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

I. INTRODUCTION 

On November 21, 2005, the Centers for Medicare & Medicaid Services ("CMS") published two rules to implement the competitive acquisition program ("CAP") for outpatient drugs and biologicals covered under Medicare Part B, as mandated by the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("MMA"). The rules modify policies CMS set forth in a July 6, 2005 interim final rule ("July 6 Interim Final Rule").¹

First, as part of the final physician fee schedule rule for calendar year 2006 ("Final Rule"),² CMS adopted refinements designed to: improve the CAP bidding process; increase the number of drugs that can be furnished under the CAP; improve access under the CAP to newlyapproved drugs; clarify how unused drugs should be treated; and enable CAP vendors to enter into arrangements with CAP physicians for the collection of coinsurance, issuing advance beneficiary notices, and other appropriate activities if they comply with applicable anti-fraud provisions.

Second, in separate interim final rule with comment period also published November 21, 2005, CMS announced that it will exclude units of drugs supplied under the CAP from Part B average sales price ("ASP") calculations for the first three years of the CAP ("CAP ASP Rule"),³. By taking this action, CMS responded to widespread concerns that including CAP prices in ASP calculations would discourage drug manufacturers from offering discounted prices to CAP vendors. CMS will accept comments on the CAP ASP Rule until January 20, 2006.

Although CMS had planned to implement the CAP on January 1, 2006, as was mandated by the MMA, CMS subsequently suspended the bidding process and delayed implementation until July 2006 to allow CMS to further refine the program.⁴ The CAP vendor bidding process was restarted upon publication of the Final Rule, however. CMS will accept applications from vendors who wish to participate in the CAP until December 22, 2005, and the initial physician election process is scheduled to begin April 3, 2006.

The two rules are discussed in greater detail below, focusing on differences between the July 6 Interim Final Rule and the Final Rule. We would be pleased to provide you with additional information upon request.

Under the CAP, physicians will make an annual election to either: (1) obtain certain Part B-covered drugs and biologicals from vendors selected through a competitive bidding process, or (2) continue to directly purchase Part B drugs and biologicals and be reimbursed under the ASP system. Physicians who choose to participate in the CAP will bill the Medicare program only for drug administration, while the CAP vendor will bill Medicare for the actual CAP drug and also will collect applicable beneficiary copayments.

As in the July 6 Interim Final Rule, the Final Rule limits the CAP program to Part B drugs and biologicals that are furnished "incident to" a physician’s service. Likewise, CMS has excluded from the program drugs and biologicals with very low volumes of utilization, certain drugs and biologicals whose patterns of use do not make them suitable for inclusion under the CAP, and those that are statutorily excluded.

Potential CAP vendors are required to submit bids on at least one drug/biological for each HCPCS code within a "category." CMS has established one broad billing category for all drugs and biologicals in the initial CAP program, rather than establishing separate categories for different specialties. Thus, a vendor will have to supply at least one drug in each of the HCPCS codes listed in the Final Rule. On the other hand, vendors are not required to provide all available FDA-approved drugs within a HCPCS code. Vendors instead will be required to provide information to potential physician participants regarding the specific National Drug Codes ("NDCs") within each HCPCS code that the vendors will be able to furnish. In addition, CMS is establishing a single, national distribution area for the initial stage of the CAP, rather than state or regional bidding areas.

 CAP vendors must meet certain quality, program integrity, and financial standards, and they must be enrolled as a Medicare supplier. Upon meeting these criteria, successful applicants will be chosen on the basis of their bid price, which cannot exceed a weighted average of ASP plus 6 percent. CAP contracts will be awarded for a three-year period (unless the contract is terminated or suspended before the three-year period ends). CAP vendors must comply with operational requirements outlined in the Final Rule, including claims processing requirements, delivery systems, and dispute resolution provisions.

