I. Introduction

The Office of the Inspector General ("OIG") of the U.S. Department of Health and Human Services ("HHS") has issued an interim final rule that sets forth the OIG’s new authority for imposing civil money penalties ("CMPs") against endorsed sponsors under the Medicare prescription drug discount card program ("the CMP interim final rule") established under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the "MMA").1 Under the new regulations, endorsed sponsors who "knowingly engage in false or misleading marketing practices, overcharge program enrollees, or misuse transitional assistance funds" will be subject to CMPs. While the CMP interim final rule is effective as of June 18, 2004, comments on the rule may be submitted to the OIG up to July 19, 2004.

II. Discussion

A. The Medicare Voluntary Prescription Drug Discount Card Program

Section 101 of the MMA, codified at section 1860D-31 of the Social Security Act ("the Act"), provides for a voluntary prescription drug discount card program for Medicare beneficiaries entitled to benefits, or enrolled, under Part A or enrolled under Part B, excluding beneficiaries entitled to medical assistance for outpatient prescription drugs under Medicaid, including section 1115 waiver demonstrations. This drug discount card program is intended to serve as a transitional means to provide assistance to Medicare beneficiaries until the Medicare drug benefit under Medicare Part D is implemented in 2006.2 The MMA and the implementing regulations3 outline the eligibility criteria as well as the process for enrolling eligible beneficiaries in, and disenrolling them from, an endorsed drug card program. Certain low-income Medicare beneficiaries enrolled in the Medicare drug discount card program are eligible to receive up to $600 in "transitional assistance" funds for each of 2004 and 2005, which is to be applied toward the cost of covered discount card drugs obtained through the program. Endorsed sponsors who administer the transitional assistance on behalf of the Centers for Medicare & Medicaid Services ("CMS") must demonstrate to the Secretary of HHS that they have "satisfactory arrangements" to account for the transitional assistance provided to these qualified enrollees. The CMP interim final rule defines "transitional assistance" as "the subsidy funds that Medicare beneficiaries enrolled in the prescription drug discount card and transitional assistance program may apply toward the cost of covered discount card drugs."

B. Civil Money Penalties Under The Drug Discount Card

Enacted in 1981, the CMP law gives the HHS Secretary and the OIG the authority to impose CMPs and program exclusions on individual and entities whose wrongdoing caused injury to HHS programs or their beneficiaries. Since the original CMPs were enacted, they have been expanded to apply by reference to numerous types of fraudulent and abusive activities.

Section 1860D-31(i)(3) of the Act authorizes the imposition of CMPs against Medicare-endorsed drug discount card sponsors that knowingly engage in conduct that violates the requirements of section 1860D-31 of the Act or engage in false or misleading marketing practices. OIG regulations interpret this to mean that endorsed sponsors may be subject to CMPs if they knowingly engage in conduct: (i) that violates the conditions of their endorsement agreement with HHS; or (ii) that constitute false or misleading practices. According to the preamble to the CMP interim final rule, HHS divided the authority to impose CMPs between CMS and the OIG. CMS has the authority to impose CMPs in situations where the endorsed sponsor’s conduct constitutes "non-compliance with an operational requirement" not directly related to beneficiary protection. The OIG has authority to impose CMPs on endorsed sponsors which mislead or defraud a beneficiary or misuse transitional assistance funds. Thus, 42 C.F.R. § 1003.102(b) has been revised to allow the OIG to impose a CMP against an endorsed sponsor who (1) "knowingly misrepresented or falsified information in outreach material or comparable material provided to a program enrollee or other person"; (2) "knowingly charged a program enrollee in violation of the terms of the endorsement contract" between the card sponsor and CMS; or (3) "knowingly used transitional assistance funds of any program enrollee in any manner that is inconsistent with the purpose of the transitional assistance program."4 The OIG may impose CMPs of up to $10,000 for each violation. This amount generally is consistent with the amount of the CMP under current regulations for many other program violations, although some are lower (e.g., $5,000 per violation for misuse of Medicare or CMS words, letters or symbols in written form) and some are higher (e.g., up to $100,000 for circumvention arrangements in violation of the Stark II physician self-referral law.)

It is important to note that because of the way that the CMS regulations define and interpret what constitutes operational requirements, the OIG may impose CMPs, in addition to or in place of sanctions that CMS may impose, against an endorsed sponsor whom it determines knowingly violated the requirements of section 1860D-31 or engaged in false or misleading marketing practices. Also, as noted, the rule only applies to card sponsors, and not manufacturers, pharmacies or other persons involved in the drug discount card program.

