United States: CMS Issues Interim Final Rule on Competitive Acquisition of Medicare Part B Drugs and Biologicals

On July 6, 2005, the Centers for Medicare & Medicaid Services ("CMS") published an interim final rule to implement the competitive acquisition program ("CAP") for outpatient drugs and biologicals covered under Medicare Part B (the "CAP Rule"),¹ as mandated by the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("MMA").

By way of background, the MMA requires CMS to establish the CAP for the acquisition of and payment for competitively-biddable Part B covered drugs and biologicals effective January 1, 2006. Under the CAP, physicians will make an annual election to either: (1) obtain certain covered drugs and biologicals ("CAP drugs") from vendors selected through a competitive bidding process ("CAP vendors"), or (2) continue to directly purchase drugs and biologicals and be reimbursed under the average sales price ("ASP") system. Physicians who participate in CAP will bill the Medicare program only for the physician administration component associated with delivering the CAP drug. The CAP vendor will bill Medicare for the actual CAP drug and also will collect applicable beneficiary copayments. CMS issued its proposed CAP rule on March 4, 2005.²

In the new interim final CAP Rule, CMS provides additional details on the structure and operational aspects of the CAP program. In particular:

• CMS has decided to establish one broad billing category for all drugs and biologicals in the initial CAP program (rather than establish separate categories for cancer and rheumatology drugs, for instance). CMS has identified 181 drugs and biologicals that are most commonly administered incident to a physician’s service for inclusion in the initial stage of the CAP, and prospective CAP vendors must submit bids on at least one drug or biological for each identified HCPCS code. However, CMS is not requiring vendors to provide all available FDAapproved drugs and biologicals within a HCPCS code.

• CMS is establishing a single, national distribution area for the initial stage of the CAP (rather than state or regional bidding areas). This national distribution area will include the 50 states, the District of Columbia, Puerto Rico, and U.S. territories. CAP vendors must service the entire national area.

• CMS states that it does not believe it has the statutory authority to exclude prices determined under the CAP from the computation of ASP under section 1847A of the Social Security Act. Prices offered under the CAP must therefore be included in ASP calculations.

• The CAP Rule clarifies that physicians will have a responsibility to appeal CAP drug administration denials, and the vendor also may appeal the denial of the related drug claim.

CMS will accept comments on the CAP Rule until September 6, 2005. Bidding by potential CAP vendors will begin on July 6, 2005, with bids due to CMS by August 5, 2005. CMS expects to award contracts in the early fall in order to start the program January 1, 2006. In the preamble to the CAP Rule, CMS notes that it recognizes "that the Medicare community will be faced with many new challenges and options in 2006," and commits to working with providers and beneficiaries to make the transition "as smooth as possible."

The CAP represents a significant departure from historic drug reimbursement practices under Medicare, but is similar to specialty pharmacy practices recently implemented by many managed care organizations. The prospects for success of the Medicare CAP are unclear at this point because it is uncertain how many physicians, vendors, and manufacturers will choose to participate in the initial implementation of the program. While the CAP presents vendors with a significant potential opportunity to secure large volume distribution contracts, potential vendors may be discouraged by CMS’s decision to require vendors to furnish a broad array of drugs on a nationwide basis, along with a host of other operational uncertainties, and the likelihood that any margin that CAP vendors may achieve could be very small. Likewise, physicians may adopt a "wait and see" attitude during the initial phase of the program while they assess potential administrative burdens and the financial implications of foregoing drug reimbursement through the "buy and bill" approach. Moreover, while drug manufacturers may seek to contract with vendors to ensure CAP physician access to their products, some drug manufacturers may be reluctant to offer significant discounts to vendors because of the impact of CAP pricing on Part B ASP payments. Nevertheless, CMS has established a rather modest goal for the CAP program: to provide physicians an alternative to the current "buy and bill" system (whether or not a physician chooses to utilize this alternative), and it appears that the CAP Rule achieves this narrowly-defined goal.

Key provisions of the CAP Rule are summarized below. We would be pleased to provide you with additional information upon request, or to assist you in preparing comments on the CAP Rule.