B. Changes to Drugs Supplied Under the CAP

In the Final Rule, CMS has updated the particular drugs to be included in the CAP to reflect new and revised HCPCS codes, and to remove one code (J1710) that is being phased out of the market. Vendors will be required to include bids for all of drugs on the updated list in their submission and provide these drugs to physicians who elect to participate in the CAP. However, as discussed in greater detail in the Final Rule, certain of the drugs will not be incorporated into the composite bid methodology because of insufficient data upon which to compute appropriate drug weights. For such drugs, bidders will submit a separate bid for each drug in the list, with a ceiling of 106 percent of the ASP for that drug as determined when bidding begins.

Moreover, given that CMS anticipates that CAP vendors will need to make changes in their product lists during the life of their three-year contracts, CMS has added procedures to allow CAP vendors to adjust their drug lists to reflect new products, new package sizes, and pricing changes. Under the July 6 Interim Final Rule, CMS allows CAP vendors to apply to CMS (or its designee) for long-term substitutions to the list of drugs supplied by the CAP vendor.⁵ In the Final Rule, CMS is extending this process to allow CAP vendors to apply to include new NDCs and new HCPCS codes in their drug list.⁶ Requests for approval of new NDCs and HCPCS codes must include a rationale and discussion of impact on the CAP, including safety, waste, and potential for cost savings. If approved, changes will become effective at the beginning of the next quarter. The addition of new NDCs to a CAP vendor’s CAP drug list will not affect the CAP payment amount for that particular HCPCS, as the payment amount will have been set during the bidding process (or approval process for adding an additional HCPCS code). CMS also is allowing CAP vendors to request approval to add single indication orphan drugs⁷ to their CAP drug list, with payment based on ASP plus 6 percent.

Beginning in 2007, CAP vendors will be able to request approval to add newly-approved drugs to their CAP drug list before the drug is assigned a HCPCS code. Such drugs will be considered for inclusion in the CAP only if CMS is able to identify a single ASP payment amount for the drug. Payment would be made at the price published in the ASP "not otherwise classified" ("NOC") price file consistent with the next quarterly update.

In light of the ability of CAP vendors to make certain changes in their drug list, the Final Rule includes regulatory language requiring physicians, as a condition of participating in the CAP, to accept: (1) the particular NDCs supplied by the CAP vendor with which the physician enrolls, and (2) changes to the vendor’s CAP drug list that are approved in accordance with the Final Rule. Physicians must place routine orders for CAP drugs at the HCPCS level, unless medical necessity requires a particular formulation on the CAP vendor’s drug list. If such medical necessity is documented, the physician can submit the prescription order that specifies the NDC.

Note that the Final Rule reiterates that CAP prices would not supersede local least costly alternative ("LCA") policies. Because all carriers have adopted LCA policies for injectable forms of leuprolide acetate, CMS has not included this product in the CAP.

In the preamble to the Final Rule, CMS discusses issues related to vendor bidding such as drug quality, vendor subcontracting, confidentiality of the bids, vendor call center requirements, the inclusion of prompt pay discounts in vendor net acquisition costs, and the mechanics of the bidding process.

• Quality and Product Integrity – CMS responds to a number of commenters who recommended stronger quality/product integrity standards for CAP vendors. CMS continues to believe that existing federal and state requirements, along with Interim Final Rule provisions, provide appropriate product integrity safeguards, although it will explore additional options as the agency gains more experience with the CAP.

• Subcontracting – A vendor can subcontract with another entity as long as that entity meets all CAP vendor requirements, is in compliance with all applicable laws and regulations, has a demonstrable record of integrity regarding fraud and abuse and conflict of interest, and has adequate administrative arrangements in place to ensure effective operations. It is the CAP vendor’s responsibility to ensure that subcontractors remain compliant with these standards. CMS is not adopting a suggestion that the agency require a binding covenant between CAP vendors and subcontractors, although CMS expects that CAP vendors may want to include this type of provision in subcontracts for their own protection. CMS also notes that contracts between a distributor and a specialty pharmacy are not automatically problematic, although CAP vendors may wish to consult with legal counsel to determine whether there unique circumstances exist that could present a conflict of interest.

