CMS Finalizes Changes to Pharmacy DIR in Part D Starting with Contract Year 2024

Impact on Pharmacies, Part D Payors, Pharmacy Benefit Managers, and Drug Manufacturers

On April 29, 2022, the Centers for Medicare and Medicaid Services (CMS) issued its final rule, Medicare Advantage and Part D Final Rule for Contract Year 2024, which requires Part D plans to include all pharmacy price concessions (also known as “Direct and Indirect Remuneration” or “pharmacy DIR”) in a pharmacy’s negotiated price at the point of sale.[1] The final rule adopts most of the changes outlined in CMS’s proposed rule that was released earlier this year, wherein CMS questioned how Part D plans’ use of pharmacy price concessions impacts Medicare beneficiaries’ out-of-pocket spending.[2]

Pharmacy price concessions are amounts that a pharmacy pays to a plan for dispensing a Part D drug, which can include concessions based on certain performance measures. Currently, payors are permitted to report pharmacy price concessions that cannot be “reasonably determined” at the point of sale in post-point-of-sale DIR reports. According to CMS, pharmacy price concessions that are retroactively reported can artificially inflate a pharmacy’s negotiated price, which is the value used to determine a patient’s cost-share. In its final rule, CMS states the rule is meant to address the impact that retroactively reported pharmacy price concessions have on out-of-pocket spending, especially in light of data that shows these concessions grew 107,400 percent between 2010 and 2020.[3]

Changes in the final rule mean that pharmacies will be able to see, at the point of sale, the “lowest possible reimbursement” for a Part D drug, which will now reflect any pharmacy price concession in that value. According to CMS, the final rule means a patient’s cost-share will also be lower based on that lowest possible reimbursement. In contrast, Part D plans will be permitted to report pharmacy incentive payments (e.g., positive amounts paid to a pharmacy after the point of sale) as post-point-of-sale DIR. CMS reasons that this exception is necessary because positive incentive payments could raise a pharmacy’s negotiated price and therefore, a patient’s cost-share.[4] The rule goes into effect for contract year 2024.  

CMS states the final rule is a win for patients who will see lower out-of-pocket costs at the pharmacy, which it estimates to save patients over $26 billion between 2024 and 2032.[5] Some pharmacy advocates also claim the final rule is an important step to bring transparency to pharmacy negotiated prices. Meanwhile, CMS projects that manufacturers will benefit from the final rule by an estimated $16.8 billion in savings from coverage gap liability between 2024 and 2032.[6] The coverage gap (also called the “donut hole”) refers to the period when the Part D plan places a temporary limit on what it will pay for drugs. Manufacturers currently pay a share of a patient’s cost-share responsibility when the patient is in the coverage gap phase of the Part D benefit. As a result of the final rule causing a reduction in patient cost-share, the manufacturer’s share of the patient cost-share will also be reduced.[7]  

Finally, for plan sponsors, CMS expects a one-time cost of $100,000 per plan to update systems to effectuate the change.[8] Some plans and pharmacy benefit managers (PBMs) have warned that the change may be disruptive to the Part D program and could lead to higher patient premiums. The individual impact on industry stakeholders is discussed below.

