NCPA v. Azar - what's the big deal?
My trade association is suing the government. Why? What is a negotiated price and who cares?
On Friday January 15th, the National Community Pharmacists Association filed suit against Alex Azar in his role as Secretary of Health and Human Service (HHS). The suit claims that the Centers for Medicare and Medicaid Services (CMS), a division of HHS, violated proper rulemaking procedures when they finalized a definition of “negotiated price” in the Medicare Part D program without proper notice and comment, and that subsequent quasi-rule guidance addressing related issues is also invalid as a result.
So what is a “negotiated price” and why should you care? In the Medicare Modernization Act of 2003 (MMA), the law that created Part D, Congress created a type of subcontractor for Medicare – a Prescription Drug Plan (or Part D Plan – PDP). These PDPs would negotiate with pharmacies across the country to secure good prices for medications for the Medicare enrollees that chose their plan. In doing so, Congress required that the PDPs “shall provide enrollees with access to negotiated prices,” and “[f]or purposes of [Part D], negotiated prices shall take into account negotiated price concessions, such as discounts, direct or indirect subsidies, rebates and direct or indirect remunerations, for cover part D drugs, and include any dispensing fees for such drugs.” In the statute, Congress gave CMS substantial leeway in interpreting and implementing the law. Over the course of the 18 year history of Part D since the MMA passed, CMS has adopted three slightly different regulatory definitions of “negotiated price.”
The current definition of “negotiated price” at issue in this case is as follows:
Negotiated prices means prices for covered Part D drugs that meet all of the following:
(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) Are inclusive of all price concessions from network pharmacies except those contingent price concessions that cannot reasonably be determined at the point-of-sale; and (3) Include any dispensing fees; but (4) Excludes additional contingent amounts, such as incentive fees, if these amounts increase prices and cannot reasonably be determined at the point-of-sale. (5) Must not be rebated back to the Part D sponsor (or other intermediary contracting organization) in full or in part.
At issue in particular in this suit is the exception in (4). The current definition allows PDPs to exclude from the definition of “negotiated price” any contingent amount that cannot be reasonably determined at the point of sale. On this exception rests the entire concept of so called “pharmacy price concessions” or “DIR fees.”
Back up – why does a negotiated price matter?
In the Medicare Part D program, the “negotiated price” drives all of the financial calculations that determine who pays what for which medications and when. The negotiated price is the price on which a patient’s coinsurance (and indirectly copayment) is based. It is the number used to determine if a patient has met their deductible, when they cross into the “donut hole,” and when they leave the donut hole.
Let us take the example of Mrs. Jones, a patient of Neighborhood Pharmacy. Mrs. Jones takes 3 inhalers which each have a negotiated price of $300/month. She is enrolled in WellCare Wellness Rx (PDP) – S4802-200, a PDP offered in my state of Utah. Her inhalers are all listed as Tier 3 medications on her plan’s formulary, or list of covered drugs. Her plan has a $445 deductible for tier 3 and above medications, and a $47/month copayment for tier 3 medications at a standard cost sharing pharmacy like Neighborhood Pharmacy. Once the total of the negotiated prices for her medications passes $445+$4130, she will enter the coverage gap (donut hole), and will be liable for 25% of the negotiated price of her medications until she has spent a total of $6550 out of pocket, at which point she would then exit the donut hole and enter the catastrophic phase. She will then be responsible for 5% or $9.20/month for her medications, whichever is greater.
Note: I am not an acutary – don’t hate on my simplified example math here
As we can see, the negotiated price is what drives Mrs. Jones’ copayments – if her PDP had a 10% lower negotiated price with the pharmacy, she would spend 1 month more in the initial coverage phase, and would pay 10% less during each month of the donut hole – resulting in a $219 decline in her spending – an 8% drop.
Back to the case
Now what if I told you that her PDP had an arrangement with Neighborhood Pharmacy in which as part of its participation in that PDP’s network of pharmacies, the pharmacy would pay the PDP back ~10% of the negotiated price several months after the prescriptions were dispensed under a complicated formula designed so that the value of this “price concession” could not be exactly determined at the time the prescription was dispensed? In this scenario, Mrs. Jones dutifully pays her $2725 for the year, not knowing that had that 10% concession been included in the price, she would have $219 more to spend each year on her heart’s desires, rather than her medication.
This exact scenario plays out in every pharmacy in the country under the current regulation. Nearly every PDP extracts “DIR fees” from its network pharmacies under the guise of a quality improvement program or a “pay for performance” contract. However, the value of the performance component pales in comparison to the amounts payable by the pharmacy to the plan. In an extreme example (that is based in the real contract structures in place in 2021), a patient might have 50% coinsurance, and the pharmacy might pay a DIR fee of >50% of the negotiated price. In that scenario, in the current setting, the patient has a true coinsurance net of DIR of >100% - they are effectively paying their PDP an additional premium via their coinsurance. If the price concessions were included in the negotiated price, they would pay less than half as much each month.
This is why NCPA is suing HHS. The current definition of “negotiated price” allows PDPs to shift a substantial portion of the true costs of medications to their beneficiaries, enhancing their profit margins at their beneficiaries’ expense by concealing the true net price from the patient and the pharmacy via complex reconciliation mechanisms which take these concessions in lump sums weeks to months after the prescription has been taken.
I am a bench pharmacist and see the impact of this policy failure every day in the form of patients not taking their medications due to cost. In addition to my role as a community pharmacist, I consult with other pharmacies to help them understand how these fees are calculated. As a result, the impacts of DIR on patients and pharmacies is texted to me daily with an “Am I doing this math right?” or a “this is criminal.”
In 2021, some PDPs have literally doubled the value of these fees and doubled down on the profit-maximizing strategy of inflating the negotiated price with exorbitant DIR in order to capture additional compensation from the patient and pharmacy. I have heard reports from nearly every Medicare region of a particular plan dramatically increasing its negotiated prices early this year in order to push its beneficiaries into the donut hole as quickly as possible, while (generally unbeknownst to the pharmacy) reclaiming up to 80% of the value of this inflated negotiated price from the pharmacy as DIR. This transforms the Part D benefit from a program to provide medications to seniors at low cost into a program to extract funds from seniors to line the pockets of PDP sponsors. This is the exact opposite of the intent of congress when creating the Part D program. NCPA’s suit could not be brought at a more pivotal time for the future of the Part D program.
My only complaint about NCPA v. Azar is that this suit was not brought 7 years ago when the rule was put in place. I understand why – NCPA is an organization that tries to resolve issues via the political process and the established regulatory procedures first. They very nearly succeeded in 2019 until the White House put the kibosh to a proposed rule that would have eliminated this exception (presumably because a side effect would be an increase in 2020 PDP premiums – not a good look in an election year). This left NCPA with no other method to resolve this issue other than the courts. Better late than never.
In summary, I believe that NCPA has brought a strong suit with a well-reasoned legal footing based on ample precedent on an issue of great importance to the nation’s seniors, even if they’ve never heard of DIR. For their sake, I pray that the DC District Court agrees.