Entities administering a Medicare prescription drug "fallback" plan in a single U.S. region will be prohibited from bidding as stand-alone PDPs anywhere nationwide during the three-year contract term, CMS' proposed regulation says.

In addition, fallback sponsors will not be allowed to bid to provide an at-risk drug plan in their fallback region for four years.

"If an organization wins the fallback bidding, it is effectively barred...from bidding as a risk plan in that region for four years," the proposed rule states. "For the 3-year contract term, it is barred everywhere, and in the 4th year, it is barred from bidding as a risk plan in that region."

The Centers for Medicare & Medicaid Services published its proposed Medicare Part D regs Aug. 3.

Maximizing Competitive Bidding

CMS noted that the three- and four-year bidding prohibitions will discourage potential drug plan sponsors from seeking to provide drugs only through the fallback plan, in accordance with statutory design.

"We believe the intent of this restriction was to maximize participation in the competitive bidding program and to limit the attractiveness of participating as a fallback plan for those plans that could participate on an at-risk basis," the regulations state.

The prohibition is one of several provisions in the rule intended to encourage PBMs, health plans and other entities to participate as risk-bearing PDPs.

One provision appears to be aimed at forcing pharmacy benefit management companies to choose between participating in a stand-alone PDP or as a fallback administrator.

PBMs' Choice: PDP Subcontractor Or Fallback

Several PBMs have expressed an aversion to bearing insurance risk as stand-alone drug plans. PBMs expect to provide administrative services for other firms providing an at-risk benefit, as well as administer fallback plans (¹ Also see "PBMs Still Skeptical Of Part D; Is “Donut Hole” A Lifesaver?" - Pink Sheet, 2 August, 2004., p. 22).

The rule says subcontractors that participate in the bidding process for stand-alone PDPs will be disqualified from fallback bidding; as a result, PBMs will be unable to partner with Part D plan sponsors while also pursuing fallback duties.

"An entity would be treated as submitting a bid under the competitive bidding process, and thus not be an eligible fallback entity, if the entity was acting as a subcontractor for an integral part of the drug benefit management activities of a PDP sponsor that is submitting a bid for a prescription drug plan," the reg says.

"Eligible fallback entities would have decided not to submit either a full-risk or limited-risk bid in any region (either as a direct contractor, or as a subcontractor for a PDP sponsor) in order to be eligible to submit a fallback prescription drug bid in any region."

CMS is standing by its prediction that the fallback will not be a prominent component of Medicare Rx.

Minimizing The Fallback

"We estimate as an upper limit that approximately 20 fallback entities will submit a bid every three years," the reg states. "Approximately five fallback entities will enter into a contract with CMS on an annual basis."

Inclusion of the fallback plan in the Medicare Rx law reflects interest among congressional Democrats in providing beneficiaries with a government-sponsored drug plan, but critics of the non-risk plans tailored the Medicare Rx statute to limit their significance (² Also see "Medicare Rx Fallback Plan Would Be More Likely Under Sen. Kennedy Bill" - Pink Sheet, 26 January, 2004., p. 19).

Drug manufacturers were concerned about the potential for the fallback to become the dominant method of drug delivery under Medicare, which they believed could lead to government drug price controls. Those concerns were assuaged by legislative provisions such as one prohibiting a single plan from serving as a national fallback (³ Also see "Fending Off The “Fallback”: Medicare Rx Bans Marketing Of Backup Plans" - Pink Sheet, 12 January, 2004., p. 26).

Another bill provision bans branding and marketing for fallback plans. According to the implementing reg, "this refers to marketing activities promoting the plan and its sponsor to Part D eligible beneficiaries... and not to required dissemination of information on approved plan characteristics to enrollees."

The reg also suggests that "activated" fallback plans could have difficulty protecting market share.

In the portions of a given PDP region lacking drug coverage from at least two separate sponsors, a single fallback entity will provide drug benefits once CMS grants a "fallback service area" designation. However, qualified at-risk plans operating elsewhere in the region could encroach upon and disqualify selected areas, carving away at the fallback market.

At-Risk Bidders Banned From Fallback

Like the decision to offer a fallback, participating in a bid for an at-risk plan in any region will have extended consequences under the proposed rule.

An entity that makes an at-risk bid in the first year of a contract cycle will be disqualified from serving as the fallback plan in any region for the second and third years of the contract term.

The reg notes, however, that subcontracting for Medicare Advantage private plans does not violate eligibility criteria, unless that health plan is acting as a PDP sponsor rather than offering a Medicare Advantage drug plan.

"We anticipate that some eligible fallback entities may contract with other entities for the performance of some required pharmaceutical benefit functions," the proposed rule states.

Defining "Fallback"

CMS is asking for comments on interpreting what it means to "offer a fallback" plan, potentially to relax certain restrictions to be placed on fallback entities.

The reg distinguishes between holding a contract with the agency to offer the fallback and providing benefits after a fallback service area is activated.

"If the fallback contract was not activated and no plan was offered during year 3, the entity could be eligible to bid at risk for year 4," the rule explains.

This definition of providing the fallback appears to comply with lawmakers' intent "since the policy goal would be to prevent plans from converting their enrollment under a fallback contract to enrollment under an at-risk plan," CMS writes. "If a fallback contract were not activated, there would be no enrollment and no risk of conversion."

Further guidance on the form and manner of fallback contracting will be offered at another time, the reg notes. "We anticipate that we would 'pre-qualify' bidders from eligible fallback entities in the first half of 2005," the rule states.

CMS' Fallback Negotiation Rights

CMS will evaluate whether a given bid is "reasonably justified," but it will not "set the price of any particular drug, or require an average discount in the aggregate on any group of drugs."

CMS will have authority to negotiate with fallback plans with respect to administrative costs, aggregate costs, benefit structure and plan management.

Therefore, the rule says, "if the price reference points appear to be particularly high (or low), we may request an explanation of the bidders' pricing structure."

CMS may negotiate price-related performance targets with fallback plans to fulfill a statutory mandate to pay management fees that are tied to performance.

"Fallback entities are paid on the basis of cost, and thus these entities will have less of an incentive to negotiate low drug prices," the reg states. "We are contemplating tying the performance payments of fallback entities to the average discounts they are able to negotiate."

"We would like the concept of discount to reflect a broad measure of lower per member spending."

The Return Of AWP?

Average Wholesale Price is proposed as a standard by which to judge a plan's drug discounts. For example, "if [a] plan was able to maintain an average discount greater than AWP -20%, it could qualify for additional incentive payments."

However, the rule notes that AWP - which is being replaced by "average sales price" in Medicare Part B - may be an inadequate benchmark.

"We are aware that using a floating target such as AWP as a reference point may be counterproductive to our goal of minimizing costs."

CMS is "interested in identifying other potential reference points that would be less subject to manipulation, such as a relationship to average sales price, or to the prior year's negotiated and delivered prices."

Medicare Rx “Fallback” Plans Ensured Small Role Under CMS Rule

More from Archive

More from Pink Sheet