Medicare Program; Proposed Changes to the Medicare Advantage and the Medicare Prescription Drug Benefit Programs for Contract Year 2013 and Other Proposed Changes; Considering Changes to the Conditions of Participation for Long Term Care Facilities

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 417, 422, 423, and 483

[CMS-4157-P]

RIN 0938-AQ86

Medicare Program; Proposed Changes to the Medicare Advantage and the Medicare Prescription Drug Benefit Programs for Contract Year 2013 and Other Proposed Changes; Considering Changes to the Conditions of Participation for Long Term Care Facilities

AGENCY:

Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION:

Proposed rule.

SUMMARY:

The proposed rule would revise the Medicare Advantage (MA) program (Part C) regulations and prescription drug benefit program (Part D) regulations to implement new statutory requirements; strengthen beneficiary protections; exclude plan participants that perform poorly; improve program efficiencies; and clarify program requirements. We are also considering changes to the long term care facility conditions of participation pertaining to pharmacy services.

DATES:

To be assured consideration, comments must be received at one of the addresses provided below, no later than 5 p.m. on December 12, 2011.

ADDRESSES:

In commenting, please refer to file code CMS-4157-P. Because of staff and resource limitations, we cannot accept comments by facsimile (FAX) transmission.

You may submit comments in one of four ways (please choose only one of the ways listed):

1.

Electronically.

You may submit electronic comments on this regulation to

http://www.regulations.gov.

Click on the link “Submit electronic comments on CMS regulations with an open comment period.” (Attachments should be in Microsoft Word, WordPerfect, or Excel; however, we prefer Microsoft Word.)

2.

By regular mail.

You may mail written comments to the following address ONLY:

Centers for Medicare & Medicaid Services, Department of Health and Human Services,

Attention:

CMS-4157-P, P.O. Box 8013, Baltimore, MD 21244-8013.

Please allow sufficient time for mailed comments to be received before the close of the comment period.

3.

By express or overnight mail.

You may send written comments (one original and two copies) to the following address ONLY:

Centers for Medicare & Medicaid Services, Department of Health and Human Services,

Attention:

CMS-4157-P, Mail Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850.

4.

By hand or courier.

Alternatively, you may deliver (by hand or courier) your written comments (one original and two copies) to one of the following addresses prior to the close of the comment period:

a. For delivery in Washington, DC—Centers for Medicare & Medicaid Services, Department of Health and Human Services, Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., Washington, DC 20201.

(Because access to the interior of the Hubert H. Humphrey Building is not readily available to persons without Federal government identification, commenters are encouraged to leave their comments in the CMS drop slots located in the main lobby of the building. A stamp-in clock is available for persons wishing to retain a proof of filing by stamping in and retaining an extra copy of the comments being filed.)

b. For delivery in Baltimore, MD—Centers for Medicare & Medicaid Services, Department of Health and Human Services, 7500 Security Boulevard, Baltimore, MD 21244-1850.

If you intend to deliver your comments to the Baltimore address, call telephone number (410) 786-1066 in advance to schedule your arrival with one of our staff members.

Comments erroneously mailed to the addresses indicated as appropriate for hand or courier delivery may be delayed and received after the comment period.

For information on viewing public comments, see the beginning of the

SUPPLEMENTARY INFORMATION

section.

FOR FURTHER INFORMATION CONTACT:

Christian Bauer, (410) 786-6043, and Kathryn Jansak, (410) 786-9364, General information.

Christopher McClintick, (410) 786-4682, Part C issues.

Deborah Larwood, (410) 786-9500, Part D issues.

Kristy Nishimoto, (206) 615-2367, Part C and D enrollment and appeals issues.

Deondra Moseley, (410) 786-4577, Part C and D payment issues.

SUPPLEMENTARY INFORMATION:

Submitting Comments:

We welcome comments from the public on all issues set forth in this rule to assist us in fully considering issues and developing policies. You can assist us by referencing the file code CMS-4157-P.

Inspection of Public Comments:

All comments received before the close of the comment period are available for viewing by the public, including any personally identifiable or confidential business information that is included in a comment. We post all comments received before the close of the comment period on the following Web site as soon as possible after they have been received at:

http://www.regulations.gov.

Follow the search instructions on that Web site to view public comments.

Comments received timely will also be available for public inspection as they are received, generally beginning approximately 3 weeks after publication of a document, at the headquarters of the Centers for Medicare & Medicaid Services, 7500 Security Boulevard, Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 a.m. to 4 p.m. To schedule an appointment to view public comments, phone at 1-800-743-3951.

Table of Contents

I. Background

II. Provisions of the Proposed Regulation

A. Implementing Statutory Provisions

1. Coverage Gap Discount Program (§ 423.100, § 423.505, § 423.1000, § 423.1002, and Subpart W (§ 423.2300-423.2410))

a. Scope (§ 423.2300)

b. Definitions (§ 423.2305)

(1) Applicable Beneficiary

(2) Applicable Drug

(3) Incurred Costs

(4) Manufacturer

(5) Medicare Part D Discount Information

(6) Negotiated Price

(7) Other Health or Prescription Drug Coverage

c. Condition for Coverage of Drugs under Part D (§ 423.2305)

d. Medicare Coverage Gap Discount Program Agreement (§ 423.2315)

(1) Obligations of the Manufacturer

(2) Length of Agreement

e. Payment Processes for Part D Sponsors (§ 423.2320)

(1) Interim Payments

(2) Coverage Gap Discount Reconciliation

f. Provision of Applicable Discounts on Applicable Drugs for Applicable Beneficiaries (§ 423.2325)

(1) Obligations of Part D Sponsors; Point-of-Sale Discounts

(2) Collection of Data

(3) Other Health or Prescription Drug Coverage

(4) Supplemental Benefits

(5) Pharmacy Prompt Payment

g. Manufacturer Discount Payment Audit and Dispute Resolution (§ 423.2330)

(1) Third Party Administrator Audits

(2) Manufacturer Audits

(3) Dispute Resolution

h. Beneficiary Dispute Resolution (423.2335)

i. Compliance Monitoring and Civil Money Penalties (§ 423.2340)

j. Termination of Agreement (§ 423.2345)

2. Inclusion of Benzodiazepines and Barbiturates as Part D Covered Drugs (§ 423.100)

3. Pharmacy Benefit Manager's Transparency Requirements (§ 423.501 and § 423.514)

B. Strengthening Beneficiary Protections

1. Good Cause and Reinstatement into a Cost Plan (§ 417.460)

2. Requiring MA Plans to Issue ID Cards (§ 422.111)

3. Determination of Actuarially Equivalent Creditable Prescription Drug Coverage (§ 423.56)

4. Who May File Part D Appeals with the Independent Review Entity (§ 423.600 and § 423.602)

5. Independence of LTC Consultant Pharmacists (§ 483.60)

C. Excluding Poor Performers

1. CMS Termination of Health Care Prepayment Plans (§ 417.801)

2. Plan Performance Ratings as a Measure of Administrative and Management Arrangements and as a Basis for Termination or Non-Renewal of a Medicare Contract (§ 422.504, § 422.510, § 423.505, and § 423.509)

3. Denial of Applications Submitted by Part C and D Sponsors with a Past Contract Termination or CMS-Initiated Non-Renewal (§ 422.502 and § 423.503)

D. Improving Program Efficiencies

1. Cost Contract Plan Public Notification Requirements in Cases of Non-Renewal (§ 417.492)

2. New Benefit Flexibility for Fully-Integrated Dual Eligible Special Needs Plans (FIDE SNPs) (§ 422.102)

3. Application of the Medicare Hospital-Acquired Conditions and Present on Admission Indicator Policy to MA Organizations (§ 422.504)

4. Clarifying Coverage of Durable Medical Equipment (§ 422.100 and § 422.111)

a. Access to Preferred DME Items and Supplies

b. Medical Necessity Requirements for DME Items and Supplies

c. Transition Period for Coverage of Non-Preferred DME Items and Supplies

d. Midyear Changes to Preferred DME Items and Supplies

e. Appeals

f. Disclosure of DME Coverage Limitations

5. Broker and Agent Requirements (§ 422.2274 and § 423.2274)

6. Establishment and Application of Daily Cost-Sharing Rate as Part of Drug Utilization Management and Fraud, Abuse, and Waste Control Program (§ 423.104 and § 423.153)

E. Clarifying Program Requirements

1. Technical Corrections to Enrollment Provisions (§ 417.422, § 417.432, § 422.60, and § 423.56)

2. Extending MA and Part D Program Disclosure Requirements to Section 1876 Cost Contract Plans (§ 417.427)

3. Clarification of, and Extension to Local Preferred Provider Plans, of Regional Preferred Provider Organization Plan Single Deductible Requirement (§ 422.101)

4. Technical Change to Private Fee-For-Service Plan Explanation of Benefits Requirements (§ 422.216)

5. Application Requirements for Special Needs Plans (§ 422.500, § 422.501, § 422.502, § 422.641, and § 422.660)

6. Timeline for Resubmitting Previously Denied MA Applications (§ 422.501)

7. Clarification of Contract Requirements for First Tier and Downstream Entities (§ 422.504 and § 423.505)

8. Valid Prescriptions (§ 423.100 and § 423.104)

9. Medication Therapy Management Comprehensive Medication Reviews and Beneficiaries in LTC Settings (§ 423.153)

10. Employer Group Waiver Plans Requirement to Follow All Part D Rules Not Explicitly Waived (§ 423.458)

11. Access to Covered Part D Drugs Through Use of Standardized Technology and National Provider Identifiers (§ 423.120)

III. Collection of Information Requirements

IV. Response to Public Comments

V. Regulatory Impact Analysis

Regulations Text

Acronyms

AO Accrediting Organization

ADS Automatic Dispensing System

AEP Annual Enrollment Period

AHFS American Hospital Formulary Service

AHFS-DI American Hospital Formulary Service-Drug Information

AHRQ Agency for Health Care Research and Quality

ALJ Administrative Law Judge

ANOC Annual Notice of Change

AOR Appointment of Representative

BBA Balanced Budget Act of 1997 (Pub. L. 105-33)

BBRA [Medicare, Medicaid and State Child Health Insurance Program] Balanced Budget Refinement Act of 1999 (Pub. L. 106-113)

BIPA [Medicare, Medicaid, and SCHIP] Benefits Improvement Protection Act of 2000 (Pub. L. 106-554)

BLA Biologics License Application

CAHPS Consumer Assessment Health Providers Survey

CAP Corrective Action Plan

CCIP Chronic Care Improvement Program

CC/MCC Complication/Comorbidity and Major Complication/Comorbidity

CCS Certified Coding Specialist

CDC Centers for Disease Control

CHIP Children's Health Insurance Programs

CMR Comprehensive Medical Review

CMS Centers for Medicare & Medicaid Services

CMS-HCC CMS Hierarchal Condition Category

CTM Complaints Tracking Module

COB Coordination of Benefits

CORF Comprehensive Outpatient Rehabilitation Facility

CPC Certified Professional Coder

CY Calendar year

DEA Drug Enforcement Administration

DIR Direct and Indirect Remuneration

DME Durable Medical Equipment

DMEPOS Durable Medical Equipment, Prosthetic, Orthotics, and Supplies

D-SNPs Dual Eligible SNPs

DOL U.S. Department of Labor

DRA Deficit Reduction Act of 2005 (Pub. L. 109-171)

DUM Drug Utilization Management

EGWP Employer Group/Union-Sponsored Waiver Plan

EOB Explanation of Benefits

EOC Evidence of Coverage

ESRD End-Stage Renal Disease

FACA Federal Advisory Committee Act

FDA Food and Drug Administration

FEHBP Federal Employees Health Benefits Plan

FFS Fee-For-Service

FIDE Fully-integrated Dual Eligible

FIDE SNPs Fully-integrated Dual Eligible Special Needs Plans

FMV Fair Market Value

FY Fiscal year

GAO Government Accountability Office

HAC Hospital-Acquired Conditions

HCPP Health Care Prepayment Plans

HEDIS HealthCare Effectiveness Data and Information Set

HHS [U.S. Department of] Health and Human Services

HIPAA Health Insurance Portability and Accountability Act of 1996 (Pub. L. 104-191)

HMO Health Maintenance Organization

HOS Health Outcome Survey

HPMS Health Plan Management System

ICD-9-CM Internal Classification of Disease, 9th, Clinical Modification Guidelines

ICEP Initial Coverage Enrollment Period

ICL Initial Coverage Limit

ICR Information Collection Requirement

ID Identification

IPPS [Acute Care Hospital] Inpatient Prospective Payment System

IRE Independent Review Entity

IVC Initial Validation Contractor

LEP Late Enrollment Penalty

LIS Low Income Subsidy

LPPO Local Preferred Provider Organization

LTC Long Term Care

MA Medicare Advantage

MAAA Member of the American Academy of Actuaries

MA-PD Medicare Advantage-Prescription Drug Plan

MIPPA Medicare Improvements for Patients and Providers Act of 2008 (Pub. L. 110-275)

MOC Medicare Options Compare

MOOP Maximum Out-of-Pocket

MPDPF Medicare Prescription Drug Plan Finder

MMA Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (Pub. L. 108-173)

MS-DRG Medicare Severity Diagnosis Related Group

MSA Metropolitan Statistical Area

MSAs Medical Savings Accounts

MSP Medicare Secondary Payer

MTM Medication Therapy Management

MTMP Medication Therapy Management Program

NAIC National Association Insurance Commissioners

NCPDP National Council for Prescription Drug Programs

NCQA National Committee for Quality Assurance

NDA New Drug Application

NDC National Drug Code

NGC National Guideline Clearinghouse

NIH National Institutes of Health

NOMNC Notice of Medicare Non-coverage

NPI National Provider Identifier

OIG Office of Inspector General

OMB Office of Management and Budget

OPM Office of Personnel Management

OTC Over the Counter

PART C Medicare Advantage

PART D Medicare Prescription Drug Benefit Program

PBM Pharmacy Benefit Manager

PDE Prescription Drug Event

PDP Prescription Drug Plan

PFFS Private Fee for Service Plan

POA Present on Admission (Indicator)

POS Point-of-Sale

PPO Preferred Provider Organization

PPS Prospective Payment System

P&T Pharmacy & Therapeutics

QIO Quality Improvement Organization

QRS Quality Review Study

PACE Programs of All Inclusive Care for the Elderly

RADV Risk Adjustment Data Validation

RAPS Risk Adjustment Payment System

RHIA Registered Health Information Administrator

RHIT Registered Health Information Technician

RPPO Regional Preferred Provider Organization

SEP Special Enrollment Periods

SHIP State Health Insurance Assistance Programs

SNF Skilled Nursing Facility

SNP Special Needs Plan

SPAP State Pharmaceutical Assistance Programs

SSA Social Security Administration

SSI Supplemental Security Income

TPA Third Party Administrator

TrOOP True Out-of-Pocket

U&C Usual and Customary

UPIN Uniform Provider Identification Number

USP U.S. Pharmacopoeia

SUPPLEMENTARY INFORMATION:

I. Background

The Balanced Budget Act of 1997 (BBA) (Pub. L. 105-33) created a new “Part C” in the Medicare statute (sections 1851 through 1859 of the Social Security Act (the Act)) which established what is now known as the Medicare Advantage (MA) program. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) (Pub. L. 108-173), enacted on December 8, 2003, added a new “Part D” to the Medicare statute (sections 1860D-1 through 1860D-42 of the Act) entitled the Medicare Prescription Drug Benefit Program, and made significant changes to the existing Part C program, which it named the Medicare Advantage (MA) Program. The MMA directed that important aspects of the Part D program be similar to, and coordinated with, regulations for the MA program. Generally, the provisions enacted in the MMA took effect January 1, 2006. The final rules implementing the MMA for the MA and Part D prescription drug programs appeared in the January 28, 2005

Federal Register

(70 FR 4588 through 4741 and 70 FR 4194 through 4585, respectively).