Although the Medicare-endorsed drug discount cards are a key part of the MMA’s new pharmaceutical reimbursement program, government officials have repeatedly expressed concerns about various fraudulent practices that might be associated with the drug discount card program, ranging from "bait and switch" advertising to improper payments to pharmacies to steer patients to a particular drug card. The CMP interim final rule focuses on abuses directed at beneficiaries. The first two grounds for imposing violations – misrepresenting or falsifying marketing material and charging an enrollee in violation of the terms of the endorsement contract – seem to be fairly straightforward. The marketing materials should be accurate and enrollees should be charged the enrollment fee which the card sponsor agreed to in the endorsement contract (in no event more than $30 per year). However, in light of the concerns expressed about so many potential abuses, government scrutiny of discount cards will likely be particularly extensive. For example, CMS’ s Administrator has stated that the agency will conduct weekly evaluations to detect any "bait and switch" tactics, log and respond to all beneficiary complaints (and impose sanctions when it finds consistent patterns of complaints), and conduct "mystery shopping" of drug card sponsors’ phone lines to monitor enrollment fees and check prices displayed on the Medicare price comparison website. It also is important to note that the preamble to the CMP interim final rule emphasizes the pre-existing CMP that prohibits misuse of the Medicare name or emblem.

The third basis – use of transitional assistance funds of any program enrollees "in any manner that is inconsistent with the purpose of the transitional assistance program" is broad as well as ambiguous, and the preamble to the regulation provides no further guidance. First, the OIG does not define what is meant by "the purpose of the transitional assistance program." While it is clear that transitional assistance must be applied "toward the cost of covered discount card drugs," it is possible to interpret the "purpose" of the transitional assistance program in a more expansive manner in the context of particular issues with respect to the program. For example, the interim final regulations for the drug card program appear to permit a Medicare-endorsed card program to make available discounted prices on drugs for purchases by non-transitional assistance enrollees, but not for purchases by transitional assistance enrollees paid for with the $600 subsidy, so that the government (and the enrollee) do not get the benefit of the discounts which the card sponsor provides to other card enrollees. Since this would result in the enrollee’s transitional assistance balance being exhausted sooner, to the detriment of both the government and the enrollee, the OIG could construe such a practice as being "inconsistent with the purposes of the transitional assistance program." While we believe such an interpretation on this issue could be challenged by a card sponsor based upon the way in which the regulations are written and certain published CMS guidance, the fact that OIG’s authority to impose CMPs is based upon such a vague standard creates ambiguity with respect to this and other types of card program practices that may be inconsistent with the government’s undefined view of the purposes for which transitional assistance is made available.

The OIG expressly seeks public comments on the possible inclusion of specific mitigating and aggravating factors to be considered in determining the penalty amounts. For example, the impact of any violation on beneficiaries could be an aggravating factor. Early detection and institution of corrective measures to avoid recurrence would be an appropriate mitigating factor. We also note that none of the three grounds for CMPs has any materiality criteria. Commenters may wish to suggest a materiality threshold before a violation leads to the imposition of penalties that potentially could be extremely large. In addition, the fact that one particular course of conduct could lead to sanctions by both the OIG and CMS may be questioned as duplicative. While the CMP interim final rule went into effect on June 18, 2004, the public’s opportunity to comment extends beyond that date to July 19, 2004. Commenters also may want to suggest that any changes to the regulations be made effective as of the prior date (June 18, 2004) that the CMP interim final rule went into effect.

1 69 Fed. Reg. 28842 (May 19, 2004). The text of the rule is available on the internet at http://a257.g.akamaitech.net/7/257/2422/14mar20010800/edocket.access.gpo.gov/2004/pdf/04- 11191.pdf.

2 Additional background information regarding the drug card program is available at http://www.cms.hhs.gov/medicarereform/drugcard/.

3 68 Fed. Reg. 69,840 (Dec. 15, 2003).

4 "Knowingly" is defined in the current regulations as someone who has actual knowledge of information, acts in deliberate ignorance of the truth or falsity of the information, or acts in reckless disregard of the truth or falsity of the information. No proof of specific intent to defraud is required. See 42 C.F.R. § 1003.102(e).

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