"CMS Announces Final Rule to Amend 'Negotiated Prices'," American Health Lawyers Association Alert

January 9, 2009

Author: Christine M. Clements.

On January 6, 2009, the Centers for Medicare & Medicaid Services (CMS) announced the much anticipated final rule on negotiated prices under Medicare Part D. The rule finalizes the May 16, 2008, proposed rule and revises the definition of "negotiated prices" under the Part D program to require Part D drug plan sponsors to use the amount ultimately received by the pharmacy or other dispensing provider (pass-through pricing) as the basis for determining beneficiary cost sharing and for reporting a plan's drug costs to CMS, rather than the amount the plan sponsor pays to an intermediary contracting organization, such as a PBM. Under current Part D requirements, plan sponsors may use either pass-through or lock-in pricing as the basis for determining beneficiary cost sharing and for reporting drug costs under Part D. The final rule requires plans sponsors to treat the differential between the lock-in price and the pass-through price (referred to by CMS as the "risk premium" ) as an administrative cost and not a drug cost. The change is effective for the 2010 plan year.

CMS views the risk premium under the lock-in pricing approach as analogous to the cost of drug utilization management, drug price negotiation, and other administrative costs incurred by plan sponsors, and therefore there is an administrative fee paid to the PBM by the plan sponsor. In the final rule, CMS identified several "undesirable effects" of continuing to permit Part D sponsors to use lock-in prices as the basis for determining beneficiary cost sharing and reporting drug costs to CMS including:

  • Cost shifting from the government to beneficiaries in the form of higher beneficiary out-of-pocket costs;
  • Interference with market competition among Part D sponsors;
  • Beneficiary confusion over actual drug prices;
  • Difficulties for pharmacies in explaining drug prices to customers and managing cash transfers to Part D sponsors or their intermediary contracting organizations; and
  • Government risk sharing on amounts that reflect administrative costs, contrary to Congressional intent to exclude risk sharing on administrative expenses.

Under the new rule, plan sponsors may continue to use the lock-in model with their PBMs, but they must report to CMS the price actually paid to the pharmacy as the negotiated price. Any difference between the price paid by the plan to the PBM and the price paid by the PBM to the pharmacy must be reported as an administrative cost.

The final rule will be published in the Federal Register on Jan. 12, 2009.

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Christine M. Clements
Partner – Washington, D.C.
Phone: +1 202.624.2595