Since the inception of both Parts C and D, we have periodically revised our regulations either to implement statutory directives or to incorporate knowledge obtained through experience with both programs. For instance, in September 2008 and January 2009, we issued Part C and D regulations (73 FR 54226 and 74 FR 1494, respectively) to implement provisions in the Medicare Improvement for Patients and Providers Act (MIPPA) (Pub. L. 110-275). We promulgated a separate interim final rule in January 2009 to address MIPPA provisions related to Part D plan formularies (74 FR 2881). In April 2010, we issued Part C and D regulations (75 FR 19678) which strengthened various program participation and exit requirements; strengthened beneficiary protections; ensured that plan offerings to beneficiaries included meaningful differences; improved plan payment rules and processes; improved data collection for oversight and quality assessment; implemented new policies; and clarified existing program policy.

In a final rule that appeared in the April 15, 2011

Federal Register

(76 FR 21432), we continued our process of implementing improvements in policy consistent with those included in the April 2010 final rule, and also implemented changes to the Part C and Part D programs made by recent legislative changes. The Patient Protection and Affordable Care Act (Pub. L. 111-148) was enacted on March 23, 2010, as passed by the Senate on December 24, 2009, and the House on March 21, 2010. The Health Care and Education Reconciliation Act (Pub. L. 111-152), which was enacted on March 30, 2010, modified a number of Medicare provisions in Pub. L. 111-148 and added several new provisions. The Patient Protection and Affordable Care Act (Pub. L. 111-148) and the Health Care and Education Reconciliation Act (Pub. L. 111-152) are collectively referred to as the Affordable Care Act. The Affordable Care Act included significant reforms to both the private health insurance industry and the Medicare and Medicaid programs. Provisions in the Affordable Care Act concerning the Part C and D programs largely focused on beneficiary protections, MA payments, and simplification of MA and Part D program processes. These provisions affected implementation of our policies regarding beneficiary cost-sharing, assessing bids for meaningful differences, and ensuring that cost-sharing structures in a plan are transparent to beneficiaries and not excessive. In the April 2011 final rule, we revised regulations on a variety of issues based on the Affordable Care Act and our experience in administering the MA and Part D programs. The rule covered areas such as marketing, including agent/broker training; payments to MA organizations based on quality ratings; standards for determining if organizations are fiscally sound; low income subsidy policy under the Part D program; payment rules for non-contract health care providers; extending current network adequacy standards to Medicare medical savings account (MSA) plans that employ a network of providers; establishing limits on out-of-pocket expenses for MA enrollees; and several revisions to the special needs plan requirements, including changes concerning SNP approvals.

II. Provisions of the Proposed Regulations

In the sections that follow, we discuss the proposed changes to the regulations in 42 CFR parts 417, 422, and 423 governing the MA and prescription drug benefit programs. We also are considering changes to the regulations setting forth Medicare conditions of participation for long-term care facilities, which are currently codified at 42 CFR part 483. To better frame the discussion, we have structured the overall preamble narrative by topic area rather than by subpart order. Accordingly, our proposals address the following five specific topic areas:

• Implementing provisions of MIPPA and the Affordable Care Act.

• Strengthening beneficiary protections.

• Excluding poor performers.

• Improving program efficiencies.

• Clarifying program requirements.

Several of the proposed revisions and clarifications affect both the MA and prescription drug programs, while a few affect cost contracts under section 1876 of the Act. Within each topic area, we provide a chart that lists the associated regulatory citations and we discuss the provisions in order of appearance in the proposed regulations. We are also considering changing the long term care facility conditions of participation

pertaining to pharmacy services and, accordingly, cover that issue under the appropriate topic in the preamble section, in order of regulation location under consideration.

We note that these regulations would be effective 60 days after the publication of the final rule that would finalize the proposed changes discussed in this proposed rule, except where otherwise noted in the preamble. Only one proposed item would have a different effective date: section 175(b) of MIPPA provides that the proposed amendments requiring that benzodiazepines and, for specified health conditions, barbiturates be considered as Part D drugs apply to prescriptions dispensed on or after January 1, 2013.

A. Implementing Statutory Provisions

This section contains three provisions, two of which would implement sections of the Affordable Care Act and one which would implement a MIPPA mandate. We propose to consolidate and codify previous guidance regarding the Coverage Gap Discount Program mandated by the Affordable Care Act. Through this consolidation we aim to provide stakeholders a central, clear source of direction. Regulations under a MIPPA provision would provide first line treatment for beneficiaries with certain health conditions who require benzodiazepines and, as specified, barbiturates. We believe that implementing section 6005 of the Affordable Care Act, which requires us to collect Pharmacy Benefit Manager (PBM) spread amounts, would establish necessary transparency related to entities that provide pharmacy benefits management services to Part D sponsors. The changes based on provisions in the Affordable Care Act and MIPPA are detailed in Table 1.

Table 1—Provisions To Implement Statutory Provisions

Preamble section

Provision

Part 423

Subpart

Section(s)

II.A.1.

Coverage Gap Discount Program

Subpart C

Subpart K

Subpart T

Subpart T

Subpart W (new)

§ 423.100

§ 423.505

§ 423.1000

§ 423.1002

§ 423.2300-§ 423.2345

II.A.2.

Inclusion of Benzodiazepines and Barbiturates as Part D Covered Drugs

Subpart C

§ 423.100

II.A.3.

Pharmacy Benefit Manager's Transparency Requirements

Subpart K

§ 423.501

§ 423.514

1. Coverage Gap Discount Program (§ 423.100, § 423.505(b), § 423.1000, § 423.1002, and § 423.2300 through § 423.2345 (Subpart W))

The Medicare Prescription Drug Benefit was enacted into law on December 8, 2003, in section 101 of the MMA and codified in sections 1860D-1 through 1860D-42 of the Act. Section 101 of the MMA amended Title XVIII of the Act by redesignating Part D as Part E and inserting new Part D, which establishes the voluntary Prescription Drug Benefit Program (Part D). The Part D program is available to individuals who are entitled to Medicare Part A or enrolled in Medicare Part B. We contract with private companies referred to as Part D sponsors to administer the Part D program via stand alone prescription drug plans (PDPs) and prescription drug plans offered by Medicare Advantage Organizations (MA-PDs). The Part D program became effective January 1, 2006.

The MMA established standard Part D prescription drug coverage that consists of coverage subject to an annual deductible, 25 percent coinsurance (or an actuarially equivalent cost-sharing design) up to the initial coverage limit (ICL), and catastrophic coverage for individuals who exceed the annual maximum true out-of-pocket (TrOOP) threshold with cost-sharing equal to the greater of a $2/$5 copayment or coinsurance of 5 percent. Prior to the enactment of the Affordable Care Act, under standard coverage, individuals that did not receive additional cost-sharing subsidies from CMS or additional coverage by other secondary payers (for example, State Pharmaceutical Assistance Programs) were responsible for paying one hundred percent of the Part D negotiated price for covered Part D claims above the ICL until their TrOOP costs exceed the annual threshold amount.

The Affordable Care Act made several amendments to Part D of Title XVIII of the Act, including adding sections 1860D-43 and 1860D-14A of the Act, and amending section 1860D-2(b) of the Act. Beginning on January 1, 2011, these amendments started phasing out the Part D coverage gap, or “donut hole” for Medicare beneficiaries who do not already receive low-income subsidies from CMS by establishing the Medicare Coverage Gap Discount Program (Discount Program) and gradually increasing coverage in the coverage gap for both generic drugs (beginning in 2011) and brand name drugs and biological products (beginning in 2013). By 2020, beneficiary cost-sharing for all covered brand-name and generic drugs and biological products will equal 25 percent until they reach catastrophic coverage.

The Discount Program makes manufacturer discounts available at the point-of-sale to applicable Medicare beneficiaries receiving applicable drugs while in the coverage gap. In general, the discount on each applicable drug is 50 percent of an amount equal to the negotiated price of the drug (less any dispensing fee). Manufacturers must agree to provide these discounts by signing an agreement with CMS in order for their applicable drugs to continue to be covered under Medicare Part D, unless we use our authority under section 1860D-43(c) of the Act to make an exception that allows coverage without an agreement.

While manufacturer discounts under the Discount Program must be made available at point-of-sale, the Affordable Care Act does not specify how this should be done. At the same time, it prohibits us from receiving or distributing any funds of the manufacturer under the program. In order to provide point-of-sale discounts, we determined that an entity must have the information necessary to determine at that point in time that the drug is discountable, the beneficiary is eligible for the discount, the claim is wholly or partly in the coverage gap, and the amount of the discount, taking into consideration negotiated plan prices and that plan supplemental benefits must pay before the discount amount can be determined. We determined that

the only entities that have the information necessary to provide point-of-sale discounts under the Discount Program are Part D sponsors. Only the Part D sponsor knows which Part D drugs are on its formulary and which enrollees have obtained an exception to receive a non-formulary Part D drug. The Part D sponsor has the low-income subsidy (LIS) information for beneficiaries that is necessary to exclude such claims from the Discount Program. The Part D sponsor tracks gross drug spend and TrOOP costs, which are necessary for determining when the beneficiary enters and exits the coverage gap. In addition, only the Part D sponsor knows which portion of the claim is in the coverage gap. For these reasons, we believe only the Part D sponsor can accurately provide the discount at point-of-sale.

We explored the viability of a model whereby a third party administrator (TPA) could directly adjudicate the discount payment to pharmacies. In this hypothetical model, the pharmacy would submit the Part D claim to the Part D sponsor and receive information on the response that would direct the pharmacy to bill the third party for applicable claims. While this model initially showed promise, our discussions with industry through National Council of Prescription Drug Program (NCPDP) workgroups revealed that neither the current Health Insurance Portability and Accountability Act (HIPAA) electronic pharmacy claims billing standard nor the next HIPAA approved version of the billing standard could support the transfer of information from the Part D sponsor that would be necessary to specify the appropriate claims and appropriate discount amounts to be billed to the third party administrator, or allow for accurate coordination of benefits among payers. Consequently, we determined that this model cannot be used to implement the Discount Program in the foreseeable future.

Section 1860D-14A(d)(5) of the Act authorizes us to implement the Discount Program through program instruction. We used this authority to issue program guidance to Part D sponsors, with an abbreviated notice and comment period, instructing them to provide applicable discounts on applicable drugs to applicable beneficiaries at point-of-sale beginning on January 1, 2011. The guidance also specified that Part D sponsors would report discount amounts to us, that we would invoice manufacturers on a quarterly basis for these discounts, and that the manufacturers would repay each Part D sponsor directly for the invoiced discount provided on the manufacturers' behalf. We determined that this model was necessary because Part D sponsors needed to provide the discounts at point-of-sale (as explained previously) and we needed to coordinate the discount payments between manufacturers and Part D sponsors to ensure discounts were appropriately provided by the Part D sponsors and reimbursed by the manufacturers without directly receiving or distributing manufacturer funds (which we are prohibited from doing by section 1860D-14A(d)(2)(A) of the Act).

We needed to implement the Discount Program through program instruction because of the January 1, 2011 implementation deadline. Although not required, we are now proposing to codify most existing Discount Program requirements (that is, those that we have previously implemented through the relevant Agreements and guidance) through full notice and comment rulemaking to provide additional transparency and a formal framework for operating the Discount Program and enforcing its requirements.

a. Scope (§ 423.2300)

Subpart W of part 423 implements provisions included in sections 1860D-14A and 1860D-43 of the Act. This subpart sets forth requirements as follows:

• Condition of coverage of drugs under Part D.

• The Medicare Coverage Gap Discount Program Agreement.

• Coverage gap discount payment processes for Part D sponsors.

• Provision of applicable discounts on applicable drugs for applicable beneficiaries.

• Manufacturer audit and dispute resolution processes.

• Resolution of beneficiary disputes involving coverage gap discounts.

• Compliance monitoring and civil money penalties.

• The termination of the Discount Program Agreement.

b. Definitions (§ 423.2305)

Proposed § 423.2305 includes definitions for terms that are frequently used in this subpart. Those terms we believe need additional clarification are described separately in this section of the proposed rule.

(1) Applicable Beneficiary

Applicable beneficiary is defined in § 423.100. We clarify that enrollees in employer-sponsored group prescription drug plans (as defined in § 423.454) may qualify as applicable beneficiaries.

(2) Applicable Drug

Applicable drug is defined in § 423.100. We clarify that applicable drugs include all covered Part D drugs marketed under a new drug application (NDA) or biologics license application (BLA) (other than a product licensed under section 351(k) of the Public Health Service Act). This means that such drugs and biological products would be subject to an applicable discount in the coverage gap even if a Part D sponsor otherwise considers the product to be generic under its benefit. Conversely, covered Part D drugs that are marketed under trade names and generally thought of as brand-name drugs or biological products, but are not approved under an NDA or licensed under a BLA (other than a product licensed under section 351(k) of the Public Health Service Act), are not applicable drugs that would be subject to an applicable discount in the coverage gap. Finally, drugs excluded from Part D under section 1860D-2(e)(2)(A) of the Act are not covered Part D drugs and therefore, such drugs would not be applicable drugs subject to an applicable discount even if covered by the Part D sponsor under an enhanced benefit. Part D sponsors would need to make these determinations on a National Drug Code (NDC) by NDC basis.

The second part of the definition provides that an applicable drug is either available on-formulary if a Part D sponsor uses a formulary, or available under the benefits provided by a Part D sponsor that does not use a formulary, or available to a particular beneficiary through an exception or appeal for that particular beneficiary. Applicable drugs covered under transition and emergency fill policies are considered covered through an exception and, therefore, would be subject to applicable discounts.

In addition, we interpret the definition of an applicable drug for purposes of the Discount Program to exclude Part D compounds. While Part D sponsors may cover compounds with at least one Part D drug ingredient, and that ingredient would be an applicable drug if dispensed on its own, in light of the operational difficulty in accurately determining which portion(s) of a Part D compound represents the Part D drug, we believe that the applicable drug determination must be made with respect to the compound as a whole. Given that a compound as a whole is not approved under an NDA or BLA, a compound does not meet the definition of an applicable drug.

(3) Incurred Costs

Section 3301 of the Affordable Care Act amends section 1860D-2(b)(4) of the Act by adding subparagraph (E) when applying subparagraph (A) to include the negotiated price (as defined in paragraph (6) of section 1860D-14A(g) of the Act) of an applicable drug of a manufacturer that is furnished to an applicable beneficiary under Medicare Coverage Gap Discount Program regardless of whether part of such costs were paid by a manufacturer under such program, except that incurred costs shall not include the portion of the negotiated price that represents the reduction in coinsurance resulting from the application of paragraph (2)(D) (that is, gap coverage). Therefore, we propose to revise the definition of incurred costs in § 423.100 by adding the following language to paragraph (2)(ii) of such definition—“or by a manufacturer as payment for an applicable discount (as defined § 423.2305) under the Medicare Coverage Gap Discount Program (as defined in § 423.2305)”. This would mean that all applicable discounts paid by manufacturers would be treated as incurred costs for purposes of calculating the beneficiary's TrOOP.

(4) Manufacturer

Section 1860D-14A(g)(5) of the Act defines manufacturer under the Discount Program as any entity which is engaged in the production, preparation, propagation, compounding, conversion or processing of prescription drug products, either directly or indirectly, by extraction from substances of natural origin, or independently by means of chemical synthesis, or by a combination of extraction and chemical synthesis. Such term does not include a wholesale distributor of drugs or a retail pharmacy licensed under State law. We propose to adopt this statutory language in § 423.2305 and also add the following clarifying language “but includes entities otherwise engaged in repackaging or changing the container, wrapper, or labeling of any applicable drug product in furtherance of the distribution of the applicable drug from the original place of manufacture to the person who makes the final delivery or sale to the ultimate consumer for use.” We propose adding this language to the definition to be consistent with the definition of the term “manufacturer” in section 510 for the Federal Food Drug and Cosmetic Act as well as to track the defined term in the Discount Program Agreement.