CMS has adopted its proposal to initially limit the CAP program to Part B drugs and biologicals that are furnished "incident to" a physician’s service. CMS notes, however, that the MMA provides for CAP to cover all Part B drugs and biologicals that are not paid on a cost or prospective payment basis. Therefore, under the language of MMA, CAP could cover a wider range of Part B drugs and biologicals than just those administered "incident to" a physician’s service, such as drugs used with durable medical equipment ("DME"), or drugs specifically covered by statute such as immunosuppressives, certain oral anti-cancer drugs, and certain oral anti-emetics.

CMS will continue to consider whether drugs and biologicals other than those administered as incident to a physician’s service can be included within the CAP, although it has no plans at this time to expand the scope of the CAP program. If CMS chooses to expand the program beyond drugs and biologicals furnished incident to a physician’s service, CMS states that it would first issue a notice of proposed rulemaking with a public comment period.

In the proposed rule, CMS set forth the following alternatives for initial implementation of the CAP by drug categories:

(1) Including all physician-administered Part B drugs and biologicals furnished "incident to" a physician’s service; or

(2) Phasing in CAP by (a) initially including all drugs and biologicals typically administered by oncologists, or (b) including a limited set of drugs and biologicals typically administered by one or more other physician specialties (e.g., urologists).

In the final CAP Rule, CMS has opted to implement the CAP initially for a wide range of drugs and biologicals administered incident to a physician’s service, rather than phase in the program by specialty. Specifically, CMS has identified a set of 181 drugs and biologicals that are most commonly administered incident to a physician’s service for inclusion in the initial stage of the CAP. CMS has not included drugs and biologicals with very low volumes of billing by physicians because it could impose a greater burden on vendors. Also as described in more detail in the preamble, CMS chose not to include certain drugs and biologicals whose patterns of use do not make them suitable for inclusion under the CAP, or those that were statutorily excluded from the program. Categories of products excluded from CAP include, among others: contrast agents; orally-administered anti-cancer and anti-emetics; certain vaccines, controlled substances, and orphan drugs; drugs billed under not otherwise classified codes, drugs used in conjunction with DME; and certain other categories of drugs and biologicals. Note, however, that the categories of CAP drugs could be reconsidered in future years. CMS also did not exercise its statutory authority to exclude drugs and biologicals from the CAP on the grounds that including those drugs and biologicals would not result in significant savings or would have an adverse impact on access to those drugs and biologicals.

The interim final rule requires potential vendors to submit bids on at least one drug/biological for each HCPCS code within a "category." CMS has decided to establish one broad billing category for all drugs and biologicals in the initial CAP program, rather than establish separate categories for different specialties, such as cancer and rheumatology drugs. Thus, a vendor will have to supply at least one drug in each of the 181 HCPCS codes. However, CMS is not requiring vendors to provide all available FDA-approved drugs within a HCPCS code. Vendors instead will be required to provide to potential physician participants in the CAP information regarding the specific National Drug Codes ("NDCs") within each HCPCS code that they will be able to provide to the physician, and this information also will be posted on the CMS web site by October 1, 2005.³ CMS expects vendors will be encouraged to offer a wide range of drugs and biologicals, including multiple NDCs within a single drug code, because "it will be difficult for vendors to attract business from physicians under the program if the choice among drugs within specific codes is unduly restrictive"

This single drug category is an interim measure. CMS expects to phase-in multiple drugs categories, probably defined around the drugs and biologicals commonly used by physicians’ specialties (for example, urology or rheumatology), as it refines and develops the CAP. In other words, a vendor would be able to specialize in furnishing drugs and biologicals to a particular physician specialty group. Even when CMS expands the single category into multiple drug categories, any physician -- regardless of specialty -- who administers the drugs and biologicals in a specific category may elect to obtain those drugs through the CAP. Moreover, when multiple drug categories are available, a physician would be permitted to contract with different vendors to supply drugs in separate categories. CMS invites comments on how to develop and refine multiple drug categories for later stages of implementing the program.