• Confidentiality of the Bids – CMS reiterates that 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, to the extent allowed by federal law, assert applicable FOIA exemptions to protect confidential cost and pricing information.

• Grievances/Call Center Hours of Operation – The Final Rule establishes more detailed requirements for CAP vendor grievance processes, including a requirement that CAP vendors respond within two business days to any inquiry (or sooner if the inquiry is related to drug quality). CAP vendors must also comply with detailed rules for the operation of toll-free customer assistance lines, including rules regarding the hours of operation and a requirement to provide assistance for the disabled, the hearing impaired, and Spanish speaking inquirers in all customer service operations. CMS also recommends that all CAP vendors have arrangements in place to obtain translation services in other languages in certain circumstances. The Final Rule also discusses the resolution of beneficiary coinsurance billing questions.

• Prompt Pay Discounts – CMS continues to expect prompt pay discounts to be disclosed by the CAP vendor and included in determining reasonable, net acquisition costs for purposes of CAP pricing.

• Bid Process – Although CMS generally retains the bidding process described in the July 6 Interim Final Rule, CMS is making certain adjustments to reflect the six-month delay in implementation. For instance, bidders will be required to base their bid on the October 2005 ASP file, and CMS will update the bid price by four quarters of the Producer Price Index, rather than five quarters. As noted previously, publication of the Final Rule marked the opening of the bidding process.

The Final Rule addresses the following operational issues: drug product waste and returns (including when unused portions of single-use drugs may be billable); billing issues and timing of claims processing and payment; coinsurance and collection of Advanced Beneficiary Notice ("ABN") forms; arrangements between CAP vendors and CAP physicians for services relating to the CAP; CAP drug-ordering; resupply and emergency use issues; the use of beneficiary’s height and weight for ordering a CAP drug; the "furnish as written" option; and patient confidentiality. Highlights of this section include the following:

• Unused Drug Product (Waste and Returns) – CMS reiterates its expectation that CAP vendors and CAP physicians will minimize unused drugs. CMS is clarifying, however that it considers the unused portion of a drug remaining in an opened single-use vial to be "administered" (and thus reimbursable under the CAP) if: (1) the CAP physician has made good faith efforts to minimize the unused portion of the CAP drug in how he or she scheduled patients and how he or she ordered, accepted, stored, and used the drug, and (2) the CAP vendor has made good faith efforts to minimize the unused portion of the drug in how it supplied the drug (note that this policy does not apply to the unused portion of drugs from multiple use vials). This requirement is being added to the physicians’ CAP election agreement. CMS is retaining its requirement from the July 6 Interim Final Rule that when a CAP physician does not administer a CAP drug during the time frame specified on the prescription order, or administers a smaller amount of the drug than was originally ordered, the physician must contact the CAP vendor to discuss what to do. If it is permissible under state law, and if the CAP drug is unopened and both the physician and the CAP vendor are in agreement, then the CAP physician may retain the drug for administration to another Medicare beneficiary (a new beneficiary-specific prescription order would be needed). CMS notes that unused CAP drugs are the property of the CAP vendor.

• Timing of CAP Vendor Billing/Payment of Claims – The July 6 Interim Final Rule requires a CAP physician to file his or her drug administration claim within 14 days of administration. The CAP vendor may not bill the beneficiary for coinsurance associated with the drug product until the claims are matched and the CAP vendor receives payment from the designated carrier. Some potential vendors expressed concern in comments to the Proposed Rule about the lag in receiving payment under this system. CMS presents data and timelines in the Final Rule indicating that in most cases the CAP vendor should be paid by CMS within two to three weeks from the date of drug administration (assuming the CAP physician and vendor have promptly and properly submitted their claims).