Moreover, we believe this is the only practical way to define manufacturer so that we can accurately assign responsibility for the discounts. While applicable drugs may actually be made by a limited number of companies, many more companies commonly repackage or relabel drug products and market them with their own labeler codes. Registered drug establishments are required by law to provide the FDA with a current list of all drugs manufactured, prepared, propagated, compounded, or processed by it for commercial distribution. (See section 510 of the Federal Food, Drug, and Cosmetic Act 921 U.S.C. 360.) Each listed product is identified by a unique NDC, which identifies the labeler, product, and trade package size. The first segment, the labeler code, identifies the firm that manufactures (including repackers and relabelers) or distributes (under its own name) the drug. Therefore, we can accurately identify the company responsible for labeling the product and require this company to pay the discount. Alternatively, it would be very difficult, if not impossible, to track such relabeled or repackaged products back to the original maker of the drug if we limited the definition of manufacturer to the original maker. We would interpret “entities otherwise engaged in repackaging or changing the container, wrapper, or labeling * * *” to mean the companies associated with the unique labeler codes that are included in the NDCs of the applicable drugs dispensed by pharmacies, therefore these companies would be considered manufacturers under the Discount Program.

Applicable drugs are marketed with labels that include a labeler code identifying the company that labels the product. While the same applicable drug may be marketed by multiple companies, only one company is linked to a unique labeler code. All manufacturers of applicable drugs, meaning all companies that label applicable drugs with unique labeler codes, would be required to sign an agreement for any applicable drugs with such labeler codes to be covered under Medicare Part D as of January 1, 2011. Only one manufacturer would be identified with each labeler code and, therefore, only one manufacturer would be responsible for paying applicable discounts associated with that labeler code at any given time.

(5) Medicare Part D Discount Information

In accordance with section 1860D-14A(d)(3)(C) of the Act, we require the TPA to provide adequate and timely information to manufacturers, consistent with the Discount Program Agreement with the manufacturers, as necessary for the manufacturer to fulfill its obligations under the Discount Program. Accordingly, we require the TPA to invoice each manufacturer each quarter on behalf of Part D sponsors for the applicable discounts advanced by the Part D sponsors to applicable beneficiaries and reported to CMS on the prescription drug event (PDE) records. The TPA also provides information to the manufacturer along with each quarterly invoice that is derived from applicable data elements available on PDE records as determined by CMS. We propose to define this information in § 423.2305 as Medicare Part D Discount Information.

Generally, the Medicare Part D Discount Information would include certain claim-level detail derived from the PDE record. Information such as applicable drug NDC, dispensing pharmacy, quantity dispensed, date of service, days supply, prescription and fill number, and reported gap discount would be provided. We would provide this information so that a manufacturer could evaluate the accuracy of claimed discounts and resolve disputes concerning the manufacturer's payment obligations under the Discount Program.

Under the current Medicare Coverage Gap Discount Program Agreement with manufacturers, “Medicare Part D Discount Information” refers to the information derived from applicable data elements available on PDEs and set forth in Exhibit A of the Agreement that will be sent from the TPA to the manufacturer along with each quarterly invoice. However, section III(f) of the Agreement generally prohibits us from disclosing any identifying beneficiary information under the Discount Program. Although the “Medicare Part D Discount Information” does not include specific beneficiary identifiers, an issue arises when the volume of claims for an applicable drug is so low that the data provided as “Medicare Part D Discount Information” could be used to identify a Medicare beneficiary.

In order to protect the identity of Medicare beneficiaries, we have a cell-size suppression policy that prohibits disclosure of data if the data cell contains 10 or fewer individuals. In applying this policy to the Discount Program, CMS would be unable to disclose all the data elements currently specified as “Medicare Part D Discount Information” when 10 or fewer beneficiaries with the same applicable drug (identified as having the same first two segments of NDC) have claims at the same pharmacy. This threshold is based on all Part D claims for an applicable drug (identified as having the

same first two segment of the NDC) at the same pharmacy, not 10 or fewer applicable beneficiaries with coverage gap claims.

When we agreed to provide the data elements specified in Exhibit A of the current Medicare Coverage Gap Discount Program Agreement, we did not take into consideration this issue that arises if claims volume is so low that this information could reasonably be used to identify a beneficiary. Consequently, we believe we would need to further limit the information that could be provided to manufacturers based upon the prohibition on releasing beneficiary identifying information. We propose withholding the Service Provider Identifier information when a claim qualifies as low volume (that is, 10 or fewer beneficiaries receiving the same drug product at the same pharmacy). This would mean that the remaining claims-level detail would be provided, but it would not specify the service provider for each claim. By doing this, we would comply with the CMS cell size suppression policy while still providing claims-level detail that would be helpful to manufacturers for evaluating the accuracy of the invoiced discount payments. We seek comments on this proposal.

(6) Negotiated Price

We propose to define negotiated price for purposes of the Discount Program consistent with section 1860D-14A(g)(6), which defines “negotiated price” in terms of its meaning in § 423.100 as of the date of enactment of the section (that is, as of March 23, 2010), except that such definition does not include dispensing fees. Part D vaccine administration fees would be excluded from the definition of negotiated price for purposes of the Discount Program because we believe that, for purposes of the Discount Program, they are analogous to dispensing fees, which are explicitly excluded from the definition of negotiated price for purposes of determining the applicable discount. Unlike sales tax, dispensing fees and vaccine administration fees pay for services apart from the applicable drug itself. This is made clear by the fact that a vaccine administration fee may be billed separately from the dispensing of the vaccine. Sales tax remains included in the definition of negotiated price under the Discount Program. Thus, we are proposing to define “negotiated price” for purposes of the Discount Program and this subpart as: the price for a covered Part D drug that— (1) the Part D sponsor (or other intermediary contracting organization) and the network dispensing pharmacy or other network dispensing provider have negotiated as the amount such network entity will receive, in total, for a particular drug; (2) is reduced by those discounts, direct or indirect subsidies, rebates, other price concessions, and direct or indirect remuneration that the Part D sponsor has elected to pass through to Part D enrollees at the point-of-sale; and (3) excludes any dispensing fee or vaccine administration fee for the applicable drug.

Further, although the statutory definition speaks only to the negotiated price with respect to a network pharmacy, given that there is no limitation on an applicable beneficiary's entitlement to applicable discounts on applicable drugs obtained out-of-network, we do not believe Congress intended to exclude these discounts from the Discount Program. Therefore, we propose to specify in § 423.2305 that the negotiated price also means, for purposes of out-of-network claims, the plan allowance as determined under § 423.124, less any dispensing fee and vaccine administration fee.

(7) Other Health or Prescription Drug Coverage

Section 1860D-14A(c)(1)(A)(v) of the Act requires that the applicable discount get applied before any coverage or financial assistance under other health benefit plans or programs that provide coverage or financial assistance for the purchase or provision of prescription drug coverage on behalf of applicable beneficiaries. Section 423.2305 of the proposed rule would define the term “other health or prescription drug coverage” as any coverage or financial assistance under other health benefit plans or programs that provide coverage or financial assistance for the purchase or provision of prescription drug coverage on behalf of applicable beneficiaries. This would include any programs that provide coverage or financial assistance outside of Part D. Thus, the applicable discount would apply before any “other health or prescription drug coverage” such as state pharmaceutical assistance programs (SPAPs), Aids Drug Assistance Programs (ADAPs), Indian Health Service, or supplemental coverage required by the Commonwealth of Puerto Rico.

In addition, we propose to include in the definition of “other health or prescription drug coverage” any coverage offered through employer group health or waiver plans (EGWPs) other than basic prescription drug coverage as defined in § 423.100. We would also propose to make a conforming change to the definition of supplemental benefits in § 423.100 to exclude benefits offered by EGWPs. Our proposal with respect to EGWPs would mean that a manufacturer discount always would be applied before any additional coverage beyond Part D, whether offered by the EGWP itself or by another party. We believe a clear standard in this regard is necessary to ensure we can properly administer the Discount Program for EGWP enrollees in light of our existing policies and procedures with respect to EGWP plans.

Under current waivers authorized by section 1860D-22(b) of the Act, EGWP sponsors submit only one formulary and standard-defined benefit package for review by CMS. EGWP sponsors may then customize actual formularies and benefit packages for specific employer or union clients, for example, by adding drugs to their formularies that are not covered under the basic benefit and/or reducing enrollee cost-sharing. Until now, we have allowed EGWP sponsors to determine whether any benefits offered under the EGWPs were Medicare (Part D) or non-Medicare (non-Part D) benefits because we did not collect information about or otherwise oversee specific EGWP benefit packages. However, with the implementation of the Discount Program, determining whether such benefits are supplemental Part D benefits (which would be applied before the applicable discount) or non-Medicare benefits (which would apply after the discount) is significant. We believe that many EGWP sponsors have already restructured their benefits so that the EGWP provides only basic Part D coverage (with full coverage gap) and considers any additional benefits as non-Medicare benefits. Given that we do not receive or review the final benefit packages and formularies offered to EGWP enrollees, we propose to exercise our waiver authority under section 1860D-22(b) of the Act to exclude all benefits offered by EGWPs from the definition of supplemental benefits and, therefore, these benefits, other than basic prescription drug coverage (as defined in § 423.100), would be considered “other health or prescription drug coverage” for purposes of the Discount Program. We seek comments on this proposal.

As an alternative to this proposal, we considered requiring EGWP sponsors to submit their final benefit packages for review and approval. Under this option, we would have limited EGWPs to offering only supplemental benefits that meet the requirements of § 423.104(f)(1)(ii). However, in addition to the significant challenges associated with expanding our review process to

accommodate another 25,000 to 50,000 benefit packages, this ultimately would not prevent employers or unions from offering separate benefits that would not be overseen or regulated by us; and therefore, would not provide the clear standard for distinguishing supplemental benefits from other health or prescription drug coverage for purposes of determining the applicable discount. Moreover, this alternative approach could adversely affect EGWP enrollees to the extent it would require EGWPs to make significant changes in order to bring their supplemental benefits in line with Part D rules—because it might prompt EGWPs to drop those supplemental benefits altogether or otherwise reduce coverage. Consequently, we believe it is better to clearly remove all employer sponsored benefits, other than basic prescription drug coverage as defined in § 423.100, from our purview, which we believe would leave EGWP enrollees in the same place they are today, while, as noted above, providing all participants in the Discount Program a bright line test for determining when the applicable discount applies.

c. Condition for Coverage of Drugs Under Part D (§ 423.2310)

Section 1860D-43(a) of the Act specifies that in order for coverage under Part D to be available for the covered Part D drugs (as defined in section 1860D-2(e) of the Act)) of a manufacturer, that manufacturer must agree to participate in the Discount Program, enter into a Discount Program Agreement, and enter into an agreement with the TPA. Although the statute appears to plainly contemplate that all manufacturers of covered Part D drugs must sign Discount Program Agreements in order for coverage under Part D to be available for such drugs, when read in context with the other provisions governing the Discount Program, we believe the plainest reading of section 1860D-43(a) is both inappropriate and infeasible. Thus, in implementing the Discount Program last year, we specified in program guidance that the exclusion from Part D coverage applies only to the applicable drugs of a manufacturer that fails to sign the Agreement and participate in the Program. We currently apply the exclusion from Part D coverage only to a manufacturer's applicable drugs. Other Part D drugs, such as generic drugs (as defined in § 423.4) of a manufacturer continue to be covered under Medicare Part D irrespective of the manufacturer's participation in the Discount Program. We propose to codify this policy in regulations.

The rationale for our narrower interpretation of section 1860D-43(a) of the Act is based on concern about beneficiary access to generic drugs and consideration of other contemporaneous provisions governing the Discount Program. First, given that the purpose of the Discount Program is to reduce financial burdens on beneficiaries in the coverage gap, we do not think that the requirements of section 1860D-43(a) of the Act were intended to potentially limit the availability of less expensive generic Part D drugs (which would occur if the generic products of a non-participating manufacturer were excluded). Rather, they were intended to ensure that manufacturers of brand name drugs had a strong incentive to participate in the Discount Program. When we were implementing the Discount Program last year, we were particularly concerned, in light of the short timeframe provided by the Affordable Care Act for collecting signed agreements from participating manufacturers for 2011, that a strict reading of the exclusion would have had the unintended consequence of negatively affecting the availability of generic drugs under Part D beginning January 1, 2011.

As noted above, we further believe that section 1860D-43(a) of the Act must be read in its proper context—in other words, it must coexist with all of the other requirements of the Discount Program, which are set forth in section 1860D-14A of the Act. Section 1860-D-14A of the Act requires manufacturers to provide discounts on applicable drugs at the point-of-sale, to provide appropriate data to CMS, and to comply with other requirements imposed by us or the TPA. Further, as described in more detail below, manufacturers with an agreement are subject to periodic audits by CMS and civil money penalties. Finally, section 1860D-14A of the Act specifies that, beginning with 2012, a manufacturer must enter into a Discount Program Agreement for a year no later than January 30 of the previous year—in other words, for a manufacturer to participate in the Discount Program for 2012, it would have had to have signed a Discount Program Agreement by January 30, 2011. In addition to these statutory requirements, there are administrative aspects of the Discount Program that include, but are not limited to, establishing connectivity with the TPA and with CMS, establishing electronic fund transfer accounts with more than 700 Part D sponsors, maintaining labeler code information with CMS, and reviewing file layouts and records for quarterly invoicing and payment reconciliation.

None of these statutory or administrative requirements is relevant to manufacturers of non-applicable drugs. Indeed, it would be impossible for a manufacturer with no applicable drugs to “participate” in the Discount Program (as a strict reading of section 1860D-43(a)(1) would require). Further, it would be wasteful and burdensome to require manufacturers of non-applicable drugs to undertake all of the administrative requirements set forth in the Discount Program Agreement with respect to drugs that are not subject to the requirements of section 1860D-14A of the Act.

With that in mind, we next turn to the issue of manufacturers with applicable drugs that also have non-applicable drugs. In our view, the same rationale applies to these manufacturers—although they can participate in the Discount Program with respect to their applicable drugs, they cannot do so with respect to their non-applicable drugs. We believe it would be both unfair and potentially very disruptive to beneficiaries to treat manufacturers of non-applicable drugs differently based on whether they also happen to make applicable drugs. For example, suppose that a manufacturer with no applicable drugs declines to participate in the Discount Program because it is literally unable to comply with the statutory requirements of section 1860D-14A of the Act. This manufacturer then acquires or begins to manufacture an applicable drug on February 1. If this manufacturer then was subject to the broader exclusion in section 1860D-43(a) of the Act arguably all of its drugs—both generic and applicable—would be non-covered for a period of almost two years. We do not believe that Congress intended such a disruptive result. Rather, we believe it is more appropriate to consider section 1860D-43(a) of the Act as excluding the applicable drugs of a manufacturer that fails to participate in the Discount Program.

In light of all of these considerations, we believe the a reasonable interpretation of 1860D-43(a) of the Act—one that preserves Congressional intent both to ensure manufacturer participation in the Discount Program and to alleviate financial burden for beneficiaries—is that the exclusion from Part D coverage applies only to the applicable drugs of manufacturers that fail to enter into a Discount Program Agreement and participate in the Discount Program. We seek comments on this proposal.

Section 1860D-43(c)(1) of the Act authorizes CMS to allow coverage for drugs that are not covered by Discount Program Agreements if CMS has made a determination that the availability of the drug is essential to the health of beneficiaries under this part, and we propose to codify this requirement in § 423.2310(b) of our proposed rule. However, we believe it is highly unlikely that we will need to exercise this authority given the strong participation by manufacturers in the Discount Program since 2011 and the likely availability of therapeutic alternatives for any Part D drugs.

d. Medicare Coverage Gap Discount Program Agreement (§ 423.2315)

Section 1860D-14A of the Act requires us to enter into agreements with manufacturers that participate in the Discount Program and to establish a model agreement in accordance with terms specified under section 1860D-14A(b) of the Act that provides for the performance of duties required under section 1860D-14A(c)(1) of the Act. We established the model agreement on August 1, 2010 and propose to codify in § 423.2315 those provisions that we believe must be included in the model agreement in order to meet the statutory requirements in these sections.