Notwithstanding inclusion of a drug or category of drugs within the CAP, physicians who submit claims under the CAP must comply with applicable carrier local coverage policies – including "least costly alternative" ("LCA") policies. In other words, if there is a local coverage determination on a particular drug that contains an LCA provision and that drug is included in the CAP, when the participating CAP physician orders that drug, the drug claim will be paid subject to the LCA policy, rather than the CAP-established price.⁴ CMS welcomes comments on how to deal with the LCA issue in later stages of CAP implementation.

Physicians who elect to participate in the CAP could obtain a CAP drug under the ASP system in "furnish as written" cases when medical necessity requires that a specific formulation of a drug or biological be furnished to the patient and that formulation is not provided by the approved CAP vendor. According to CMS, an appropriate use of the "furnish as written" option would be if a physician is treating a patient with a documented allergy to certain excipients or preservatives who requires a specific formulation of a product that the CAP vendor does not furnish under its CAP contract. In such a case, documentation of the allergy is a justification to use another product, and this documentation must be maintained in the patient’s medical record.

In the proposed rule, CMS solicited comments on several potential approaches to defining competitive acquisition areas for contract award purposes, including nationwide, regional, or statewide competitive acquisition areas. In the final CAP Rule, CMS has decided to establish a single, national distribution area for the initial stage of the CAP that includes the 50 states, the District of Columbia, Puerto Rico, and U.S. territories. Vendors would, however, be permitted to employ subcontractors, including vendors that operate on a state-wide or regional basis, to provide for distribution of drugs across the nationwide area.⁵ CMS considers this to be a phase-in of implementation, since it enables the program to begin with a limited number of vendors that can deliver drugs on a nationwide basis. CMS expects the definition of competitive acquisition areas ultimately will be established on the basis of regions, states, or some other smaller geographic area to increase the number of vendors that could bid to participate in the program. CMS will consider how to establish smaller competitive acquisition areas as this initial phase of implementation proceeds.

Under the CAP Rule, CMS will review bids submitted by prospective CAP vendors for both price and non-price (i.e., quality of service and financial qualifications) components. CAP contracts will be awarded for a three-year period (unless the contract is terminated or suspended before the three-year period ends).

The CAP Rule establishes a number of quality and product integrity requirements for CAP vendors. Among other things, CAP vendors will be required to: have and maintain licensure as required by the states in which they furnish drugs under the CAP; assure that drug and biological products are not adulterated, misbranded, spoiled, contaminated, expired, or counterfeit; employ trained personnel; have appropriate physical facilities, and use adequate security measures to maintain product integrity; and ship CAP drugs in unopened manufacturer’s packaging (although packages containing multiple individual units of one drug may be split into appropriate quantities for shipment).

The CAP Rule also addresses the application of fraud and abuse requirements to the CAP. For instance, CMS requires vendors to submit a compliance plan outlining the organizations’ commitment to complying with all applicable federal and state standards, including the designation of a compliance officer and compliance committee, compliance training, internal enforcement and monitoring, and procedures for ensuring prompt responses to detected offenses. Vendors also must establish a code of conduct related to conflicts of interest in bidding and performance.⁶ CMS notes that the code of conduct should address issues such as acceptance of remuneration to or from an approved CAP vendor, participating CAP physician, beneficiary, or manufacturer that would diminish, or appear to diminish, the objectivity of professional judgment, along with whether or not certain transactions raise patient safety or quality of care concerns.

Likewise, the final CAP Rule includes performance and solvency standards for prospective CAP vendors, along with other bidding entity qualifications related to management, operations, experience, and capabilities.

Prospective CAP vendors will be required to bid on all drugs and biologicals in a category. The submitted bid price must include all costs related to the delivery of the drug/biological to the selecting physician, and the costs of dispensing (including shipping) the drug/biological and management fees. Costs related to physician administration or wastage, spillage, or spoilage are excluded from the submitted bid.

