The Centers for Medicare and Medicaid Services (CMS) recently issued the Medicare Advantage and Part D proposed rule (CMS-4192-P) that contains Part D program changes, many of which may be effective January 1, 2023. In the fact sheet for the rule, CMS describes how it plans to lower Part D beneficiary cost sharing at the pharmacy counter:1
“CMS is proposing a policy that would require Part D plans to apply all price concessions they receive from network pharmacies to the point of sale, so that the beneficiary can also share in the savings. Specifically, CMS is proposing to redefine the negotiated price as the baseline, or lowest possible, payment to a pharmacy, effective January 1, 2023.”
In this article we focus on this proposed policy change, moving pharmacy direct and indirect remuneration (DIR) to the point of sale (POS). We do not cover the other proposed changes, of which there are many in the 360-page document. This proposal does not include changes to the treatment of manufacturer rebates.2
What is pharmacy DIR?
Medicare Part D plan sponsors may negotiate POS and post-POS price concessions with pharmacies to reduce net claim costs. Post-POS price concessions are reported to CMS as DIR:3,4“DIR […] includes price concessions from and additional contingent payments to network pharmacies that cannot reasonably be determined at the point of sale.”
For additional context on Part D DIR, please see Medicare Part D DIR: Direct and indirect remuneration explained. Pharmacy DIR is often tied to preferred network participation. For example, plan sponsors may steer members to “preferred” pharmacies through reduced cost sharing. Pharmacies might contract DIR arrangements with plans in exchange for this increased foot traffic. In recent years, the use of DIR has expanded to other types of pharmacies and arrangements.
CMS reports that Medicare pharmacy price concessions, or DIR, have increased over time.
Figure 1: Pharmacy DIR over time
Source: https://public-inspection.federalregister.gov/2022-00117.pdf, Table 3.
The proposed rule specifies the price concessions must reflect the lowest possible price, including only amounts that reduce the net price. Some pharmacy contracts may have terms that include contingent prices based on performance or other metrics. In such cases, the net price must reflect the best possible reductions, meaning it is possible the pharmacy price concessions at point of sale could create a negative DIR once reconciled at year-end.
In this 2022 proposed rule, section 3.e “Negotiated Prices of Applicable Drugs in the Coverage Gap,” CMS extends some flexibility in reflecting the pharmacy DIR at the POS in the coverage gap phase of a beneficiary’s benefit year:5
“In summary, under our proposed approach, for non-applicable drugs in the coverage gap, and during the non-coverage gap phases of the Part D benefit for applicable drugs, claims would be adjudicated using the negotiated price determined using the lowest possible reimbursement to the pharmacy. In contrast, for applicable drugs during the coverage gap, plans would have the flexibility to determine how much of the pharmacy price concessions to pass through at the point-of-sale, and beneficiary, plan, and manufacturer liability in the coverage gap would be calculated using this alternate negotiated price.”
This in turn creates two versions of a “negotiated price” at the POS for a drug, depending on the drug type and benefit phase of the beneficiary.
How will stakeholders be affected?
CMS estimates the following impacts to stakeholders by moving pharmacy DIR to the POS:
Figure 2: Estimated stakeholder cost impacts over 10 years (2023-2032)
Source: https://public-inspection.federalregister.gov/2022-00117.pdf, page 18 and 324.
Based on prior analyses, if price concessions are moved to the POS, we expect significant variation in stakeholder impacts. The federal government costs may go up due to increases in the direct subsidy payments to plans and low-income premium subsidies. Premiums may increase or decrease by plan but are expected to increase on average across all beneficiaries. Cost sharing may decrease for some non-low-income beneficiaries—particularly for beneficiaries with coinsurance plan designs. Pharmaceutical manufacturer Coverage Gap Discount Program (CGDP) payments may decrease, assuming the lowest negotiated price is continued through the coverage gap.
Figure 3: Expected stakeholder impacts by component
What should stakeholders consider?
The requirement that pharmacy DIR be reflected at the POS could require all Medicare stakeholders to reevaluate their calendar year (CY) 2023 bid strategies. Plan sponsors, pharmacies, pharmacy benefit managers (PBMs), and other entities may consider:
1. Timing. How will the uncertain timing of a potential final rule affect the CY 2023 bidding process?
At this time, it is unknown when CMS will release the final rule. This could prove problematic for Part D plan sponsors as they develop their CY 2023 bids without clear direction on how to treat pharmacy DIR. A similar situation occurred during the CY 2020 bid development season, in which a comparable policy was proposed in November 2018, but ultimately not finalized. The rule proposed in 2018 stated that the proposed changes could take effect “as early as 2020.” CMS released the final version of the rule less than a month before CY 2020 Part D bids were due. In similar circumstances of uncertainty, CMS has suggested plan sponsor participation in demonstration programs, such as the Part D risk corridor demonstration or other additional CMS protections.6
Figure 4: Timelines
2. Contracting. Would plan sponsors continue to contract pharmacy DIR arrangements, or would they shift to discount arrangements? Will new types of contracting arrangements emerge?