(1) Obligations of the Manufacturer

Section 1860D-14(A)(b)(1) of the Act specifies that the Discount Program Agreement between CMS and the manufacturers shall require manufacturers to provide applicable beneficiaries access to applicable discounts for applicable drugs of the manufacturer at the point-of-sale. In light of how the Discount Program has been structured (see the discussion section II.A.1. of this proposed rule), we would propose to implement this requirement as set forth in the current Discount Program Agreement; that is, we would propose in § 423.2315(b)(2) to require manufacturers to reimburse all applicable discounts provided by Part D sponsors on behalf of the manufacturer for all applicable drugs having NDCs with the manufacturer's FDA-assigned labeler code(s) that were invoiced to the manufacturer within a maximum of 3 years of the date of dispensing based upon information reported to CMS by Part D sponsors and used by CMS or the TPA to calculate the invoice.

In order for CMS and Part D sponsors to determine which applicable drugs are covered by Discount Program Agreements, the manufacturers must provide CMS with the FDA-assigned labeler code(s) for all applicable drug NDCs covered by their Discount Program Agreement. Under the current Discount Program Agreement, manufacturers must provide all of their labeler codes to CMS and must promptly update CMS with any additional labeler codes for applicable drugs no later than three business days after having received written notification of the codes from the FDA. We included this requirement in the Discount Program Agreement because, for the reasons previously described, it is the most efficient and accurate way to track which manufacturer is responsible for paying the applicable discount for an applicable drug and to assist plan sponsors in determining which drugs are applicable drugs. We maintain an up-to-date listing of the labeler codes covered under the Discount Program Agreements on the CMS website so that Part D sponsors can determine which labeler codes are covered by a Discount Program Agreement. To ensure that we have up-to-date information for this purpose, § 423.2315(b)(4) would require manufacturers to provide CMS with all labeler codes for all the manufacturer's applicable drugs and promptly update CMS with additional labeler codes for applicable drugs no later than three business days after having received written notification of the codes from the FDA.

To permit CMS and Part D sponsors to accurately identify applicable drugs, we propose to codify the requirement set forth in the Discount Program Agreement that manufacturers electronically list and maintain up-to-date electronic listing of all NDCs of the manufacturer, including the timely removal of discontinued NDCs, in the FDA NDC Directory. We believe this requirement will help ensure that all currently marketed applicable drugs are subject to the applicable discount and that only currently marketed applicable drugs are subject to the discount. Because manufacturers know the regulatory and marketing status of their products, they are in the best position to make this information available to Part D sponsors and CMS. We believe maintaining an up-to-date FDA electronic listing provides the most efficient, timely, and authoritative mechanism to accomplish this purpose while placing little additional burden on manufacturers that already must use the FDA electronic registration and listing system to comply with other FDA requirements.

We also propose to require manufacturers to maintain up-to-date NDC listings with the electronic database vendors for which they provide their NDCs for pharmacy claims processing. Part D sponsors rely upon these databases for adjudication of pharmacy claims at the point-of-sale, including discounting applicable drugs, and, therefore it is imperative that the information in these databases is accurate and up-to-date. Our proposal would require manufacturers to ensure that electronic database vendors are prospectively notified of NDCs for products that no longer are available on the market. We believe this requirement will benefit manufacturers because it will ensure that applicable discounts cease being applied as of the last lot expiration date of an applicable drug that is no longer on the market.

In implementing the Discount Program Agreement, we required manufacturers to pay each Part D sponsor in the manner specified by us within 38 calendar days of receipt of an invoice and Medicare Part D Discount Information for the quarterly applicable discounts included on the invoice. As previously described, we implemented the Discount Program such that Part D sponsors pay applicable discounts on behalf of manufacturers in order to comply with the statutory mandate that discounts be provided at the point-of-sale; and therefore, we require manufacturers to reimburse plan sponsors promptly because it is the manufacturers that are financially responsible for payment of applicable discounts. Given this structure, we propose to codify this requirement at § 423.2315(b)(3). We further propose in § 423.2315(b)(10) to require that manufacturers pay the quarterly invoices to accounts established by Part D sponsors via electronic funds transfer, unless otherwise specified by CMS, and within 5 business days of the transfer provide the TPA with electronic documentation in a manner specified by CMS. We believe these requirements are appropriate because they provide sufficient time for manufacturers to process the information in order to make the payments and are generally consistent with manufacturer obligations under the Medicaid Drug Rebate Program. Moreover, § 423.2315(b)(2) would prohibit manufacturers from withholding discount payments for their applicable drugs pending dispute resolution and, therefore, the 38-day requirement applies even if the manufacturer decides to dispute discount payments. As noted in our May 21, 2010 guidance, we believe this requirement is necessary to ensure that the manufacturer discounts are paid to Part D sponsors in a timely manner and are not delayed due to disputed amounts. We address our proposals with respect to

manufacturers' disputes later in this section of the proposed rule.

Section 1860D-14A(b)(2) of the Act requires each manufacturer with a Discount Program Agreement in effect to collect and have available appropriate data, as determined by CMS, to ensure that it can demonstrate to CMS compliance with the requirements under the Discount Program. In § 423.2315 (b)(5), we would codify this requirement by specifying that such information would include data related to manufacturer labeler codes, FDA drug approvals, FDA NDC Directory listings, NDC expiration dates, utilization and pricing information relied on by the manufacturer to dispute quarterly invoices and any other data we determine are necessary to carry out the Discount Program, and that manufacturers must collect, have available and maintain such information for a period of not less than 10 years from the date of payment of the invoice. The minimum 10-year retention requirement aligns with the standard Part D record retention requirement for Part D sponsors, thereby ensuring that applicable information would be maintained by manufacturers for the same time period.

Section 423.2315(b)(6) would require manufacturers to comply with the audit and the dispute resolution requirements proposed in § 423.2330, which are discussed in section II.A.1.g. of this proposed rule.

Section 1860D-43(a)(3) of the Act requires manufacturers to enter into and have in effect, under terms and conditions specified by CMS, a contract with a third party that CMS contracted with under subsection (d)(3) of section 1860D-14A of the Act. We propose to codify this requirement in § 423.2315(b)(9) by requiring the manufacturer to enter into and have in effect, under terms and conditions specified by CMS, an agreement with the TPA that has a contract under section 1860D-14A(d)(3) of the Act.

Finally, proposed § 423.2315(b)(11) would restrict the use of information disclosed to the manufacturer on the invoice, as part of the Medicare Part D Discount Information, or upon audit or dispute such that the manufacturer could use such information only for purposes of paying the discount under the Discount Program. This means that manufacturers would be allowed to use the information only as necessary to evaluate the accuracy of claimed discounts and resolve disputes concerning the manufacturer's payment obligations under the Discount Program. We believe this is an important limitation because we are making claim-level detail available to manufacturers that is not otherwise available to the public and therefore, should not be used for reasons beyond which it is being made available. As specified in the Data Use Provisions in Exhibit C of the Discount Program Agreement, the manufacturer would be prohibited from using the information to perform any functions not governed by the Discount Program Agreement, including, but not limited to, determination of non-Coverage Gap Discount payments to Part D sponsors and their subcontractors, payments to other providers of health and drug benefits under any Federal health care program or for marketing activities. Nevertheless, we recognize that manufacturers need to account for the discounts for financial statement forecasting and accounting purposes and therefore, these restrictions would not apply to the use of aggregated, summary-level data (that is, not prescription or claim-level data) for such purposes.

(2) Length of Agreement

Section 1860D-14A(b)(4)(A) of the Act states that an agreement shall be effective for an initial period of not less than 18 months and shall automatically be renewed for a period of not less than 1 year unless terminated under section 1860D-14A(b)(4)(B) of the Act. To ensure that the end of the initial term of each Discount Program Agreement corresponds to the end of a calendar year, § 423.2315(c)(3) would specify that all Discount Program Agreements have an initial period of 24 months, with automatic renewal for a period of one year each January 1 thereafter, unless the agreement is terminated in accordance with § 423.2345.

e. Payment Processes for Part D Sponsors (§ 423.2320)

(1) Interim Payments

Section 1860D-14A(c)(1)(A)(ii) of the Act requires that manufacturer discounts be provided to applicable beneficiaries at the point-of-sale. To ensure that Part D sponsors have the funds available to advance the gap discounts at the point-of-sale, we are proposing to provide monthly interim coverage gap payments to Part D sponsors under § 423.2320(a).

We propose to base these interim payments on a percentage of the coverage gap drug cost assumptions submitted with plan bids under § 423.265 and negotiated and approved under § 423.272, adjusted as necessary to account for applicable drug costs for applicable beneficiaries. Recognizing that Part D sponsors receive payments from manufacturers for invoiced discount amounts during the quarterly invoice process, we seek to ensure that Part D sponsors do not receive duplicate Discount Program payments for the manufacturer discounts advanced to beneficiaries at the point-of-sale. Thus, we propose to offset the Part D payments made to the Part D sponsor for each Part D plan by the discount amounts invoiced to manufacturers for that Part D plan.

EGWPs are not required to submit Part D bids. Thus, we do not have the information necessary to estimate the cost of manufacturer discounts for these Part D plans. Similar to our current policy for prospective low-income cost sharing subsidy and reinsurance subsidy payments, we propose not to provide interim payments to EGWPs. However, EGWPs will receive final reconciled coverage gap payments under the reconciliation process described in § 423.2320(b).

Program of All-inclusive Care for the Elderly (PACE) plans would not receive interim coverage gap payments because their enrollees already have zero cost-sharing without any coverage gap.

(2) Coverage Gap Discount Reconciliation

Because the interim coverage gap payments are estimates, Part D sponsors may incur actual Discount Program costs that are greater or less than the interim coverage gap payments. We would perform a cost-based reconciliation to ensure that Part D sponsors are paid dollar for dollar for all manufacturer discount amounts as reported on invoiced PDE data submitted for Part D payment reconciliation. This process is termed “Coverage Gap Discount Reconciliation” under § 423.2320(b) and will occur after Part D payment reconciliation.

The purpose of the coverage gap discount reconciliation is to make Part D sponsors whole for the gap discount amounts provided to applicable beneficiaries at the point-of-sale. In general, we would calculate the Coverage Gap Discount Reconciliation amount by subtracting the interim coverage gap payments from all manufacturer discount amounts as they are reported on PDE records by Part D sponsors. If the difference is positive, we would pay the difference to Part D sponsors. If the interim coverage gap payments exceed the manufacturer discount amounts, we would recover the difference from Part D sponsors.

Manufacturer discount amounts reported on PDE records submitted by the PDE submission deadline for Part D

payment reconciliation are included in Coverage Gap Discount Reconciliation. We would continue to accept PDEs with manufacturer discount amounts for 37 months following the end of the benefit year. Any manufacturer discount amounts reported on PDE records submitted after the PDE submission deadline for Part D payment reconciliation would continue to be invoiced to manufacturers and manufacturers would remit payments for invoiced coverage gap discount amounts to Part D sponsors.

f. Provision of Applicable Discounts on Applicable Drugs for Applicable Beneficiaries (§ 423.2325)

(1) Obligations of Part D Sponsors; Provision of Point-of-Sale Discounts

Section 1860D-14A(c)(1)(A)(ii) of the Act requires the manufacturer discounts to be provided at the point-of-sale. As extensively discussed previously in this subpart, manufacturer discounts can be provided at point-of-sale only if the entity adjudicating the electronic pharmacy claim has the information necessary to determine at that point in time: (1) The drug is an applicable drug; (2) the beneficiary is an applicable beneficiary; (3) the claim is wholly or partly in the coverage gap; and (4) the amount of the discount, taking into consideration Part D supplemental benefits that pay first. We have determined that the only entity capable of providing the discount at point-of-sale is the Part D sponsor because no other entity would have all four pieces of information. Therefore, § 423.2325(a) would require Part D sponsors to provide applicable beneficiaries with applicable discounts on applicable drugs at point-of-sale. Part D sponsors would be required by § 423.2325(b)(1) to determine that: (1) An enrollee is an applicable beneficiary (as defined in § 423.100); (2) a Part D drug is an applicable drug (as defined in § 423.100); and (3) the amount of the applicable discount (as defined in § 423.2305) in order to provide a discount at point-of-sale.

Part D sponsors would use the date of dispensing for purposes of providing an applicable discount at point-of-sale and determining the amount of such discount. However, if later information changes the beneficiary's eligibility for the applicable discount back to the date of dispensing (for example, retroactive low-income subsidy status changes, or retroactive changes resulting from automated TrOOP balance transfers between Part D sponsors via Financial Information Reporting (FIR) transactions), or changes the amount of the applicable discount or the applicable beneficiary's cost sharing, we propose to require, in § 423.2325(b)(2), that Part D sponsors make retroactive adjustments to the applicable discount as necessary to reflect such changes. For example, if a claim for an applicable drug was originally adjudicated in the initial coverage phase but later moved into the coverage gap as a result of receipt of an automated TrOOP balance transfer from a previous Part D sponsor, the applicable discount and the corrected beneficiary cost-sharing would be reported on the adjusted PDE. Conversely, if an original claim was adjudicated in the coverage gap with an applicable discount but later reprocessed in the catastrophic phase as a result of an automated TrOOP balance transfer, the applicable discount reported on the adjusted PDE is the mechanism for refunding the manufacturer.

If an applicable beneficiary has a claim for an applicable drug that straddles the coverage gap and another phase of the Part D benefit, section 1860D-14A(g)(4)(C) of the Act requires Part D sponsors only provide the discount on the portion of the negotiated price of the applicable drug that falls at or above the initial coverage limit and below the annual out-of-pocket threshold. Because our proposed definition of negotiated price for purposes of the Discount Program would exclude both the dispensing fee and vaccine administration fee, § 423.2325(b)(3) would require the dispensing fee and vaccine administration fee be included in the portion of the negotiated price that falls below the ICL or above the annual out-of-pocket threshold, to the extent possible (that is, as much of the dispensing fee that can be included in the portion below the ICL or above the annual out-of-pocket threshold). If the portion of the negotiated price that falls below the ICL or above the annual out-of-pocket threshold is less than the sum of the dispensing fee and vaccine administration fee, the dispensing fee must be included first in the portion that falls below the ICL or above the annual out-of-pocket threshold. The Affordable Care Act authorizes CMS to establish procedures to determine the discount at point-of-sale and is silent on the order in which negotiated price and non-negotiated price apply (as opposed to with supplemental and other health or prescription drug coverage) and thus, we propose this requirement in order to further support the statutory goal of alleviating the burden of the coverage gap on applicable beneficiaries.

Section 423.2325(b)(4) would require Part D sponsors to determine whether any affected beneficiaries need to be notified by the Part D sponsor that an applicable drug is eligible for Part D coverage whenever CMS specifies a retroactive effective date for a labeler code and would require the Part D sponsors to notify such beneficiaries. This situation could occur if participating manufacturers fail to notify CMS when a new labeler code becomes available or otherwise fail to provide us with all of their labeler codes as required. As required in proposed § 423.2315(b)(4), manufacturers participating in the Discount Program must submit to CMS all of their labeler codes. We make the participating labeler code information available to Part D sponsors so they can determine which drug products are covered by Discount Program Agreements. Part D sponsors cannot cover any applicable drugs marketed with labeler codes that are not specified by CMS as participating in the Discount Program. Consequently, a manufacturer's failure to provide a labeler code to CMS could result in beneficiaries being denied access to both covered Part D drugs and applicable discounts.

While we anticipate such occurrences will be very rare, we believe it is necessary that Part D sponsors determine whether affected beneficiaries need to be notified once CMS makes the labeler code and effective date information available to the Part D sponsor. For example, Part D sponsors generally would need to notify affected beneficiaries that had denied claims if their claims history reasonably indicates that the beneficiary either might still need the previously denied drug or paid for the drug out-of-pocket. If the claims history indicates that the beneficiary has not received an alternative replacement medication since the denied claim, it might reasonably be inferred that the beneficiary still needs (or should be reimbursed for) the denied drug. We recognize that this would place a burden on Part D sponsors through no fault of their own, but, in these rare instances, we believe it would help ensure the beneficiaries have appropriate access to Part D drugs and applicable discounts. It would also increase the likelihood that manufacturers would be held responsible for paying discounts that should have been paid previously.