• Arrangements Between CAP Vendors and CAP Physicians for the Collection of Coinsurance and ABNs – In response to commenters’ requests, CMS states explicitly in the Final Rule that nothing in the CAP statute or regulations prohibits CAP vendors and CAP physicians from entering into voluntary written arrangements to (1) notify the CAP vendor after the CAP drug has been administered to the beneficiary; (2) communicate with the beneficiary about coinsurance for CAP drugs on behalf of the CAP vendor; (3) issue an ABN on behalf of the CAP vendor; or (4) collect applicable coinsurance and deductible on behalf of the CAP vendor from the beneficiary with no supplemental insurance coverage after the drug has been administered. Moreover, the CAP statute and regulations do not bar any other appropriate and legal arrangement between a CAP physician and a CAP vendor. However, such arrangements should be carefully scrutinized to ensure that they are not disguised payments for referrals for items or services payable by a federal health care program, which could implicate the physician self-referral ("Stark") prohibition, the federal anti-kickback statute, or any other federal or state law or regulation governing billing or claims submission. Arrangements should be at fair market value for actual services provided and should not take into account the volume or value of referrals. Likewise, percentage compensation arrangements or per item arrangements for billing and collection services between CAP physicians and CAP vendors would be highly suspect under the fraud and abuse laws. CAP vendors who enter into these arrangements with CAP physicians remain subject to liability for improper waivers of deductibles and coinsurance. CMS cautions that these arrangements should be monitored to ensure that they are not used by CAP vendors or CAP physicians as inappropriate marketing tools. CMS also points out that a CAP vendor may not refuse to do business with a CAP physician because the CAP physician has declined to enter into an arrangement with the CAP vendor; CAP vendors must accept all participating CAP physicians who choose to enroll with that CAP vendor.

• Resupply Option/Definition of Emergency – CMS reaffirms the July 6 Interim Final Rule policy establishing the criteria for a CAP physician to acquire drugs under the CAP to resupply his or her own private inventory after administering a drug in an emergency situation. CAP vendors do not have the authority to override a CAP physician’s determination of what constitutes an emergency situation for purposes of the resupply provision (although CMS points out in the preamble that driving distance should not be a determining factor in the use of the emergency supply provision, as had been suggested by a commenter). CMS will reassess the emergency resupply provision as it gains experience with the CAP.

• Order Form Information on Patient’s Height and Weight – In the July 6, 2005 Interim Final Rule, CMS required the CAP physician to provide the CAP vendor with certain specific information, including the Medicare beneficiary’s height and weight. In the Final Rule, CMS is clarifying that height and weight should be provided only if necessary.

• Furnish as Written – CAP physicians may obtain a drug and bill Medicare under the ASP system using the "furnish as written" ("FAW") option when medical necessity requires that a specific formulation of a drug be furnished to the patient, and that formulation is not provided by the CAP vendor. CMS emphasizes in the Final Rule that: (1) CAP physicians who use FAW must appropriately document their clinical judgment supporting the use of FAW; and (2) CMS does not intend FAW "to provide participating CAP physicians with an ‘end run’ around their decision to participate in the CAP."

• Patient Data Confidentiality – CMS reiterates in the Final Rule that CAP vendors must comply with the HIPAA Administrative Simplification Rules, including the Privacy Rule, and notes that subcontractors are held to the same requirements and standards as the CAP vendor, including those pertaining to confidentiality.

The Final Rule explains the process by which a CAP vendor may stop supplying drugs for a beneficiary who is not meeting their coinsurance obligations. CMS also clarifies its regulatory language to require CAP vendors to inform beneficiaries of available cost sharing assistance. The agency will monitor CAP vendor refusals to ship for nonpayment of coinsurance to ensure that the provision is not being abused.

CMS also discusses comments on its July 6 Interim Final Rule provision allowing CAP vendors and CAP physicians to ask a beneficiary to sign an Advanced Beneficiary Notice ("ABN") if the vendor or physician believes a local carrier will not cover a drug. A signed ABN would make the beneficiary liable to pay for the drug if a carrier denies the claim. CMS reaffirms the policy in the Final Rule. CMS stresses that a CAP physician’s decision to issue an ABN is voluntary, and the CAP vendor may not penalize a physician who refuses to do so by refusing to ship the drug or attempting in some other way to force the CAP physician to obtain the ABN.