CMS will require prospective vendors to submit a "composite bid" consisting of the bid prices for the individual drugs and biologicals in a CAP category, weighted for each HCPCS code’s share of volume (based upon the most recent available utilization data). CMS will select up to the five lowest qualified bidders for a drug category in each area, although the weighted average of the bids for all drugs in the category must be less than or equal to 106 percent of the weighted ASP⁷ for the drugs in that category.⁸ The amount of a bid for any CAP drug must be uniform for all portions of the competitive acquisition area. CMS will establish a single price for each drug in a competitive acquisition area based on the median bid of the winning bidders. In the final CAP Rule, CMS has adopted an inflation update to account for the time lag between bidding and the CAP prices going into effect. Specifically, CMS is providing that the single price for each CAP drug will be initially determined on the basis of the median of the bids submitted during the second quarter of calendar year 2005 for that product, but the price of each CAP drug then will be updated to the mid-point of calendar year 2006 (five quarter increase) Producer Price Index for prescription preparations, as released by the Bureau of Labor Statistics. CMS invites comments on this methodology for updating the single drug prices.

CMS has established special provisions to include newer drugs and biologicals (i.e., introduced during and after 2003 but in time for consideration in the CAP Rule) in the CAP program. CMS will include certain newer drugs and biologicals⁹ in the CAP if they meet the minimum threshold of allowed charges ($50,000) in CMS billing data from the first quarter of calendar year 2005 and otherwise meet program requirements. CMS will require that prospective vendors include bids for these products in their submissions and provide these drugs to physicians who elect to participate in the CAP. However, CMS will not incorporate the bids for these items into the composite bid methodology, because CMS lack sufficient utilization data to compute appropriate weights for these drugs. Instead, CMS will consider these bids separately from the evaluation of the composite bid. CMS also will limit bids on such newer drugs and biologicals to 106 percent of the ASP for that drug, as determined at the time when the bidding begins.

CMS will update the CAP prices for each drug in a category in years two and three of a three-year contract based on the vendor’s "reasonable, net acquisition costs" for that category as determined by CMS based, in part, on information reported annually by the vendor and limited by the weighted payment amount for all drugs in that category.¹⁰ If a CAP vendor has experienced a significant increase or decrease in its reasonable, net acquisition costs, CMS would use a two-step process to recompute the single price for each drug in that category.¹¹ First, CMS would adjust the bid price that the vendor originally submitted by the percentage change indicated in the information that the vendor disclosed. Next, CMS would recompute the single price for the drug as the median of these adjusted bid prices, and notify all vendors of the single price the agency would be paying for the particular drugs in the following year. CMS notes that this mechanism would apply in the case of any significant change in reasonable, net acquisition costs, whether those changes reflect increase or decreases in costs. As a result, the single price for a drug could decrease in the second or third year of a contract if, for example, acquisition costs for the drug have decreased because of the introduction of a generic equivalent. It is also possible that one vendor would report large increases while the other vendors report price decreases or vice versa; in such cases, CMS would use the same two-step process for updating the single price.

As in the proposed rule, CMS defines "reasonable, net acquisition costs" as costs actually incurred by a CAP vendor that are necessary and proper for acquiring the drugs that a CAP vendor is obligated to provide under a CAP contract. Actual acquisition costs would be net of all discounts and rebates provided by a CAP vendor’s own suppliers. CMS will require full disclosure of the CAP vendor’s acquisition costs for drugs included in the CAP contract, including purchases of these drugs from all manufacturers and the total number of units purchased from each manufacturer. A CAP vendor would be required to submit full documentation reflecting these purchases, along with all records reflecting discounts that result in a reduction of actual cost to the CAP vendor (i.e., volume discounts, prompt pay discounts, cash discounts, free goods that are contingent on any purchase requirement, chargebacks, rebates, refunds, and other price concessions regardless of when they are recognized).

CMS received several comments suggesting that submitted bid information provided by the vendor should be kept confidential and protected from public disclosure. In the final rule, CMS states that it will follow HIPAA standards to protect privacy. All cost information, including bid prices, will be confidential and not made available for public display. Note, however, that confidential information may not necessarily be protected under the Freedom of Information Act ("FOIA"). In the event that CMS receives a FOIA request for pricing information, CMS will determine whether any of the FOIA’s exemptions to mandatory disclosure may apply to protect the information. In addition, the Medicaid drug rebate confidentiality provisions apply to periods during which a bid is submitted with respect to a CAP drug in the same manner as it applies to information disclosed under the Medicaid drug rebate statute.