We do not believe the point-of-sale requirement was intended to exclude discount payments for claims that were not adjudicated by the Part D sponsor at point-of-sale: even though the statute

requires provision of the discount at the point-of-sale, it does not state that applicable beneficiaries are not entitled to the discount if it was not provided at the point-of-sale. Instead, we believe this requirement was meant to ensure the discount would be available at the point-of-sale when and if a claim is electronically adjudicated. However, in limited circumstances beneficiaries submit claims for reimbursement that were not adjudicated at the point-of-sale, such as when they needed to obtain a prescription from an out-of-network pharmacy. Therefore, our guidance and the Discount Program Agreement specify that Part D sponsors provide, and manufacturers reimburse, applicable discounts for applicable drugs submitted by applicable beneficiaries via paper claims, including out-of-network and in-network paper claims, if such claims are payable under Part D. In these situations, beneficiaries are still entitled to the discount and therefore, we propose to codify this requirement in § 423.2325(c).

(2) Collection of Data

Section 1860D-14A(c)(1)(C) of the Act states that we may collect appropriate data from Part D sponsors in a timeframe that allows for applicable discounts to be provided for applicable drugs. Section 423.2325(d) of the proposed rule would require Part D sponsors to provide CMS with appropriate data on the applicable discount provided by the Part D sponsors in a manner specified by CMS. In implementing the Discount Program we determined that using the existing PDE reporting process to collect the necessary data would be most efficient and least burdensome for Part D sponsors. Thus, we would require Part D sponsors to report the applicable discount that was provided at the point-of-sale as part of the PDE record in addition to the other claim-level detail that is reported on the PDE. We would also require Part D sponsors to report confirmation of payment from manufacturers during the quarterly invoice process.

(3) Other Health or Prescription Drug Coverage

Section 1860D-14A(c)(1)(A)(v) of the Act requires that applicable discounts for applicable drugs get applied before any coverage or financial assistance under other health benefit plans or programs that provide coverage or financial assistance for the purchase or provision of prescription drug coverage on behalf of applicable beneficiaries as the Secretary may specify. We propose to codify the requirement in § 423.2325(f) by specifying that an applicable discount must be applied to beneficiary cost-sharing when Part D is the primary payer before any other health or prescription drug coverage is applied. Since the Part D sponsor would provide the discount at the same time as it makes primary payment on the claim, this coordination generally would take place in real time as the claim is adjudicated by the pharmacy in accordance with existing Part D coordination of benefit requirements. We specify that this requirement would not apply to Medicare secondary payer claims because the beneficiary would not have a Medicare Part D coverage gap on the initial claim to the primary payer. However, this requirement would apply to coordination of benefit claims in which the Part D sponsor coordinates benefits post point-of-sale with another payer who paid primary in error.

(4) Supplemental Benefits

Section 1860D-14A(c)(2) of the Act provides that if an applicable beneficiary has supplemental benefits under his or her Part D plan, the applicable discounts shall not be provided until after such supplemental benefits have been applied. Supplemental benefits offered under a Part D plan would have the meaning set forth in § 423.100 (see discussion of supplemental benefits under the proposed definition “other health or prescription drug coverage”). Section 423.2325(e)(1) would codify this requirement by specifying that an applicable discount is applied to beneficiary cost-sharing after supplemental benefits have been applied to the claim for an applicable drug, and paragraph (e)(2) would establish that no applicable discount is available if supplemental benefits eliminate the coverage gap so that a beneficiary has zero cost-sharing on a claim.

If a Part D sponsor offers a plan with supplemental benefits on applicable drugs covered between the plan's initial coverage limit and the Medicare Part D catastrophic threshold using either coinsurance or fixed copay, the value of the supplemental benefits would need to be calculated first on any claim for an applicable drug as the difference between the proposed supplemental cost-sharing and the coinsurance under the basic benefit. For example, if the supplemental benefit for an applicable drug had a 60 percent coinsurance, the value of the supplemental benefits that would need to be applied first (plan liability) would be 40 percent (100 percent coinsurance under basic minus 60 percent coinsurance) of the negotiated price of the drug. The applicable discount would then be calculated as 50 percent of the negotiated price (as defined in § 423. 2305) less the supplemental benefit. Beneficiary cost-sharing would then be the remainder of the negotiated price after the plan liability and applicable discount had been applied. Thus, in the case of either a coinsurance or copay design for supplemental benefits, the amount the beneficiary pays at point-of-sale would generally be approximately 50 percent of his or her expected cost-sharing under the plan's benefit package. This amount will change over time as the coinsurance level for a beneficiary is reduced until it reaches 25 percent in 2020. Section 423.2325(e)(3) would require that the dispensing fee and the vaccine administration fee be included in the Part D sponsor liability portion of a claim with supplemental benefits. For the same reasons that we propose to require the dispensing fee and the vaccine administration fee to be applied to the portion of a claim for an applicable drug that falls below the initial coverage limit or above the annual out-of-pocket threshold, to the extent possible, on straddle claims, we believe including the dispensing fee and the vaccine administration fee in the plan liability supports the statutory goal of alleviating the burden of the coverage gap on applicable beneficiaries.

(5) Pharmacy Prompt Payment

Section 1860D-14A(c)(1)(A)(iv) of the Act requires procedures to ensure that, not later than the applicable number of calendar days after the dispensing of an applicable drug by a pharmacy or mail order service, the pharmacy or mail order service is reimbursed for an amount equal to the difference between: (1) The negotiated price of the applicable drug; and (2) the discounted price of the applicable drug. This amount would be equal to the amount of the applicable discount. The applicable number of calendar days with respect to claims for reimbursement submitted electronically is 14 days, and otherwise, is 30 days. We propose to implement this requirement in § 423.2325(g) by specifying that Part D sponsors reimburse a pharmacy or mail order service the amount of the applicable discount no later than the applicable number of calendar days after the date of dispensing an applicable drug. This requirement would apply to all network pharmacies, including but not limited to long term care pharmacies and home infusion pharmacies.

We considered using the existing prompt pay requirements in § 423.520 as the basis for implementing the discount payment prompt pay requirements because it seemed to make sense given that the discounts are included on the pharmacy claims and the timeframes are identical. However, unlike § 423.520, § 423.2325(g) does not exclude mail order or long term care pharmacies. Therefore, Part D sponsors that do not currently pay mail order or long term care pharmacies in accordance with the § 423.520 prompt pay requirements for other network pharmacies would need to establish another mechanism for reimbursing these pharmacies for discount payments in accordance with the § 423.2325(g).

Finally, we propose to add a new paragraph (24) to § 423.505(b) so that the requirements we are proposing in § 423.2325 are included in all Part D sponsor contracts with us.

g. Manufacturer Discount Payment Audit and Dispute Resolution (§ 423.2330)

(1) Third Party Administrator Audits

Section 1860D-14A(d)(3)(D) of the Act permits manufacturers to conduct periodic audits, directly or through contracts, of the data and information used by the TPA to determine discounts for applicable drugs of the manufacturer under the Discount Program. Section 423.2330(a) would codify the provisions of the Discount Program Agreement governing these audits by specifying the requirements for requesting an audit and the rights of manufacturers associated with conducting audits.

We propose in § 423.2330(a)(1) that the term periodic be defined as no more often than annually. We believe that this standard would ensure that all manufacturers have an opportunity to conduct meaningful audits within available TPA resources. The proposed definition of periodic represents a balance between frequent audits that may provide the greatest level of detail and very infrequent audits that may be less costly to implement, but may not provide needed information in a timely manner.

While we considered allowing quarterly audits, we do not believe that there will be significant quarter to quarter changes in data collection and invoice calculation procedures that would warrant such frequent audits. Given that the TPA will need to allow all participating manufacturers the opportunity to conduct audits, we believe that an annual audit strikes the right balance of providing meaningful and timely information to manufacturers that can reasonably be accommodated by the TPA.

Section 1860D-14A(d)(3)(D) of the Act requires that our contract with the TPA permit audits by manufacturers of the data and information used by the TPA to determine discounts for manufacturer's applicable drugs. Because the statute thus permits the manufacturer to audit data used by the TPA, and importantly, does not grant manufacturers a right to audit CMS or the Part D sponsors, we propose to specify in regulations that the audit right is limited to information held by the TPA and used to calculate discounts. This means that the manufacturer would not have the ability to audit CMS records or the records of Part D sponsors. We believe the data provided from the TPA provides manufacturers with appropriate and sufficient information to conduct an audit because it provides the claim-level information specified in the Discount Program Agreement that is used to calculate the discounts. We believe that defining the data available for audit also requires balancing considerations between efficiently administering the Discount Program and providing manufacturers with an appropriate level of information to validate invoices. Section 423.2330(a)(3) would establish, consistent with the Discount Program Agreement, that manufacturers may audit a statistically significant sample of the database used by the TPA to calculate gap discounts. We believe that a statistically significant sample provides a balance between allowing an audit to include: (1) All of the data, which would provide complete information, but would be unwieldy in terms of resources; and (2) a very small sample that would have insufficient information but be inexpensive to implement. Moreover, the use of a statistically valid sample meets generally accepted auditing standards, would provide sufficient data to manufacturers to reach statistically valid conclusions that could be used to dispute discount payments, and is an efficient use of audit resources.

Proposed § 423.2330(a)(3) also supports our obligation to protect the privacy of beneficiary medical information. This section proposes that, with the exception of work papers, audit data may not leave the room where the audit is conducted, which would further protect beneficiary privacy. Another measure to protect the confidentiality of beneficiary medical information is contained in proposed § 423.2330(a)(4), which would specify that the auditor may only release an opinion of the results of the audit and may not release any other information obtained from the audit, including its work papers, to its client, employer, or any other party. We believe these limitations on the distribution of data support beneficiary privacy, while addressing manufacturer need for access to data that are relevant to the calculation of the gap discounts. These regulations all would codify provisions in the current Discount Program Agreement.

(2) Manufacturer Audits

Section 1860D-14A (e)(1) of the Act specifies that each manufacturer with a Discount Program Agreement in effect shall be subject to periodic audit by CMS and we propose to codify this requirement in § 423.2330(b). Similar to the limitation in § 423.2330(a)(1), we propose to define the term periodic in § 423.2330(b)(1) as no more often than annually. In § 423.2330(b)(3) we propose that we would have the right to audit appropriate data of the manufacturer, including data related to a manufacturer's FDA-assigned labeler codes, expiration date of NDCs, utilization, and pricing information relied on by the manufacturer to dispute quarterly invoices, as well as any other data CMS determines are necessary to carry out the Discount Program.

(3) Dispute Resolution

Section 1860D-14A(c)(1)(A)(vii) of the Act requires the Secretary to establish “a reasonable dispute resolution mechanism to resolve disagreements between manufacturers, applicable beneficiaries, and the third party with a contract * * * .”

Therefore, we propose in § 423.2330(c) a multi-stage dispute resolution process consisting of: (1) An initial dispute stage; (2) an appeals stage for manufacturers that do not accept the findings of the dispute process; and (3) a final administrator review when either a manufacturer or CMS disagree with the outcome of the initial appeals process.

Before proposing this multistage dispute resolution process, we reviewed potentially analogous appeals mechanisms, both within the Medicare program and in other, similar government programs, such as Tricare and Medicaid. Within the Medicare Part D program we reviewed the appeals process for organizations seeking to become Part D sponsors and the appeals process for Medicare beneficiaries challenging denials of benefits. We also reviewed the appeals mechanism for the Department of Defense (DoD) Tricare program and Medicaid—two existing government programs that collect rebates from pharmaceutical

manufacturers. In each instance, we found a multistage dispute resolution program. We concluded that a multi-stage process results in balanced, equitable decisions because of the multiple perspectives that are available. Therefore, we are proposing a similar multistage process for the Medicare Coverage Gap dispute resolution process.

Section 423.2330(c) would include a timetable for the three-stage approach to manage the process most efficiently and to support equal treatment of each appeal. The timetable ensures that manufacturers' disputes are resolved as quickly as possible, while allowing both parties to perform the necessary calculations and investigations to evaluate the gap discount invoice. The proposed timeframes were established by estimating the time required to analyze the data presented, by the volume of claims, and by considering the characteristics of the Discount Program compared to the other similar programs previously noted.

Specifically, we propose in § 423.2330(c)(1) that manufacturers may dispute quarterly gap discount amounts by providing notice of the dispute to the TPA within 60 days of the receipt of information that is the subject of the dispute. The information is limited to data received from the TPA, or as a result of a manufacturer's audit.

We believe that the deadline for filing disputes will result in more prompt remuneration to manufacturers receiving positive decisions and more predictable workloads for the dispute infrastructure.

Proposed § 423.2330(c)(2) also states that the notice of dispute be accompanied by supporting evidence that is material, specific, and related to the dispute. We propose this requirement because the manufacturer bears the burden of proof that the PDE data is incorrect. We also propose in § 423.2330(c)(3) to codify the Discount Program Agreement provision that manufacturers may not withhold any invoiced amounts pending dispute resolution except for invoiced amounts for applicable drugs without labeler codes provided by the manufacturer to us. The proposition to generally bar the withholding of disputed invoice amounts is justified because gap discounts are owed by manufacturers but are paid by Part D sponsors to beneficiaries at the point-of-sale; we believe that the prohibition of withholding disputed invoices will minimize the risk to Part D sponsors for these discount-related incurred liabilities without significantly increasing the financial risk to a manufacturer because of the extensive quality assurance CMS performs on PDEs submitted by Part D sponsors. The PDE data used to calculate quarterly invoices are of high quality. The PDE data are derived from claims for each prescription submitted to Part D sponsors for payment. Part D sponsors validate each claim to comply with the False Claims Act and as part of their process to reimburse pharmacies for the cost of the drug. In addition, we implement multiple edits to validate the PDE data submitted by Part D sponsors. Those edits include identification and adjustment of outlier and other inappropriate entries for variables such as discount amount, beneficiary eligibility for the gap discount, incorrect NDCs, etc. Therefore, the burden of proof is on manufacturers to demonstrate that the data used to calculate the quarterly invoice are incorrect.

Section 423.2330(c)(4) would allow manufacturers to request an additional adjudication by the Independent Review Entity (IRE), under contract with CMS, within 30 days of the receipt of an unfavorable determination from the TPA, or if no decision was received from the TPA, within 90 days of the receipt of the dispute submission. This section also proposes that the IRE be required to make a determination within ninety calendar days of receipt of the manufacturer request for an appeal.

Section 423.2330(c)(6) establishes a final administrative step to support an equitable dispute resolution process. We are proposing that both manufacturers and CMS would have the right to request a final review of the dispute by the Administrator. Since we administer the Discount Program and manufacturers have financial liability for the discounts, both parties have an interest in ensuring an equitable resolution to the dispute. We propose that this request be made within 30 days after the manufacturer receives a decision from the IRE to facilitate a timely outcome. Finally, we propose that the decision of the Administrator would be final and binding.

We propose to codify the policies as described and welcome comments on the dispute and appeals process.

h. Beneficiary Dispute Resolution (§ 423.2335)

Section 1860D-14A(c)(1)(A)(vii) of the Act requires CMS to provide a reasonable dispute mechanism to resolve disagreements between manufacturers, applicable beneficiaries, and the TPA. While § 423.2330(c) would address the disputes that could arise between the manufacturer and CMS or the TPA, § 423.2335 would provide the beneficiary dispute resolution requirements. Specifically, § 423.2335 would provide that beneficiaries shall have access to the Part D coverage determination and appeals process as described in § 423.558 through § 423.638 for disputes involving the availability and amount of applicable discounts under the Discount Program.

As previously discussed in this preamble, we have determined that the Part D sponsor is the only entity capable of accurately providing applicable discounts at the point-of-sale because of its detailed knowledge of the drug, the beneficiary, and the claim. Part D sponsors would advance applicable discounts as part of their normal process for adjudicating Part D claims. Since we consider the discounts to be a Part D benefit we propose that the existing mechanism that Part D sponsors have in place to accommodate coverage determinations and appeals related to Part D sponsor decisions on the amount of cost-sharing for a drug be used for beneficiary disputes associated with the Discount Program (see § 423.558 through § 423.638).