Moreover, CMS responds to comments about the financial liability of a Medicare/Medicaid dual eligible beneficiary who receives a CAP drug. CMS notes that a state Medicaid program may deem a CAP vendor to be paid in full even if the vendor has received either no coinsurance payment or a reduced payment from the state. Dual eligible beneficiaries have no liability for a covered Medicaid benefit beyond the state’s Medicaid payment amount.

The Final Rule responds to a number of questions about physician election and education issues, including group versus individual participation in the CAP, inclusion of all practitioners in the definition of physician, physician choice of CAP vendor, and opt-out issues. Among other things, the Final Rule provides that:

• The physician election period announced in the July 6 Interim Final Rule has been delayed until spring 2006. The CAP physician election period for calendar year 2007 will occur from October 1, 2006 to November 15, 2006.

• A physician within a group practice can opt out of the CAP while the partners within the group opt in only if the physician has not reassigned his or her benefits to the group. CMS also states in response to a question that if a non-participating physician elects to participate in the CAP, he or she must agree to accept assignment for drug administration for all CAP drugs to allow for the Medicare beneficiary’s and CAP vendor’s appeal rights.

• A physician can opt out of the CAP mid-year if a CAP vendor declines to ship CAP drugs to the physician for a beneficiary because of the beneficiary’s failure to pay required copayments.

Note that the Final Rule does not respond to all issues raised by commenters in response to the July 6 Interim Final Rule. For instance, CMS states that it anticipates addressing in future rulemaking comments related to rural operational issues, the impact of CAP delivery times on satellite clinics, restrictions on transporting drugs, the 14 day CAP physician billing requirement, impact on clinical research, and licensure requirements for CAP pharmacies and distributors. Moreover, additional operational issues undoubtedly will arise when the CAP gets underway that will require CMS to issue subregulatory guidance.

In the July 6 Interim Final Rule, CMS stated that it did 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. CMS was 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 nonfederal average manufacturer price calculations under the Veterans Health Care Act.

In response to numerous comments on this issue, CMS revisited its analysis of its statutory authority and found compelling the argument that Congress intended the ASP system and the CAP programs to be separate and independent alternatives. As a result, CMS has decided to exclude from ASP calculations units of CAP drugs that are administered to beneficiaries by CAP physicians for the initial 3-year contract period under the CAP. Likewise, manufacturers must exclude rebates and lagged price concessions attributable to units of CAP drugs administered to a beneficiary by a CAP physician when using the ASP estimation methodology. To assist manufacturers in compliance with this requirement, CMS will require in CAP vendor contracts that the CAP vendors provide manufacturers with information necessary to determine which sales to that vendor are excludable from ASP calculation.

CMS invites further comment on the exclusion of CAP drug units from the calculation of the ASP, including comments on accounting for this exclusion when estimating lagged price concessions. CMS will provide additional guidance regarding lagged price concessions in a future ASP document.

While these changes are effective November 21, 2005, there will not be any excludable CAP units until the CAP begins on July 1, 2006. Thus, this exclusion will not affect manufacturers’ calculation of ASP until the third quarter of 2006.

CMS intends to reevaluate this policy after the initial 3-year period of the CAP. If CMS believes it should not continue to exclude units supplied under the CAP from the calculation of ASP, it will undertake a rulemaking process to seek public comment.

By excluding CAP drugs from the ASP calculation, CMS is removing a hurdle that could have prevented drug manufacturers from offering significant discounts to CAP vendors. Thus, CMS’s decision to exclude such sales from ASP has the potential to improve the viability of the new CAP program.

Nevertheless, it remains to be seen how many vendors and physicians will choose to participate in the CAP. Potential CAP vendors must weigh the opportunity to secure large volume distribution contracts against numerous operational uncertainties. Likewise, physicians will need to determine whether or not to participate initially in this new distribution mechanism and forego drug reimbursement through the "buy and bill" approach.

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