CMS addresses questions on the treatment of CAP drug prices on ASP calculations. CMS states that it does not believe it has the statutory authority to exclude prices determined under the CAP from the computation of ASP under section 1847A of the Social Security Act. Section 1847A(c)(2) of the Act contains a specific list of sales that are exempt from the ASP calculation, and sales to vendors operating under CAP are not included on that list. Therefore, CMS has concluded that prices offered under the CAP must be included in ASP calculations.

CMS is silent regarding whether manufacturers must include prices negotiated with a CAP vendor in the calculation of average manufacturer price and best price under the Medicaid rebate program, and Federal Supply Schedule and non-federal average manufacturer price calculations under the Veterans Health Care Act. Similarly, the CAP Rule does not provide guidance on the extent to which the Office of Inspector General of the Department of Health and Human Services would consider CAP prices for purposes of determining the "widely available market price" under the ASP system. In all likelihood, CMS would require manufacturers to include prices offered under the CAP program in these other government pricing calculations. Therefore, in the absence of further CMS guidance, we would recommend inclusion of the CAP prices in these calculations.

One commenter asked CMS to clarify whether the CAP vendor could provide services to manufacturers for fees and whether this payment would influence ASP calculations. CMS responded that bona fide service fees that are paid by a manufacturer to an entity, that represent fair market value for an actual service provided by the entity, and that are not passed on in whole or in part to a client or customer of an entity, are not included in the calculation of ASP because these fees would not ultimately affect the price realized by the manufacturer. CMS defines "bona fide service fees" as expenses that are for an itemized service actually performed by an entity on behalf of the manufacturer that would have generally been paid for by the manufacturer at the same rate had these services been performed by other entities.

The CAP Rule addresses many other operational aspects of the CAP, including claims processing requirements, delivery systems, dispute resolution, the physician election process, and related education efforts. Among other things, the CAP Rule provides that:

• Physicians must file claims for drug administration under the CAP within 14 days of the service. After shipping the drug to the physician, the CAP vendor may file a claim for the drug with the designated carrier no sooner than the expected date of administration. CMS will pay a claim only when both the vendor claim for the drug and the physician’s claim for the administration have been matched in the claims processing system. The vendor will not be allowed to bill the beneficiary or his or her third party insurance for any applicable deductible and coinsurance until the Medicare carrier has verified that the physician administered the drug to the beneficiary, and final payment for the drug is made by the Medicare program.

• CAP vendors generally must provide for routine delivery of CAP drugs within two business days and emergency delivery within one business day, although the vendor may be required to ship drugs more quickly if the integrity of the product requires it.

• If a vendor’s routine and emergency delivery processes would not enable a physician to obtain a drug quickly enough for a particular patient, the physician will have the option of obtaining the drug order under an "emergency replacement" process if the situation complies with four statutory criteria: the drugs are required immediately; the physician could not have anticipated the need for the drugs; the vendor could not have delivered the drugs in a timely manner; and the drugs were administered in an emergency situation. In such cases, the physician would treat the Medicare beneficiary with a drug from his or her own stock. After administering the drug, the physician would prepare an order, identifying the drug as an emergency replacement for a drug already administered to the beneficiary. The CAP vendor would prepare the drug order, assign the unique transaction identification number and ship the replacement product to the physician. When the drug is received from the CAP vendor, the physician would return the drug to his stock. Both the physician and the approved CAP vendor would bill normally for the drug or its administration.

• Physicians participating in the CAP must maintain a separate electronic or paper inventory for each CAP drug obtained, and must agree not to transport drugs from one place of service to another location.