Although section 1860D-14A(c)(1)(A)(vii) of the Act specifies disputes that could arise between manufacturers, applicable beneficiaries and the TPA, we believe that under the Discount Program model whereby Part D sponsors provide the discounts at point-of-sale, each Part D sponsor is the appropriate party to address any beneficiary disputes that would otherwise involve manufacturers or the TPA. We believe that the beneficiary would generally contact his or her plan with any questions about any coverage gap claims, including the availability or amount of an applicable discount. Currently a beneficiary who wishes to see how his or her claim amounts were calculated, including those affected by a manufacturer discount, would consult the Explanation of Benefit (EOB) form distributed by the Part D sponsor. For 2011, we amended the model EOB to add coverage gap discounts as “other payments” that count toward a beneficiary's out-of-pocket costs. Beneficiaries may not know at the point-of-sale whether a manufacturer discount has been applied to their claim, or if the discount has been applied correctly. Part D sponsors direct beneficiaries to their EOBs for information about claims-payment amounts. The EOB instructs beneficiaries to contact the Part D sponsor with any remaining concerns. Maintaining this consistent process for all member benefit payments would be the easiest for the beneficiaries to understand and follow, and, we believe,

impose minimal additional burden on Part D sponsors.

Although we could establish a separate mechanism for beneficiary disputes under the Discount Program, we decline to do so because we believe it would prove duplicative and inefficient for Part D sponsors, beneficiaries, and us. It also would be potentially more confusing for beneficiaries who would be unable to rely on a single process to resolve their benefit-related inquiries. For all of these reasons, we propose to designate the existing Part D coverage determination appeals process as the mechanism for beneficiary disputes about the Discount Program.

i. Compliance Monitoring and Civil Money Penalties (§ 423.2340)

Section 1860D-14A(e)(2) of the Act requires us to impose a civil money penalty (CMP) on a manufacturer that fails to provide applicable beneficiaries applicable discounts for applicable drugs of the manufacturer in accordance with the Discount Program Agreement. The statute sets forth the formula for determining the CMP amount, which will equal the sum of the amount that the manufacturer would have paid with respect to such discounts under the agreement (which will then be used to pay the discounts which the manufacturer had failed to provide) plus 25 percent of such amount. Section 423.2340 would implement these requirements and establish the procedures for imposing and collecting the CMPs in accordance with subpart T of this part. Accordingly, we propose to revise the definition of “affected party” in subpart T (as defined in § 423.1002) by adding the term “manufacturer” (as defined in § 423.2305) to the definition and clarifying that we interpret the use of “Part D sponsor” throughout subpart T to be synonymous with “affected party”. In accordance with the Discount Program Agreement and proposed § 423.2315(b)(3), manufacturers must pay each Part D sponsor within 38 calendar days of receipt from the TPA of the electronic invoice and Medicare Part D Discount Information for the applicable discounts included on the invoice except as specified in § 423.2330(c)(3). Therefore, we consider a manufacturer to have failed to provide applicable beneficiaries applicable discounts for applicable drugs of the manufacturer in accordance with the Discount Program Agreement if it fails to comply with this requirement unless such failure is due to technical or other reasons beyond the control of the manufacturer, such as a natural disaster. Consequently, we would impose a civil money penalty whenever a manufacturer fails to make full payment on its invoice within 38 calendar days of receipt of the invoice and Medicare Part D Discount Information for the applicable discount included on the invoice unless such failure is due to technical or other reasons beyond the control of the manufacturer. We plan to add this provision to the Discount Program Agreement.

Section 423.2340(c) would codify the methodology for determining the amount of the CMP as equal to the amount of applicable discount the manufacturer would have paid under the Discount Program Agreement, which will then be used to pay the applicable discount that the manufacturer had failed to provide, plus 25 percent of such amount. This amount may be reduced by any amount that the manufacturer has paid after the 38th calendar day but before the date the CMP is collected. We interpret this to mean that the CMP would be calculated based upon the outstanding invoiced amount that was not paid within 38 calendar days of receipt as required under the Discount Program Agreement and proposed § 423.2315(b)(3) irrespective of any partial or late payments. In other words, a manufacturer's failure to pay the entire invoice amount would trigger the CMP and late payments would not relieve the manufacturer of its obligation to pay an additional 25 percent of the unpaid amount from the invoice. In order to ensure consistency and transparency with the imposition of these civil money penalties, unless the exception applies (that is, the payment is late due to technical or other reasons beyond the control of the manufacturer), we would impose the additional 25 percent on all invoiced amounts not paid within 38 calendar days of receipt, even, for example, if the payment is only 1 day late.

Section 423.2340(d) specifies that if CMS makes a determination to impose a CMP, we would send a written notice of our decision to impose a CMP that includes a description of the basis for the determination, the basis for the penalty, the amount of the penalty, the date the penalty is due, the manufacturer's right to a hearing (as specified under § 423.1006) and information about where to file the request for hearing. To ensure a consistent approach to CMPs, we propose extending existing appeal procedures for CMPs in subpart T of this part to manufacturers appealing a CMP imposed under the Discount Program. We have utilized this appeals process for more than 20 years for various types of adverse agency determinations affecting an array of medical providers, MA organizations, and Part D sponsors. We therefore propose to use this well established process and infrastructure for CMP appeals from manufacturers that have contracted with the Discount Program and are delinquent in paying the discounts as required. To that end, we propose to revise the definition of “affected party” in § 423.1002 to include manufacturers participating in the Discount Program. Section 423.2340(e) would provide that we would initiate collection of the CMP following expiration of the timeframe for requesting an ALJ hearing, which is 60 calendar days from the CMP determination, as specified in § 423.1020 if the manufacturer did not request a hearing; and CMS would initiate collection of the CMP once the administrative decision is final if a manufacturer requests a hearing and our decision to impose the CMP is upheld.

Section 1860D-14A(e)(2)(B) of the Act states that the provisions of section 1128A of the Act (except subsections (a) and (b)) apply to CMPs under this subpart to the same extent that they apply to a CMP or procedure under section 1128A(a) of the Act. We propose to codify this requirement in § 423.2340(f). We welcome comments on this proposal.

j. Termination of Agreement (§ 423.2345)

Section 1860D-14A(b)(4)(B)(i) of the Act provides that we may terminate a Discount Program Agreement for a knowing and willful violation of the requirements of the agreement or other good cause shown. Such termination shall not be effective earlier than 30 days after the date of notice to the manufacturer of such termination and CMS shall provide, upon request, a hearing concerning such termination, and such hearing shall take place prior to the effective date of the termination with sufficient time for such effective date to be repealed if CMS determines appropriate. Section 423.2345 would codify these requirements consistent with the termination provisions in the Discount Program Agreement. For instance, § 423.2345(a)(1) would clarify that “good cause shown” must relate to the manufacturer's participation in the Discount Program. Our proposed regulation would further specify that we must provide the manufacturer with an opportunity to cure any ground for termination within 30 calendar days of receipt of the written termination notice. In addition, we propose, consistent with the statutory requirement as reflected in the Discount

Program Agreement, that the manufacturer may request a hearing with a hearing officer concerning such termination if requested in writing within 15 calendar days of receiving notice of the termination, and such hearing must take place prior to the effective date of termination with sufficient time for such effective date to be repealed if we determine appropriate.

In order to address potential timing issues with appeals during the termination process, we propose to clarify in § 423.2345(a)(2) that termination must not be effective earlier than 30 days after the date of notice to the manufacturer of such termination and must not be effective prior to resolution of timely appeal requests received in accordance with paragraphs (a)(4) and (a)(5) of this section. Proposed sections (a)(4) and (a)(5) state, in part, that CMS will provide a manufacturer with a hearing before the hearing officer about such termination if requested in writing within 15 calendar days of receiving notice of the termination. Further, CMS or a manufacturer that has received an unfavorable determination from the hearing officer may request review by the CMS Administrator within 30 calendar days of receipt of the notification of such determination. Therefore, a termination would not be effective until either the timeframes to pursue a hearing with the hearing officer or CMS Administrator have passed or a final decision has been issued by the hearing officer or CMS Administrator and there is no remaining opportunity to request further review.

We also propose in § 423.2345(a)(5)(i) to specify that CMS or a manufacturer that has received an unfavorable determination from the hearing officer may request review by the CMS Administrator within thirty calendar days of receipt of the notification of such determination. The Discount Program Agreement currently provides only that a manufacturer may request review of an unfavorable decision by the CMS Administrator. However, we believe that a fair appeals process must ensure that both parties have an opportunity for further review of a decision made by an independent review entity. The decision of the CMS Administrator would be final and binding on either party. We request comments on these termination requirements.

Section 1860D-14A(b)(4)(B)(ii) of the Act provides that a manufacturer may terminate the Discount Program Agreement for any reason. Such termination shall be effective as of the day after the end of the calendar year if the termination occurs before January 30 of a calendar year or as of the day after the end of the succeeding calendar year if the termination occurs on or after January 30 of a calendar year. We propose to codify these requirements in § 423.2345(b).

Section 1860D-14A(b)(4)(B)(iii) of the Act states that any termination shall not affect discounts for applicable drugs of the manufacturer that are due under the Discount Program Agreement before the effective date of the termination and we propose to codify this requirement in § 423.2345(c). However, upon the effective date of the Discount Program Agreement termination, the manufacturer's drugs would no longer be covered under Medicare Part D. In addition, § 423.2345(d) would specify that we would cease releasing data to the manufacturer except as necessary to ensure the manufacturer reimburses applicable discounts for time periods in which the Discount Program Agreement was in effect and would notify the manufacturer to destroy data files provided by us under the Discount Program Agreement.

Finally, § 423.2345(e) would restrict reinstatement of manufacturers that previously terminated their Discount Program Agreements or had them terminated by CMS to those manufacturers that pay any and all outstanding applicable discounts incurred during any previous periods under Discount Program Agreements.

2. Inclusion of Benzodiazepines and Barbiturates as Part D Covered Drugs (§ 423.100)

Section 175 of the Medicare Improvements for Patients and Providers Act of 2008 (MIPPA), amended section 1860D-2(e)(2)(A) of the Act to include barbiturates, when used for the medical indications of epilepsy, cancer, or a chronic mental health disorder and to include benzodiazepines. These amendments apply to prescriptions dispensed on or after January 1, 2013. Accordingly, we propose to revise the definition of Part D drug at § 423.100, by including barbiturates (when used for the previously noted medical indications) and benzodiazepines that are dispensed on or after January 1, 2013. Like any covered prescription drugs under the Part D benefit program, benzodiazepines and barbiturates must meet all other conditions as defined in § 423.100 of a Part D covered drug such as: FDA approved for safety and effectiveness as a prescription drug under section 505 of the Federal Food, Drug, and Cosmetic Act; used and sold in the United States; not otherwise covered by Medicare Part A or Part B; and used only for medically accepted indications.

We remind plans that it is their responsibility to use the tools (that is, system edits, quality assurance checks) at their disposal to ensure barbiturates are covered for the conditions specified in statute. Also, given the vulnerability of these drugs to misuse and abuse, it is recommended that Part D sponsors use their Drug Utilization Report tools to identify and prevent waste and clinical abuses/misuses.

3. Pharmacy Benefit Manager's Transparency Requirements (§ 423.501 and § 423.514)

Under section 6005 of the Affordable Care Act, Part A of Title XI of the Act was amended by inserting after section 1150 of the Act a new section: “SEC. 1150A. Pharmacy Benefit Manager's Transparency Requirements.” Section 1150A of the Act contains several new reporting requirements for Part D sponsors under Part D of title XVIII, qualified health benefits plans (QHBP) offered through an exchange established by a State under section 1311 of the Affordable Care Act, and entities that provide pharmacy benefits management services, referred to in this section as pharmacy benefit managers (PBMs). The purpose of these new reporting requirements is to promote transparency of financial transactions involving Part D sponsors, QHBPs, and PBMs. Under section 1150A, the information is required to be reported to the Secretary by the Part D sponsor or QHBP and, in the case of a PBM, to the Part D sponsor or QHBP. In accordance with this authority, we propose to codify various reporting requirements in our regulation at § 423.514. In addition, we propose to add a definition for “bona fide service fees” to our regulations at § 423.501.

Under the authority of section 1860D-15 of the Act, we collect from Part D sponsors cost data necessary to determine payments under the Part D program. Currently, we collect from Part D sponsors PDE data that provide detailed information on each drug dispensed under Part D. In addition, we collect direct and indirect remuneration (DIR) information that indicates the amount of remuneration received by the sponsor or its PBM from pharmaceutical manufacturers and other sources. Part D sponsors are required to report these cost data to CMS within 6 months of the end of the coverage year.

We propose to amend our regulations to implement the provisions of section 1150A of the Act with respect to Part D sponsors and the PBMs that manage prescription drug coverage under a contract with a Part D sponsor. The

provisions of section 1150A of the Act with respect to QHBPs and their PBMs will be addressed in separate rulemaking.

The specific information that is required to be collected and reported under Section 1150A of the Act by each Part D sponsor and PBM for a contract year is the following:

• The percentage of all prescriptions that were provided through retail pharmacies compared to mail order pharmacies.

• The percentage of prescriptions for which a generic drug was available and dispensed (generic dispensing rate), by pharmacy type (which includes an independent pharmacy, chain pharmacy, supermarket pharmacy, or mass merchandiser pharmacy that is licensed as a pharmacy by the State and that dispenses medication to the general public), that is paid by the Part D sponsor or PBM under the contract.

• The aggregate amount and the type of rebates, discounts, or price concessions (excluding bona fide service fees) that the PBM negotiates that are attributable to patient utilization under the plan, the aggregate amount of the rebates, discounts, or price concessions that are passed through to the plan sponsor, and the total number of prescriptions that were dispensed.

• The aggregate amount of the difference between the amount the Part D sponsor pays the PBM and the amount that the PBM pays retail pharmacies, and mail order pharmacies, and the total number of prescriptions that were dispensed.

Under section 1150A(c) of the Act, information disclosed by a Part D sponsor or PBM is confidential and generally shall not be disclosed by the Secretary or by a plan receiving the information. Consistent with the statute as applied to Part D sponsors and PBMs that provide pharmacy benefits management services on behalf of Part D sponsors, we propose to add language listing the following exceptions, which allow the Secretary to disclose the information in a form which does not disclose the identity of a specific PBM, plan, or prices charged for drugs, for the following purposes:

• As the Secretary determines necessary to carry out section 1150A or Part D of Title XVIII.

• To permit the Comptroller General to review the information provided.

• To permit the Director of the Congressional Budget Office to review the information provided.

We believe the exception allowing disclosure to States to carry out section 1311 of the Act is relevant in the context of QHBPs but is not relevant to the Part D sponsors and their PBMs. Thus, this exception will be addressed in separate rulemaking regarding the provisions of 1150A of the Act with respect to QHBPs and their PBMs.

As required by section 1150A(d) of the Act, the provisions of section 1927(b)(3)(C) of the Act shall apply to a Part D sponsor or PBM that fails to provide the required information on a timely basis or knowingly provides false information “in the same manner as such provisions apply to a manufacturer with an agreement under that section.”

Consistent with the statute, we are implementing this new reporting requirement by updating the regulations to specify reporting requirements for pharmacy benefits manager data. Each entity that provides pharmacy benefits management services must provide to the Part D sponsor, and each Part D sponsor must provide to CMS, the data elements required by this rulemaking.

Accordingly, in § 423.514, we propose to add language requiring that each entity that provides pharmacy benefits management services must provide to the Part D sponsor, and that each sponsor of a Part D plan provide to CMS, all of the following information in a manner specified by CMS:

• The total number of prescriptions that were dispensed.

• The percentage of all prescriptions that were provided through retail pharmacies compared to mail order pharmacies.

• The percentage of prescriptions for which a generic drug was available and dispensed (generic dispensing rate), by pharmacy type (which includes an independent pharmacy, chain pharmacy, supermarket pharmacy, or mass merchandiser pharmacy that is licensed as a pharmacy by the State and that dispenses medication to the general public), that is paid by the Part D sponsors or PBM under the contract.

