feeling threatened by the economics of large preferred pharmacy networks.”

But independent community pharmacists currently and in the future can access a PBM’s preferred network without government handholding and interference.  By utilizing a pharmacy services administrative organization (PSAO), independent community pharmacies can come together and create the volume necessary to become part of a preferred network and provide the lower prices that consumers enjoy.  A PSAO is similar to an organization like Ace Hardware, which works with local, individually-owned hardware stores to purchase merchandise in bulk to save money and pass along the savings to their customers.  Ace helps independent hardware stores compete with the big box hardware stores.

The Government Accountability Office released a study of PSAOs in January 2013, including a primer on how they work with independent community pharmacists:

While PSAOs provide a broad range of services to independent pharmacies, and vary in how they offer these services, PSAOs consistently provide contract negotiation, communication, and help-desk services.  All of the model agreements between PSAOs and independent pharmacies that GAO reviewed stated that the PSAO will negotiate and enter into contracts with third-party payers on behalf of member pharmacies. PSAOs may also contract with pharmacy benefit managers (PBM), which many third-party payers use to manage their prescription drug benefit.”

The GAO also noted:

Independent pharmacies dispensed about 17 percent of all prescription drugs in the United States in 2010.  To obtain, distribute, and collect payment for drugs dispensed, pharmacies interact with a network of entities, including drug wholesalers and third-party payers.  With limited time and resources, independent pharmacies may need assistance in interacting with these entities, particularly with third-party payers that include large private and public health plans.  Most use a PSAO to interact on their behalf.

In addition, Medicare beneficiaries can still purchase their drugs at an independent community pharmacy that is not part of a preferred network; the PBM will likely not cover the price of the drug in the same way that it does for a drug purchased through an in-network pharmacy, but some beneficiaries may prefer to pay a bit more to shop at a neighborhood drugstore with which they have a long-standing personal relationship and then submit the claim for reimbursement later.

CMS should not be ordering private PBMs to contract with certain pharmacies since preferred provider networks are permitted in the MMA statute.  After all, if any pharmacy can join a network, regardless of their ability to provide enough volume for a bigger discount, then the deep discounts will disappear for all consumers.  In a March 7, 2014 letter to CMS, the Federal Trade Commission said “The proposed any willing pharmacy provisions threaten the effectiveness of selective contracting with pharmacies as a tool for lowering costs.  Requiring prescription drug plans to contract with any willing pharmacy would reduce the ability of plans to obtain price discounts based on the prospect of increased patient volume and thus impair the ability of prescription drug plans to negotiate the best prices with pharmacies.”

Fortunately this portion of the proposed rule has also been suspended as a result of pushback from a variety of stakeholders.

Twenty of the 24 members of the Senate Finance Committee sent a letter on February 28, 2014 to CMS Administrator Marilyn Tavenner, expressing their bi-partisan concerns over the proposed changes: 

We write you to express our strong objections to the 2015 MA and Part D Proposed Rule that was published in the Federal Register on January 10, 2015. We have serious concerns that the proposed rule would disrupt care for millions of Part D beneficiaries and unnecessarily interfere with a successful program…

[Given the remarkable success of Medicare Part D] we are perplexed as to why the Centers for Medicare and Medicaid Services (CMS) would propose to fundamentally restructure Part D by requiring immediate, large-scale changes to the program that have direct consequences for beneficiaries. Many of the proposed changes are untested and unstudied and could result in significant loss of beneficiary choice, access, and consumer protections.

Therefore, we strongly oppose the implementation of these proposals. Instead, we urge you to begin a new dialogue with Congress, Medicare beneficiaries, and relevant stakeholders on how best to achieve the universal goal of a sustainable and successful Part D program.

The objections did not stop there.  The Health Leadership Council, united with “371 organizations representing millions of patients, seniors, employers and Americans with disabilities as well as multiple healthcare sectors,” wrote a letter on March 7, 2014 to CMS asking the agency to “withdraw proposed regulations that will significantly change the Medicare Part D prescription drug program in ways that will have unintended consequences for seniors and beneficiaries with disabilities.”

CCAGW sent a letter on March 11, 2014 to the House of Representatives in support of H.R. 4160, the "Keep the Promise to Seniors Act of 2014,” which was introduced by Rep. Renee Ellmers (R-NC).  The legislation would have blocked “the prescription drug provisions in the proposed rule, ensuring seniors can keep the Part D plans they chose and like.”

In the wake of such broad-based and intense objection, CMS got the message and backed away from parts of the proposed rule.  Administrator Marilyn Tavenner wrote a letter on March 10, 2014 to Senate Finance Committee Chairman Ron Wyden (D-Ore.) stating the “proposed rule included many important provisions related to the Medicare Part C and D prescription drug program” and that “during the rule’s comment period, we received numerous concerns about some elements of the proposal from members of Congress and stakeholders.”  She went on to say, “given the complexities of these issues and stakeholder input, we do not plan to finalize these proposals at this time.”  The bottom line:  The agency cried “uncle.”

Still, Tavenner’s letter states that CMS plans to “engage in further stakeholder input before advancing some or all of the changes in these areas in future years.”

If CMS’s efforts should eventually succeed, the regulation will ensure seniors have less choice and access, along with increased costs for beneficiaries and taxpayers.

The regulation would also put the Medicare Part D program on the precarious path to even more heavy-handed government interference in what has been a healthy, competitive marketplace.  It would give a green light to government officials to impose other stifling regulations, such as price controls, leading to fewer options for seniors and ultimately destroying the nation’s leadership in pharmaceutical research and development.

It is clear that CMS remains committed to imposing damaging new regulatory provisions on Medicare Part D in the future.  Since bad ideas never die easily in Washington, CCAGW will remain vigilant and be prepared to put a stake through the regulation’s heart the next time it rears its wasteful and unnecessary head.

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