Plan sponsors may seek to renegotiate current DIR contracts and elect to negotiate equivalent POS discounts and forgo separate pharmacy DIR. Plan sponsors may deploy a dual pricing strategy for cases when the script is in the coverage gap. Additionally, value-based or outcomes-based contracts with drug manufacturers could become more prevalent as plan sponsors continue to seek innovative contracting methods.
3. Preferred network disruption. Would changes in the pharmacy DIR structure result in changes to preferred pharmacy arrangements?
In the current structure of the Part D program, a $1 increase in pharmacy DIR reduces premiums to a greater degree than $1 in additional discounts. Preferred network arrangements are often structured around pharmacy DIR and may become less attractive if based on discount differentials alone. This may also impact cost-sharing differentials between preferred and nonpreferred pharmacies.
4. Pharmacy cash flow. How might pharmacy cash flow be affected?
Pharmacy DIR arrangements are often structured in a way that is helpful to pharmacies from a cash flow perspective. Pharmacies receive reimbursement for the full POS drug cost at the time the drug is dispensed, and pharmacies reimburse plan sponsors for a portion of the drug cost after the POS. With this arrangement, pharmacies have the opportunity to leverage the spread between the POS cost and DIR payment. The change, however, will improve transparency and cost predictability for the pharmacy and limit the concern of funds being taken back from the pharmacy.
5. Operations. How might this impact payers and PBMs in processing claims?
If the rule is finalized, the plan sponsor or PBM will need to ensure compliance by evaluating current contracts and payment models. This may create the need to update the reimbursement algorithm used to process the pharmacy claims. Updates to the coding of the claim processing system may be necessary to be able to implement the modifications to the adjudication algorithm.
Plans may retain flexibility in the application of the pharmacy DIR at the POS for applicable drugs in the coverage gap phase. If plans elect to not apply pharmacy DIR to applicable drugs in the coverage gap, this will create a second definition of “negotiated price,” adding complexity and compliance challenges.
6. Member cost sharing. Would member copays or coinsurance change?
With lower POS costs, plan sponsors may need to reduce copayments to maintain actuarial equivalence with the defined standard plan. Additionally, CMS may reevaluate the defined standard plan benefit parameters and maximum cost sharing limits by tier. Preferred network disruption may impact the cost-sharing differentials between preferred and nonpreferred pharmacies.
7. Formulary management. How would plans optimize formulary strategy with lower POS costs?
Plan sponsors may consider formulary changes to manage costs most effectively as beneficiaries move through the benefit phases more slowly. Additionally, leaner formularies may become more prevalent as plan sponsors seek ways to mitigate premium increases.
8. Low-income (LI) auto-assignment. How might LI beneficiaries be impacted?
Since this proposal is likely to affect plans with higher levels of pharmacy DIR more than plans with lower pharmacy DIR, there could be significant movement in the regional low income benchmark (LIB) premiums. It is possible some plan sponsors with high pharmacy DIR may be unable to offer plans below the LIB. This could result in movement of low-income members who would be reassigned to other plans.
As with prior Medicare program changes, a key challenge in optimizing strategies for a POS pharmacy DIR structure will be predicting how others in the market might react. Understanding varying stakeholder perspectives can help each organization best position itself for the future.
1 CMS (January 6, 2022). CY 2023 Medicare Advantage and Part D Proposed Rule (CMS-4192-P). Fact Sheet. Retrieved January 24, 2022, from https://www.cms.gov/newsroom/fact-sheets/cy-2023-medicare-advantage-and-part-d-proposed-rule-cms-4192-p.
2 CMS finalized a policy that would have required drug manufacturer rebates be reported at the point of sale in December 2020. However, Congress has prohibited implementation of this rule to date, most recently through 2025.
3 Bell, D. & Margiott, T. (January 2018). Medicare Part D DIR. Milliman White Paper. Retrieved January 24, 2022, from https://www.milliman.com/-/media/milliman/importedfiles/uploadedfiles/insight/2018/medicare-part-d-dir.ashx.
4 CMS (April 28, 2021). Final Medicare Part D DIR Reporting Guidance for 2020. Retrieved January 24, 2022, from https://www.hhs.gov/guidance/sites/default/files/hhs-guidance-documents/2020_DIR_Reporting_Guidance_Memo.pdf.
5 See the full text of the proposed rule, p. 235, at https://public-inspection.federalregister.gov/2022-00117.pdf.
6 CMS (April 5, 2019). Guidance Regarding Part D Bids. Retrieved January 26, 2022, from https://www.cms.gov/Research-Statistics-Data-and-Systems/Computer-Data-and-Systems/HPMS/Downloads/HPMS-Memos/Weekly/SysHPMS-Memo-2019-Apr-5th.pdf.