• The aggregate amount and type of rebates, discounts, or price concessions (excluding bona fide service fees) that the PBM negotiates that are attributable to patient utilization under the plan.

• The aggregate amount of the rebates, discounts or price concessions that are passed through to the plan sponsor.

• The aggregate amount of the difference between the amount the Part D sponsor pays the PBM and the amount that the PBM pays retail pharmacies, and mail order pharmacies.

The information submitted under this regulation would be subject to the confidentiality requirements under section 1150A(c) of the Act, and the provisions of section 1927(b)(3)(C) of the Act are applicable to any Part D sponsor or PBM that fails to provide this information on a timely basis or that knowingly provides false information in the same manner as those provisions apply to a manufacturer with an agreement under section 1927 of the Act.

We believe that we already collect much of the above listed information. For example, we can tally the total number of prescription dispensed from PDE records. Other information can be collected by modifying existing reporting mechanisms. For example, the aggregate amount of the difference between the amount the Part D sponsor pays the PBM and the amount the PBM pays pharmacies (that is, the PBM spread) is available from the DIR data reported to CMS by Part D sponsors on the 2010 DIR Report for Payment Reconciliation: Summary Report. We plan to add to the DIR reporting requirements PBM spread amounts for retail pharmacies and PBM spread amounts for mail order pharmacies in order to meet section 1150A of the Act reporting requirements.

In the interests of administrative simplicity and to minimize reporting burden on Part D sponsors, we would like to further leverage existing data sources and reporting mechanisms. Thus, we solicit comment on whether any of the following data elements can be collected using existing data sources such as PDE records and/or added to existing reporting mechanisms, and whether any may require a separate reporting mechanism:

• Number of retail prescriptions.

• Number of mail order prescriptions.

• Number of prescriptions dispensed by independent pharmacies.

• Number of prescriptions dispensed by chain pharmacies.

• Number of prescriptions dispensed by supermarket pharmacies.

• Number of prescriptions dispensed by state-licensed mass merchandisers to the general public.

We note that the provisions regarding DIR under the Part D program do not mention DIR attributable to patient utilization, whereas section 1150A of the Act references rebates, discounts, and price concessions that are attributable to patient utilization. We are soliciting comments regarding whether there are differences between DIR under the Part D program and DIR attributable to patient utilization. If there are any such differences, we also seek comments regarding whether we should establish additional reporting requirements for DIR attributable to patient utilization.

Consistent with the requirement under section 1150A of the Act that plans exclude bona fide service fees when they report the aggregate amount and type of rebates, discounts or price concessions, we also propose to amend the regulations at § 423.501 to add the following definition for bona fide service fees:

Bona fide service fees

means fees paid by a manufacturer to an entity that represent fair market value for a bona fide, itemized service actually performed on behalf of the manufacturer that the manufacturer would otherwise perform (or contract for) in the absence of the service arrangement, and that are not passed on in whole or in part to a client or customer of an entity, whether or not the entity takes title to the drugs. Bona fide service fees include, but are not limited to, distribution service fees, inventory management fees, product stocking allowances, and fees associated with administrative services agreements and patient care programs (such as medication compliance programs and patient education programs).

We are soliciting comment on this definition, which is taken without modification from section 1150A of the Act and is consistent with the definitions used in Medicare FFS and Medicaid. We intend to monitor the reported bona fide service fees reported by Part D sponsors to ensure compliance with program requirements.

B. Strengthening Beneficiary Protections

This section includes provisions aimed at strengthening beneficiary protections under Parts C and D. We are also considering changes under the long term care (LTC) conditions of participation. In our opinion, it is appropriate to provide for reinstatement of beneficiaries in the section 1876 cost plans from which they were disenrolled for failing to pay premiums when they can establish good cause for their failure to pay. We anticipate that this would result in uninterrupted plan coverage for eligible beneficiaries thereby improving access to healthcare for individuals such as those with chronic conditions requiring continual monitoring and medication. Similarly, we expect that requiring enrollees in MA plans to be provided with uniform ID cards that all providers can easily recognize would facilitate access to health care for those beneficiaries. We also think that calculating creditable coverage by excluding the value of additional coverage in the coverage gap and the manufacturer's discount—the standard that qualifies retiree drug coverage for the retiree drug subsidy—would mean a beneficiary receiving retiree drug coverage would be less likely to be assessed a late enrollment penalty if he or she decided to enroll in a Part D plan. Enabling health care professionals to request Independent Review Entity (IRE) reconsiderations of Part D coverage determinations on behalf of enrollees without having to obtain signed authorized representative forms would, in our opinion, lessen the burden faced by providers seeking to assist enrollees with appeals and would encourage more health care professionals to step forward and help beneficiaries access this level of the appeals process. Lastly, the various arrangements that exist involving LTC facilities, LTC pharmacies and the LTC consultant pharmacists these pharmacies provide to LTC facilities, and pharmaceutical manufacturers and/or distributors have raised concerns regarding the quality of the consultant pharmacist reviews and the potential impact on resident health and safety. We believe these concerns may be addressed by changes we are considering that would require LTC consultant pharmacists be independent of the LTC facility pharmacy, pharmaceutical manufacturers or distributors, or any affiliate of these entities. The foregoing proposals and the change under consideration are set forth in Table 2.

Table 2—Provisions To Strengthen Beneficiary Protections

Preamble section

Provision

Part 417

Subpart

Subpart

Part 422

Subpart

Section

Part 423

Subpart

Section

Part 483

Subpart

Section

II.B.1

Good Cause and Reinstatement into a Cost Plan

Subpart K

§ 417.460

N/A

N/A

N/A

N/A

N/A

N/A.

II.B.2

Requiring MA Plans to Issue Member ID cards

N/A

N/A

Subpart A

§ 422.111

N/A

N/A

N/A

N/A.

II.B.3

Determination of Actuarially Equivalent Creditable Prescription Drug Coverage

N/A

N/A

Subpart K

§ 422.56

N/A

N/A

N/A

N/A.

II.B.4

Who May File Part D Appeals with the Independent Review Entity

N/A

N/A

N/A

N/A

Subpart M

§ 423.600, § 423.602

N/A

N/A.

II.B.5

Independence of LTC Consultant Pharmacists

N/A

N/A

N/A

N/A

N/A

N/A

Subpart B

§ 483.60.

1. Good Cause and Reinstatement Into a Cost Plan (§ 417.460)

Current regulations at § 417.460(c) specify that an HMO or competitive medical plan may disenroll a member who fails to pay premiums or other charges imposed by the HMO or competitive medical plan for deductible and coinsurance amounts. The cost plan must demonstrate that it made reasonable efforts to collect the unpaid amount (for example, attempted to contact the member by phone or mail) and sent the enrollee written notice of the proposed disenrollment (including an explanation of the enrollee's right to a hearing under the HMO's or competitive medical plan's grievance procedures). Cost plans also have the option of not disenrolling members who fail to pay their premiums or cost-sharing. Whichever policy they choose, it must be applied consistently to all members in the plan.

In the April 2011 final rule (76 FR 21511), we established rules that allowed beneficiaries disenrolled from MA and Part D plans for failure to pay premiums the ability to request reinstatement into the plan from which they were involuntarily disenrolled provided they could establish good cause and pay all arrearages. We established these rules at § 422.74 and § 423.44 not only because they were consistent with the policy for delinquent Medicare Part B premium payments, but because beneficiaries who were disenrolled from an MA or Part D plan for failure to pay premiums generally were not eligible for a special enrollment period. We believed there may be situations where individuals had extenuating circumstances that prevented them from paying their premiums timely and that reinstatement would be appropriate.

We received broad support for this regulatory change for MA and Part D plans, and stated at the time that we would consider expanding the scope of this provision to section 1876 cost enrollees in the future. Based on feedback we have received from partners, we are proposing to amend § 417.460(c) regarding disenrollment for non-payment of premiums to allow for the reinstatement of enrollment for good cause subsequent to an involuntary disenrollment associated with the failure to pay premiums or other cost-sharing amounts. In order to be eligible for reinstatement, the beneficiary would have to pay all outstanding arrearages, including premiums that accrued during the period of disenrollment. We believe this is an important protection to provide beneficiaries enrolled in cost plans because even though members of cost plans do not have the same election period restrictions as those in MA and Part D plans, a reinstatement of enrollment would remove the involuntary disenrollment and result in continuous coverage.

We propose that the requirements for reinstatement be similar to those established under Part C and Part D. That is, the reinstatement must be requested, good cause determined and payment made of all premium or cost sharing arrearages, including amounts that would have been due since the disenrollment, within 3 months of the disenrollment date. Examples of good cause would be similar to those established for individuals disenrolled from MA or Part D plans and may include, but are not limited to: (1) An unexpected, prolonged hospitalization; (2) an error by a Federal government employee or plan representative; or (3) loss of home or severe impact by fire, or other exceptional circumstance outside the beneficiary's control. We also propose that good cause would not exist if the only basis for requesting reinstatement was a change in the individual's circumstances subsequent to the involuntary disenrollment resulting in his or her ability to pay the premiums.

We would note that an individual who is involuntarily disenrolled within the same timeframe from both his or her cost plan and a separate prescription drug plan (not affiliated with the cost plan) would need to seek separate good cause determinations for reinstatement into both plans. This is because the two plans may have different grace periods and arrearage amounts.

2. Requiring MA Plans To Issue ID Cards (§ 422.111)

Pursuant to section 1860D-4(a)(1) of the Act and § 423.120(c), and consistent with standards established by CMS, Part D sponsors must issue and re-issue as appropriate a card or other technology that enrollees can use to access negotiated prices for Part D covered drugs. While we have made recommendations through sub-regulatory guidance (

http://www.cms.gov/ManagedCareMarketing/

) with respect to member identification (ID) cards for Medicare Advantage (MA) Preferred Provider Organization and Private Fee-for-Service products, we have issued no related requirements. Many MA organizations issue ID cards to their enrollees, though absent regulation, there is no way to ensure consistency of information across such documents. We believe it is important to establish requirements for the MA member ID card to ensure that information such as the plan's customer service number, link to the plan's website and member ID number are disclosed to enrollees for access to care. Specifically, we propose to require that ID cards contain the following information: (1) For an MA PPO or PPFS plan, a statement that Medicare Limiting Charges apply; (2) an address for the plan's website; (3) a customer service number; and (4) the individual identification number for each enrollee, to clearly identify that he or she is a member of the plan.

Implementation of these provisions will ensure providers have easy access to the necessary information for verifying coverage and processing claims. Therefore, under our authority at section 1852(c) of the Act to require that MA organizations disclose MA plan information upon request, as well as our authority under section 1856(b)(1) to establish standards by regulation and section 1857(e) of the Act to specify additional contractual terms and conditions the Secretary may find

necessary and appropriate, we propose to amend § 422.111 by adding a new paragraph (i) to expressly require MA plans issue and re-issue, as necessary, a card that contains certain information and enables enrollees to access all covered services. Additionally, in an effort to protect beneficiaries from misuse of personal information, we will explicitly prohibit plan sponsors from disclosing social security numbers or health insurance claim numbers on the member ID cards. We will provide further instructions in the Medicare Marketing Guidelines.

3. Determination of Actuarially Equivalent Creditable Prescription Drug Coverage (§ 423.56)

Section 1860D-22 of the Act outlines the special rules for employer-sponsored programs. Subsection 1860D-22(a) of the Act establishes that the Secretary shall provide payment to sponsors of qualified retiree prescription drug plans that provide equivalent or better coverage than the actuarial value of standard prescription drug coverage. The Affordable Care Act amended section 1860D-22(a)(2)(A) of the Act by adding a provision with regard to the actuarial equivalence of retiree prescription drug coverage to the defined standard coverage. The new provision requires that when attesting to the actuarial equivalence of the plan's prescription drug coverage to the defined standard coverage, qualified retiree prescription drug plans not take into account the value of any discount or coverage provided during the gap between the initial coverage limit during the year and the out-of-pocket threshold for the defined standard coverage under Part D. This change was intended to carve-out coverage provided during the gap when determining the actuarial equivalence of retiree prescription drug coverage for the purpose of qualifying for the retiree drug subsidy payment under section 1860D-22(a)(2) of the Act. In addition, section 1860D-14A(g)(1) of the Act expressly excludes enrollees in RDS plans from the definition of “applicable beneficiary.” Thus, these Part D eligible individuals are not entitled to gap coverage or any applicable discount on drugs. In accordance with these legislative changes, we revised the retiree drug subsidy calculation by amending § 423.884(d) to remove the value of any discount or coverage provided during the coverage gap from the valuation of the RDS coverage. In other words, the calculation of the actuarial value of defined standard Part D coverage for the purposes of the RDS attestation excludes discounts provided to applicable beneficiaries in the gap by the discount program under 1860D-14A of the Act and the decreases in gap coinsurance for applicable beneficiaries under 1860D-2(b) of the Act.

Section 1860D-13(b)(4) of the Act defines creditable prescription drug coverage to include coverage that at least meets the actuarial equivalence requirements in 1860D-13(b)(5)(A) of the Act. Section 1860D-13(b)(5)(A) of the Act further states that an individual's prescription drug coverage meets the actuarial equivalence requirements only if the coverage is determined (in a manner specified by the Secretary) to provide coverage of the cost of prescription drugs the actuarial value of which (as defined by the Secretary) to the individual equals to or exceeds the actuarial value of the standard prescription drug coverage (as determined under section 1860D-11(c) of the Act). The Affordable Care Act, as amended, establishes two types of standard prescription drug coverage. Specifically, the standard defined benefit now includes provisions that apply only for applicable beneficiaries (see sections 1860D-2(b)(2)(C) and (D) of the Act), while the rest of the standard defined benefit applies for other enrollees. Thus, we calculate two actuarial values for standard prescription drug coverage—one value that would apply to applicable beneficiaries, and another value for standard prescription drug coverage when establishing the low-income subsidy. As a result of these changes, we need to clarify which actuarial equivalence standard is used for the valuation of creditable prescription drug coverage when determining whether an individual is subject to the late enrollment penalty (LEP) under 1860D-13(b) of the Act.

We believe the value of the defined standard benefit, as it applies to the valuation of creditable coverage, should be consistent with the regulation change for the valuation of the retiree drug subsidy calculation. Retiree prescription drug coverage is a primary source of creditable coverage. This being the case, we are proposing to align the actuarial value calculation we use for purposes of section 1860D-13(b) of the Act with the actuarial value calculation used to determine the value of the retiree drug subsidy. By using the same value for both determinations, we will be ensuring that the individuals who are enrolled in retiree drug plans that have met and attested to the actuarial equivalence value of defined standard prescription drug coverage as provided under § 423.884(5)(iii)(C) are not subject to the LEP under § 423.46.

To this end, we are proposing to amend § 423.56(a) to exclude the value of gap discounts or coverage, so that it is consistent with the calculation of the actuarial value of qualified retiree prescription drug coverage found at § 423.884(d). We also propose to revise the reference to “CMS actuarial guidelines” in § 423.56(a) to read “CMS guidelines.” We believe this revision would allow CMS additional flexibility to provide interpretive guidance on the definition of creditable coverage for reasons beyond those relating to actuarial principles.

4. Who May File Part D Appeals With the Independent Review Entity (§ 423.600 and § 423.602)

Section 1860D-4(h) of the Act directs the Secretary to establish a Part D appeals process that is similar to the appeals process used for MA appeals. The Parts C and D appeals procedures are set forth in Subpart M of Parts 422 and 423 of our regulations, respectively. In our January 12, 2009 final rule (74 FR 1494), we amended both these sets of regulations to strengthen enrollee access to the Part C and Part D appeals process. Specifically, we amended the MA appeals regulations at § 422.582 to permit physicians to request standard plan reconsiderations of pre-service requests on behalf of MA enrollees. Consistent with section 1860D-4(g) of the Act, we made a corresponding change to the Part D regulations at § 423.580, allowing physicians and other prescribers to request standard redeterminations on behalf of enrollees. Allowing prescribers to request coverage determinations and plan level appeals on behalf of enrollees has significantly enhanced enrollee access to these processes.

