President George W. Bush signs The Medicare Prescription Drug, Improvement, and Modernization Act (also known as the Medicare Modernization Act, or MMA), the law that created Medicare Part D. The voluntary Part D benefit, administered by federally approved private plans, provides coverage for beneficiaries’ outpatient prescription drugs.

The law requires Part D plans to “provide enrollees with access to negotiated prices used for payment for [covered drugs].” The law further requires that, “[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 [DIR], for covered part D drugs, and include any dispensing fees for such drugs.” Congress intended that “negotiated price concessions” would include all pharmacy price concessions, without exception.

Congress did not authorize retroactive DIR fees.

HHS issues a final rule that includes its first regulatory definition of “negotiated prices,” which requires “that ‘discounts, direct or indirect subsidies, rebates, other price concessions, and direct or indirect remunerations’ be taken into account in establishing covered Part D drug negotiated prices.”

The rule did not authorize retroactive DIR fees.

In another final rule, HHS amended its definition of “negotiated prices” to refer to the “total” negotiated amount that would be received by the network pharmacy. According to HHS, this amendment was designed to increase price transparency and ensure “that Part D sponsors base beneficiary cost sharing and price reporting to CMS on the price ultimately received by the pharmacy or other dispensing provider, also known as the pass-through price.”

The rule did not authorize retroactive DIR fees.

HHS issues a final rulethat reaffirmed its definition of “negotiated prices.”

The rule did not authorize retroactive DIR fees.

HHS issues a final rule that adds a narrow exception to its definition of “negotiated prices,” which was previously required to include all price concessions from pharmacies. The “narrow exception” applied to “contingency price concessions that cannot be reasonably determined at point-of-sale [sic].”

This created a loophole that PBMs exploited to begin assessing retroactive DIR fees.

The final rule states that HHS declined to prepare a full and thorough small-business analysis “because the Secretary has determined that this final rule will not have a significant impact on a substantial number of small entities.” In other words, HHS failed to consider the loophole’s impact on small pharmacies.

HHS requested comments “with examples of pharmacy price concessions that cannot reasonably be determined or approximated at point-of-sale [sic],” but offered only 2 weeks to respond.

Pharmacy organizations warned HHS that the “reasonably determined” exception to the definition of “negotiated price” was subject to manipulation by Part D sponsors and PBMs.

The agency failed to heed these warnings and did nothing to close the loophole that allows for the extraction of retroactive DIR fees. PBMs increased their use of retroactive DIR fees.

HHS directed Part D sponsors to report as DIR “any reconciliation amount that accounts for differences between the effective rate and the adjudicated rate achieved by the pharmacy at the point-of-sale [sic] and contingent incentive fees…” This guidance (and the DIR reporting guidances issued annually thereafter) was contrary to HHS’s established definition of “negotiated price.” The difference between the effective rate and adjudicated rate is not contingent and can reasonably be determined at the point of sale.

By failing to include the determination in its definition of “negotiated price,” HHS again neglected to close the loophole that PBMs exploit to extract retroactive DIR fees. Unchecked, PBMs stepped up their use of the deceptive practice.

In a proposed rule, HHS conceded that despite its intention that the exception be used narrowly, “we now understand that [it] applies more broadly than we had initially envisioned because of the shift by Part D sponsors and their PBMs towards these types of contingent pharmacy payment arrangements.” As a result, HHS said, “this exception prevents the current policy from having the intended effect on price transparency, consistency, and beneficiary costs.”

To address this challenge, HHS advised that it was “considering revising the definition of negotiated price…to remove the reasonably determined exception and to require that all price concessions from pharmacies be reflected in the negotiated price.”

Despite recognizing its error, the agency did nothing to close the loophole, and PBMs increase their use of retroactive DIR fees.

HHS proposed the elimination of the exception it adopted in May 2014. “When pharmacy price concessions are not reflected in the price of a drug at the point of sale, beneficiaries might see lower premiums, but they do not benefit through a reduction in the amount they must pay in cost-sharing, and thus, end up paying a larger share of the actual cost of a drug,” the agency said in its proposed rule.

The proposed rule further acknowledged data that showed pharmacy price concessions had grown by more than 45,000% between 2010 and 2017. Since the point-of-sale price that Part D plans report to the agency does not account for those discounts, “the negotiated price is rendered less transparent at the individual prescription level and less representative of the actual cost of the drug for the sponsor.”

Despite widespread support, HHS failed to finalize the November 2018 proposal. Instead, it adopted a final rule that left the loophole intact. PBMs continued to levy retroactive DIR fees.

Defending Pharmacies and Their Patients

APhA and other pharmacy groups have long sought legislative and regulatory relief from retroactive DIR fees and, time and again, have been ignored. This federal lawsuit demands the justice pharmacies and patients have been repeatedly denied.

The lawsuit does:

• Challenge the HHS final rule at issue on the grounds that its definition of “negotiated prices” contradicts Congress’s plain language and intent in the legislation that established the Medicare Part D program.
• Prove the final rule is invalid and capricious and was adopted without giving stakeholders notice or the opportunity to comment.
• Assert that HHS has repeatedly and irresponsibly failed to close the regulatory loophole it acknowledges was a mistake.

The lawsuit does not:

• Attempt to eliminate all DIR fees—only require PBMs to assess them at the point of sale instead of weeks and months later.
• Resolve all the factors that lead to pharmacy closures.