Key Takeaways

• “Reasonably Determined” Exception Eliminated: Currently, Part D plans can report pharmacy price concessions that cannot be “reasonably determined” at the point of sale as post-point of-sale-pharmacy DIR. Under the final rule, CMS eliminates the “reasonably determined” exception, meaning that pharmacy price concessions must instead only be included in a pharmacy’s negotiated price and cannot be reported as post-point-of-sale pharmacy DIR.[9]
• New Definition of Negotiated Price: In conjunction with deleting the “reasonably determined” exception, CMS also deletes the entire current definition of “negotiated prices” (plural) at 42 C.F.R. § 423.100 and replaces it with a new definition of “negotiated price” (singular). The new definition requires that pharmacy price concessions be included in a pharmacy’s negotiated price, not reported as post-point-of-sale pharmacy DIR. Specifically, the negotiated price means the lowest amount a pharmacy could receive as reimbursement for a covered Part D drug under its contract with the Part D plan sponsor or the sponsor’s intermediary (e.g., PBM). As described above, the effect of the new definition means that a pharmacy’s negotiated price will be lower, as will patients’ cost sharing that is based on that value.[10]
• New Definition Applies to the Coverage Gap: The proposed rule originally did not apply the new definition of negotiated price to instances when a patient is in the coverage gap. In its final rule, however, CMS modifies the definition of negotiated price in the coverage gap at § 423.2305 to align with the new definition of negotiated price at § 423.100. According to CMS, this means patients will have lower out-of-pocket spending in all phases of their Part D benefit.[11]
• New Definition of Price Concession: Currently, there is no definition of “price concession” under Part D, which some pharmacy advocates have argued permits ambiguity in the types of concessions Part D plans report to CMS. To that end, the proposed rule defined “price concession” at § 423.100 to read, “[p]rice concession means any form of discount, direct or indirect subsidy, or rebate received by the Part D sponsor or its intermediary contracting organization from any source that serves to decrease the costs incurred under the Part D plan by the Part D sponsor. Examples of price concessions include but are not limited to: discounts, chargebacks, rebates, cash discounts, free goods contingent on a purchase agreement, coupons, free or reduced-price services, and goods in kind.” CMS finalizes this language in the final rule. The new definition puts parameters around what Part D plans and PBMs must consider as a price concession in a pharmacy’s negotiated price.[12]
• Reaffirmation of CMS Authority: In the proposed and final rule, CMS once again reaffirms its authority to require plans to include pharmacy price concessions in the negotiated price and states such action does not violate Medicare Part D’s non-interference clause. CMS’ reaffirmation is important because in past years plans and PBM groups have questioned whether such a change would be legal.[13]
• Reaffirmation of Policy Towards Pharmacy Administrative Service Fees: CMS reiterates its long-standing policy that pharmacy administrative service fees take the form of deductions from payments to pharmacies for Part D drugs dispensed to Part D beneficiaries and should be accounted for in the administrative costs of the Part D bid.[14]
• Effective Date: In the proposed rule, the change was slated to go into effect for contract year 2023. However, several plans and PBMs called for CMS to allow more time to operationalize the change if finalized. In response, CMS’ final rule changes the effective date to contract year 2024.[15]

Pharmacy Takeaways

• Impact on Pharmacy Reimbursement: Pharmacies should be aware that the final rule could result in changes to reimbursement terms in contracts with Part D payors for contract year 2024. Specifically, pharmacies should evaluate how shifting pharmacy price concessions to the point of sale impacts current contracts and should expect PBMs to propose amendments and possibly adjust reimbursement. Indeed, CMS reiterated that the rule “requires only that the negotiated price reflect the price that the parties have negotiated as the lowest possible reimbursement that the pharmacy could receive for a particular drug, inclusive of all pharmacy price concessions” and that “[s]ponsors and pharmacies remain free to negotiate any such arrangements they wish.”[16]
• Change to Pharmacy Cash Flow: Pharmacies may also experience immediate but temporary cash flow issues in the first few months of implementation of the proposal. This is because some pharmacies rely on overpayments in the negotiated price to float operational expenses from month to month. CMS recognized cash flow concerns in the final rule but stated it does not have the authority to mandate payment plans between plan sponsors to alleviate such concerns. CMS noted it “will be particularly attuned” to plan compliance with pharmacy access standards under § 423.120 to “ensure that all Medicare Part D beneficiaries have convenient access to pharmacies and medications.”[17]

Part D Payor and PBM Takeaways

• Impact on Part D Bids: Part D payors and PBMs have historically used pharmacy price concessions reported as post-point-of-sale DIR to keep beneficiary premiums low in the Part D program. The final rule effectively takes away this tool, leaving Part D plans and PBMs to reevaluate the structure of their Part D bids and their usage of post-point-of-sale DIR reports. However, this impact may be somewhat mitigated as Part D sponsors remain permitted to choose whether to reflect manufacturer price concessions in the negotiated price, which continue to represent the majority of post-point-of-sale DIR.
• Delay for Operational Considerations: CMS delayed the final rule to contract year 2024 to provide more time for plans and PBMs to operationalize the changes.
• Broader Context: The final rule was issued at an interesting time, when the Federal Trade Commission (FTC) is beginning a study to look at the impact of PBM business operations, including the usage of rebates and fees that impact net drug prices (including Direct and Indirect Remuneration), whether patients are steered to PBM-affiliated specialty pharmacies, and consolidation in the market. While the study is not specific to Part D, the changes made under this final rule may have an impact on the study and FTC’s understanding of how PBM contractual arrangements, like retroactive reporting of price concessions, impact patients and stakeholders across all markets.