Subsequent program experience has taught us that these changes to the Part D appeal process may not go far enough in terms of improving access to the Part D appeals process, as explained in this section. Consequently, we are proposing to revise the Part D regulations at § 423.600 to allow physicians and other prescribers to request Independent Review Entity (IRE) reconsiderations on behalf of enrollees. We are also proposing to make a corresponding change to the notice provisions at § 423.602(a).

Currently, the Part D IRE reports that approximately 46 percent of the cases it dismisses lack a valid appointment of representative (AOR) form, and that the overwhelming majority of these dismissed appeals (close to 90 percent) are initiated by prescribers. Such dismissals impede prescribers from assisting enrollees in obtaining timely

independent review of their cases which creates the potential for delays in prescription drug access. Furthermore, given a prescribers' ability to act on behalf of an enrollee in requesting Part D plan level appeals, prescribers frequently express dissatisfaction with not being able to also assist patients with IRE level appeals and the perceived burden associated with becoming the enrollee's appointed representative. Clearly, this proposal would significantly reduce the number of requests for review that the Part D IRE dismisses due to the lack of an AOR form. In addition, because the IRE will no longer have to seek an AOR form, it will be able to immediately initiate substantive review of these cases. Thus, we believe this change would enhance beneficiary access to the appeals process and better ensure prompt IRE decisions on whether requested drugs should be covered under Part D.

Under this proposal, the regulations would continue to require a Part D enrollee, or a prescriber acting on his/her behalf, to request an IRE review; adverse redeterminations would not be automatically forwarded to the IRE. We have considered requiring auto-forwarding of adverse redetermination requests under the Part D program, but we continue to believe that the statute supports the position that in order to obtain IRE review the enrollee (or someone acting on the enrollee's behalf) must request such review. (See the January 28, 2005 final rule (70 FR 4193) for a discussion of this issue.) Although section 1860D-4(h) of the Act states that only the Part D eligible individual shall be entitled to bring an appeal to the IRE, we do not interpret this language as precluding a prescriber from acting on a Part D enrollee's behalf in requesting IRE review. As required by section 1860D-4(h) of the Act, this proposed change makes the MA and prescription drug benefit programs' appeals processes more similar, by giving Part D prescribers a mechanism to assist enrollees in accessing IRE review. In the MA program, the regulatory requirement that adverse plan reconsiderations be auto-forwarded to the IRE essentially gives physicians acting on behalf of enrollees direct access to the IRE reconsideration process. Also, as explained in our January 2009 final rule, allowing prescribers to request IRE appeals on behalf of enrollees does not present a conflict of interest because Part D prescribers are generally not entitled to payment from the enrollee, pharmacy, or plan for the prescribed drug, and therefore, do not have a financial interest in the outcome of appeals in the same manner as physicians requesting appeals under the MA program. Furthermore, we believe that an enrollee's prescriber has already been selected by the enrollee and occupies a position of trust. A prescriber is in a good position to know whether an independent review is warranted and is in the best interest of his or her patient.

This proposal should reduce administrative burdens under the IRE appeal process by eliminating the need for prescribers to routinely obtain AOR forms from enrollees and permitting prescribers to assist their patients in the appeals process without taking on the added responsibilities attendant to being an appointed representative. In contrast to the ongoing authority of appointed representatives, this proposal would allow a prescriber to act on an enrollee's behalf on an as-needed, case-by-case basis. A completed AOR form is not necessary or advisable for prescribers who are only seeking to assist Part D enrollees in exercising their own appeal rights under the statute. Prescribers will not have the same authority as an appointed representative, such as the right to bring appeals at any level, the right to obtain information on appeals, etc. Instead, we envision that from the time of the initial IRE appeal request, the prescriber's role will remain what it has been—providing a supporting statement or the clinical information necessary to approve coverage, if appropriate. Accordingly, we believe that this proposal will promote enrollee access to the Part D appeals process, reduce the burden on the prescriber community, and allow a more efficient use of appeals resources.

We are proposing a corresponding change to § 423.602(a) to specify that the IRE is responsible for notifying the prescriber of its decision when the prescriber makes the request on behalf of the enrollee. The enrollee will receive a written decision notice from the IRE, ensuring that enrollees are fully informed about the review process and able to participate if they choose to do so. We intend to issue additional manual guidance regarding the specifics of prescriber notice requirements.

As in § 422.582 and § 423.580, we are proposing that prescribers must notify enrollees whenever they request IRE review on their behalf, and we intend to issue additional operational guidance with respect to how this requirement may be satisfied. Finally, we want to make clear that this proposal addresses only the right of a prescriber to file an appeal on behalf of an enrollee at the IRE level. Other individuals who wish to act on behalf of an enrollee in filing an appeal must continue to do so as the enrollee's representative.

5. Independence of LTC Consultant Pharmacists (§ 483.60)

Under sections 1819(b)(4) and 1919(b)(4) of the Act, long term care (LTC) facilities must provide, either directly or under arrangements with others, for the provision of pharmaceutical services to meet the needs of each resident. This requirement is codified in regulations at § 483.60, which require LTC facilities to employ or obtain the services of a licensed pharmacist to provide consultation on all aspects of the provision of pharmacy services in the facility, including a drug regimen review at least once a month for each facility resident.

In the process of performing the drug regimen reviews, if the consultant pharmacist recommends a modification of a resident's drug treatment regimen, he/she notates the resident's medical record with the recommendation to the prescribing physician. The prescribing physician must respond to the recommendation and, based on our experience, the physician generally follows it because the consultant pharmacist is considered to be an unbiased expert of pharmacology in the LTC setting. As a result of their role in LTC facilities, LTC consultant pharmacists have significant influence over the drugs that LTC facility residents receive.

In accordance with section 1860D-4(b)(1) of the Act, as codified in our regulations at § 423.120(a)(5), Part D sponsors are required to provide LTC facility residents who are plan enrollees convenient access to LTC pharmacies. We expect that each LTC facility would select one, or possibly more than one, eligible network LTC pharmacy to provide Medicare drug benefits to its residents. We have specified minimum performance and service criteria in the Medicare Prescription Drug Benefit Manual, Chapter 5 (“Benefits and Beneficiary Protections”), section 50.5.2 (available on the CMS Web site at:

http://www.cms.gov/PrescriptionDrugCovContra/Downloads/Chapter5.pdf).

Commonly, nursing homes contract with a single LTC pharmacy for prescription drugs for facility residents. Very often the same LTC pharmacy then also contracts with the facility to provide consultant pharmacists for required consultation on all aspects of the provision of pharmacy services in the facility, including the monthly resident drug regimen reviews. In verbal conversations with industry representatives, we have been informed

that LTC pharmacies typically provide the consultant pharmacists to nursing homes at rates that are well below the LTC pharmacy's cost and below fair market value.

We have been concerned with the potential effect on patient safety and quality of care of various contractual arrangements involving LTC facilities, LTC pharmacies, the LTC consultant pharmacists these pharmacies provide to LTC facilities, and pharmaceutical manufacturers and/or distributors. These arrangements may take many forms. The practice of LTC pharmacies' providing consultant pharmacists to nursing homes at below cost or fair market value is one such type of arrangement. We are concerned that these arrangements may be used to entice nursing homes to enter into contracts with the LTC pharmacy for pharmacy dispensing services and the purchase of prescription drugs. We are greatly concerned with financial arrangements that involve payments from pharmaceutical manufacturers directly or indirectly to LTC pharmacies and LTC consultant pharmacists for encouraging physicians to prescribe the manufacturer's drug(s) for residents. The impact of these financial incentives is heightened when, as permitted under State law or by the State Pharmacy Board, LTC facilities sign agreements with LTC pharmacies permitting the consultant pharmacists to make medication switches. These types of arrangements may result in incentives for the LTC consultant pharmacist to make recommendations that conflict with the best interests of nursing home residents, as well as with Part D sponsors' formularies and/or drug utilization management (DUM) programs. Any such arrangements have the potential to directly or indirectly influence consultant pharmacist drug regimen recommendations. As a result, the arrangements bring into question the ability of the LTC consultant pharmacists to provide impartial reviews of the residents' drug regimens, which in turn raises concerns regarding the quality of those reviews and potential impact on resident health and safety.

Industry estimates indicate that three LTC pharmacy organizations have 90 percent of the market. Based on these estimates, the LTC pharmacy industry is highly concentrated, and we believe, therefore, these arrangements are widespread. As a result, we are concerned that the lack of independence of the consultant pharmacist from the interests of the LTC pharmacy or other LTC pharmacy-related organization may lead to recommendations that steer nursing home residents to certain drugs. This steering could result in the overprescribing of medications, the prescribing of drugs that are inappropriate for LTC residents, or the use of unnecessary or inappropriate therapeutic substitutions. Such potential outcomes can pose serious jeopardy to nursing home residents' health and safety. Although we have no evidence directly linking these arrangements to adverse outcomes, we believe a requirement under consideration that LTC consulting pharmacists be independent would be appropriate and prudent because it would ensure that financial arrangements did not influence the consultant pharmacist's clinical decision making to the detriment of LTC residents. Our concerns are not merely theoretical. We are aware of claims brought by qui tam relators under the False Claims Act alleging that, for instance, an LTC pharmacy received quarterly payments styled as rebates from the pharmaceutical manufacturer to engage in an active intervention program to convince physicians to prescribe a manufacturer's antipsychotic agent to the physicians' nursing home patients and to authorize all competitive products only after the failure of the manufacturer's product. In 2005, the Food and Drug Administration (FDA) issued warnings of the increasing death rate associated with the use of antipsychotic agents for behavioral symptoms for older persons with dementia. In reporting the results of 17 clinical trials, FDA noted an approximately 1.6 to 1.7 fold increase in mortality, compared to placebo-treated patients, in these studies.

1

Thus, any financial arrangements that encourage consultant pharmacists to prescribe these drugs to older LTC residents with dementia contrary to FDA warnings may detrimentally affect those residents' health and safety.

1

FDA, Public Health Advisory: Deaths with Antipsychotics in Elderly Patients with Behavioral Disturbances, April 2005. Accessed online at

http://www.fda.gov/Drugs/DrugSafety/PublicHealthAdvisories/UCM053171

on May 26, 2010.

Recent research suggests the use of antipsychotic drugs in nursing homes remains high—higher, in fact, than the percentage of residents diagnosed with psychoses. Despite the serious safety concerns, researchers reported nearly 1 in 3 nursing home residents in the U.S. received antipsychotic drugs in 2007.

2

Prior research examining potentially inappropriate prescription drugs among nursing home residents found half of the almost 3,400 study residents were prescribed a potentially inappropriate prescription medication. Forty percent of these residents had medication that was identified as both inappropriate and generally to be avoided among older LTC residents; a third of these medications posed a potential for severe harm. The therapeutic class most prevalent was antipsychotic agents.

3

2

Chen, Y, Briesacher, BA, Field, TS Tjia, J Lau, DT, Gurwitz, JH. Unexplained Variation across US Nursing Homes in Antipsychotic Prescribing Rates.

Archives of Internal Medicine.

2010:170(11):89-95.

3

Lau, DT, Kasper, JD, Potter, DE and Lyles, A. Potentially Inappropriate Medication Prescriptions among Elderly Nursing Home Residents: Their Scope and Associated Resident and Facility Characteristics.

Health Services Research.

2004:39(5):1257-1276.

More recently, a review by the HHS Office of Inspector General of Medicare Part D claims for atypical antipsychotics for elderly nursing home residents in the first half of 2007 found that 22 percent of those drugs were not administered in accordance with CMS standards for unnecessary drug use in nursing homes. The OIG also found a very high incidence of atypical antipsychotic prescribing for elderly nursing home patients with dementia despite the presence of an FDA black box warning that such prescribing is associated with increased mortality.

In addition to research findings, nursing home survey and certification data reported in the CMS online survey and certification reporting system indicate unnecessary drug use in nursing homes continues to be a problem. In 2006, we issued updated guidance for LTC survey and certification reviews of the use of potentially unnecessary medications.

4

The guidance, providing specific information on medications that are problematic to the nursing home population, was implemented in December 2006. In the 7 years prior to the implementation, the percent of surveys with a citation for unnecessary drug use ranged from 12.6 to 14.0 percent. Since implementation, however, the percent of surveys with these citations has increased yearly from 18.2 percent in 2007 to 19.4 percent in 2009.

4

CMS, Guidance for Unnecessary Drugs § 483.25(l), September 2006. Accessed online at

http://cms.gov/manuals/Downloads/som107ap_pp_guidelines_ltcf.pdf

on June 3, 2010.

The research and our survey and certification data indicate that the use of unnecessary medications, particularly antipsychotics, is problematic in LTC facilities. Although our findings do not directly connect LTC pharmacy relationships with consultant pharmacists to these research findings and survey results, we believe it is reasonable to presume that the

incentives present in the relationships among consultant pharmacist, LTC pharmacies and drug manufacturers can influence the prescribing practices reflected in these data.

As a result, we believe requiring the independence of consultant pharmacists is necessary and appropriate and are considering making such a change. We solicit comments on our understanding in this matter, as well as on our changes under consideration discussed in this section.

We note further that, although Federal regulations at § 483.25(l) require LTC facilities to avoid unnecessary drugs, our experience indicates that this responsibility generally is delegated to the consultant pharmacist who is, for the most part, provided by the facility's contracted LTC pharmacy. According to a June 2008 report of a study by the HHS Office of Inspector General (OIG) regarding Part D drugs and LTC facility residents, about 80 percent of the 128 nursing home administrators interviewed for the study indicated the consultant pharmacists performing their facility's drug regimen reviews were employed by the nursing home's LTC pharmacy.

5

Further, this report states that 54 percent of the 79 pharmacy directors interviewed for the study reported that their pharmacy receives rebates from pharmaceutical manufacturers that are frequently based on market share or volume. However, only three of the pharmacy directors reported providing rebate information to the LTC facility. Thus, in delegating responsibility for avoiding use of unnecessary drugs to consultant pharmacists, nursing homes generally are unaware of any financial interests that can bias the pharmacist's drug recommendations.

5

HHS, Office of Inspector General, “Availability of Medicare Part D Drugs to Dual-Eligible Nursing Home Residents,” June 2008. Available online at

http://oig.hhs.gov/oei/reports/oei-02-06-00190.pdf.

Accessed on June 28, 2010.

Consultant pharmacists perform monthly drug regimen reviews for all LTC facility residents. During this review, the consultant pharmacist may recommend a medication change. In making a decision whether to accept the recommended change, prescribing physicians are likewise generally unaware of the LTC pharmacy rebate arrangements with pharmaceutical manufacturers that may influence the recommendation. In the previously cited report, the OIG noted that when a consultant pharmacist recommended a medication change during the drug regimen review, the recommendation was accepted by the prescribing physician about 74 percent of the time.

6

We believe severing the relationship between the consultant pharmacist and the LTC pharmacy, pharmaceutical manufacturers and distributors, and any affiliated entities would further protect the safety of LTC residents because it will ensure that financial arrangements do not influence the consultant pharmacist's clinical decision making to the detriment of LTC residents.

6

HHS, Office of Inspector General, “Availability of Medicare Part D Drugs to Dual-Eligible Nursing Home Residents,” June 2008. Available online at

http://oig.hhs.gov/oei/reports/oei-02-06-00190.pdf.

Accessed on June 28, 2010.

Therefore, we are considering requiring that LTC consultant pharmacists be independent of any affiliations with the LTC facilities' LTC pharmacies, pharmaceutical manufacturers and distributors, or any affiliates of these entities. For the reasons described in this section, we believe such a requirement is necessary to ensure that consultant pharmacist decisions are objective and unbiased. That is, LTC facilities must use a qualified professional pharmacist to conduct drug regimen reviews and make medication recommendations based solely on what is in the best interests of the resident. We believe this can be achieved only if the consultant pharmacist is working without the influence of conflicting financial interests that might otherwise encourage overprescribing and overutilization, wh

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