• Local carriers will be responsible for adjudicating a physician’s claim for drug administration. If the local carrier determines that the claim is not compliant with all local coverage determinations, the carrier will deny the physician’s claim for administering the drug and send a message to the CMS central claims processing system that the CAP vendor’s claim for the drug also is not payable. In a significant change from the proposed rule, the final CAP Rule clarifies that physicians will have a responsibility to appeal the denial, and the vendor also may appeal the denial of the drug claim. The participating CAP physician’s participation obligations have been expanded to include support of the CAP vendor’s appeal with documentation and written statements.

• If a CAP vendor believes a local carrier will not cover a drug, the vendor may ask the beneficiary to sign an Advanced Beneficiary Notice ("ABN"). A signed ABN would make the beneficiary liable to pay for the drug if a carrier denies the claim. However, in the event the vendor is not successful in collecting an ABN from the beneficiary, and the physician refuses to change the order, the vendor still would be required to provide the drug to the physician. If the claim for drug administration (and consequently the drug payment) is denied, the appeals and dispute resolution processes could be used.

• Vendors must provide information on sources of cost-sharing assistance available to beneficiaries on request and offer to implement a reasonable payment plan to beneficiaries experiencing financial difficulty in paying their cost-sharing amounts. CAP vendors also may waive cost-sharing for beneficiaries who are experiencing financial hardship if they meet all corresponding anti-fraud provisions set forth in §1128A(i)(6)(A) of the Social Security Act and the regulations established at 42 C.F.R. 1003.101 (the definition of "Remuneration"). Moreover, if the beneficiary still does not pay his or her cost sharing, the vendor may in certain circumstances refuse to ship additional drugs to the participating CAP physician for that beneficiary.

• CMS defers to state law and regulations as well as manufacturers’ requirements concerning the disposition of drugs that are not administered or drugs that are left over from an administration. If a physician does not administer a drug during the time frame specified on the order form, or administers a smaller amount of the drug than was originally ordered, the physician must contact the vendor to discuss what to do. If it is permissible under state law, the drug is unopened, and both the physician and the vendor are in agreement, the physician may retain the drug for administration to another Medicare beneficiary. However, before the drug could be administered, the physician would need to provide the vendor with a new prescription order for the drug, and the vendor would need to supply the physician with a new beneficiary-specific prescription order number. Additional details regarding return of unused drug products are provided in the preamble.

• CMS has expanded its grievance and dispute resolution provisions. Among other things, CMS has added a process that could culminate in termination of a CAP vendor’s contract for serious quality or service issues that cannot be resolved cooperatively. The final CAP Rule also modifies the process for a vendor’s request to suspend a physician’s CAP agreement (for instance, CMS has withdrawn its proposal to publish the names of suspended physicians in the Federal Register, and the physician will have the right to offer information to the carrier and CMS regarding a proposed suspension).

• The CAP Rule establishes a process for physicians to elect, on a voluntary basis, to participate in the CAP.¹² The participating CAP physician election agreement for 2006 must be postmarked by November 15, 2005. Physicians generally will be required to remain in the program for at least one calendar year and comply with the terms of the CAP election agreement. CMS notes that the CAP Rule does not prohibit CAP vendors and physicians from entering into a contract or agreement governing their arrangements for the provision of CAP drugs or other items or services. However, parties to such arrangements must ensure that the arrangements do not violate the "Stark" physician self-referral prohibition, the federal anti-kickback statute, or any other federal or state law or regulation governing billing or claims submission.¹³

Drug manufacturers, providers, vendors, and beneficiaries all will be faced with numerous changes in Medicare drug policy in 2006, as CMS implements the CAP for Part B drugs along with the sweeping new Medicare Part D outpatient drug benefit.¹⁴ Given the scope of changes being made to Medicare drug coverage policies, the drug distribution framework, and drug payment policies, interested parties should monitor carefully CMS developments in these areas. Industry also should take advantage of CMS outreach efforts and opportunities to comment on implementation issues. CMS compiles information about the CAP at http://www.cms.hhs.gov/providers/drugs/compbid/, while the main Part D web page is:

http://www.cms.hhs.gov/medicarereform/pdbma/pdp.asp. Reed Smith is closely following developments in this area, and we would be pleased to answer any questions you might have about the new drug payment policies.

This article is presented for informational purposes only and is not intended to constitute legal advice.