Pharmaceutical Manufacturer Takeaways

• Limited Coverage Gap Discount Liability: Pharmaceutical manufacturers would appear to benefit from the rule because of the lower patient cost-share and the slower patient progress through the Part D benefit, which reduces the number of beneficiaries for which manufacturers must pay coverage gap discounts. In recent years, however, policymakers have made several legislative attempts to close the coverage gap, thereby eliminating patient and manufacturer responsibility in that phase. The most recent attempt is in the proposed Build Back Better Act. These efforts have not passed in part due to including the effort in larger legislative packages that remain stagnant or fail under political pressure. If legislation is passed to close the coverage gap, manufacturer savings under this final rule could be less significant.
• Dry Run for Rebate Reform: CMS has signaled that this final rule could inform the impact of similar price concession reform policies like the Office of Inspector General’s rebate rule from 2019.[18] Manufacturers may be interested to note that CMS reaffirmed it has independent statutory authority outside of the rebate rule to regulate the application of non-pharmacy price concessions in the negotiated price but noted that given the existing moratorium on implementation of the rebate rule, CMS is now following an "incremental approach."[19] This means CMS could, in future rulemaking, consider changes to the application of manufacturer rebates.

Epstein Becker Green is available to help businesses navigate the impact and implementation of the final rule on their individual operations.

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This Insight was authored by Alan J. Arville, Kala K. Shankle, and Constance A. Wilkinson. For additional information about the issues discussed in this Insight, please contact one of the authors or the Epstein Becker Green attorney who regularly handles your legal matters.

ENDNOTES

[1] See Medicare Program; Contract Year 2023 Policy and Technical Changes to the Medicare Advantage and Medicare Prescription Drug Benefit Programs; Policy and Regulatory Revisions in Response to the COVID-19 Public Health Emergency; Additional Policy and Regulatory Revisions in Response to the COVID-19 Public Health Emergency, 87 Fed. Reg. 27704 (May 9, 2022), available at https://www.federalregister.gov/documents/2022/05/09/2022-09375/medicare-program-contract-year-2023-policy-and-technical-changes-to-the-medicare-advantage-and.

[2] See Medicare Program; Contract Year 2023 Policy and Technical Changes to the Medicare Advantage and Medicare Prescription Drug Benefit Programs, 87 Fed. Reg. 1842 (Jan. 12, 2022), available at https://www.federalregister.gov/documents/2022/01/12/2022-00117/medicare-program-contract-year-2023-policy-and-technical-changes-to-the-medicare-advantage-and.

[3] See Medicare Program; Contract Year 2023 Policy and Technical Changes to the Medicare Advantage and Medicare Prescription Drug Benefit Programs; Policy and Regulatory Revisions in Response to the COVID-19 Public Health Emergency; Additional Policy and Regulatory Revisions in Response to the COVID-19 Public Health Emergency, 87 Fed. Reg. 27704, 27834 (May 9, 2022), available at https://www.federalregister.gov/documents/2022/05/09/2022-09375/medicare-program-contract-year-2023-policy-and-technical-changes-to-the-medicare-advantage-and.

[4] Id. at 27842.

[5] Id. at 27883.

[6] Id.

[7] Id. at 27882.

[8] Id. at 27883.

[9] Id. at 27899.

[10] Id. However, as noted previously, Part D plans can still report pharmacy incentive payments (e.g., positive amounts paid to a pharmacy) as post-point-of-sale DIR. The effect of allowing positive incentive payments to be reported as post-point-of-sale DIR means that the negotiated price will not be inflated by positive amounts that could raise a patient’s cost-share.

[11] Id. at 27902.

[12] Id. at 27899.

[13] Id. at 27840.

[14] Id. at 27848-49.

[15] Id. at 27704.

[16] Id. at 27840.

[17] Id. at 27843.

[18] See Fraud and Abuse; Removal of Safe Harbor Protection for Rebates Involving Prescription Pharmaceuticals and Creation of New Safe Harbor Protection for Certain Point-of-Sale Reductions in Price on Prescription Pharmaceuticals and Certain Pharmacy Benefit Manager Service Fees, 85 Fed. Reg. 76666 (Nov. 30, 2020), available at https://www.federalregister.gov/documents/2020/11/30/2020-25841/fraud-and-abuse-removal-of-safe-harbor-protection-for-rebates-involving-prescription-pharmaceuticals.

[19] See Medicare Program; Contract Year 2023 Policy and Technical Changes to the Medicare Advantage and Medicare Prescription Drug Benefit Programs, 87 Fed. Reg. 1842, 1911 (Jan. 12, 2022), available at https://www.federalregister.gov/documents/2022/01/12/2022-00117/medicare-program-contract-year-2023-policy-and-technical-changes-to-the-medicare-advantage-and.