United States: CMS Issues Guidance on Controlling Fraud, Waste, and Abuse for Medicare Part D Sponsors

Originally published February 22, 2006

On February 8, 2006, the Centers for Medicare and Medicaid Services (CMS) updated its guidance for Sponsors of Medicare Part D prescription drug plans on detecting, correcting, and preventing fraud, waste, and abuse (FWA). The guidance, which was 63 pages long, is an update to Chapter 9 of the Prescription Drug Benefit Manual, and it expands on an eight-page summary document issued last June. CMS will accept comments on the draft guidance until March 1, 2006.

Although in draft form, the guidance nevertheless offers insight into CMS’s expectations for various parties involved in the Part D benefit. Notably, CMS identifies potential risk areas, schemes, and vulnerabilities for key stakeholders, including employer or union sponsored plans, pharmacy benefit managers, pharmacies, prescribers, wholesalers, pharmaceutical manufacturers, and Medicare beneficiaries.

Delegation of Compliance Functions

CMS emphasizes that the Sponsor ultimately is responsible for fulfilling its contractual obligations to CMS. A Sponsor must have monitoring processes in place to ensure subcontractor compliance with applicable laws, rules, and regulations. CMS expects that Sponsors will require subcontractors to submit to ongoing monitoring for compliance purposes. The guidance mentions that CMS may require a Sponsor to revoke a particular subcontract if compliance concerns arise.

FWA Compliance Program Basics

A Sponsor may use the guidance to develop a comprehensive FWA program or to integrate CMS’s requirements into its existing compliance plan. According to CMS, the latter approach would be the most efficient, but it defers to Sponsors to make this determination based on their individual needs.

Written Policies and Procedures. CMS recommends that every Sponsor implement a code of conduct/ethics for its Part D business. It also provides a laundry list of the policies and procedures that a FWA program should include, such as:

  • a comprehensive conflict of interest disclosure protocol,
  • a process to ensure lawful marketing practices,
  • a commitment to legal Pharmacy and Therapeutic Committee decisions and formulary decisions, and
  • measures for timely responding to data requests by CMS and its designees, such as the Medicare Drug Integrity Contractors (MEDICs).

A Sponsor should distribute these policies and procedures not only to its employees but also to officers, directors, and managers of its subcontractors. CMS expects employees as well as subcontractors to certify that they have received, read, and will comply with the written standards of conduct.

Compliance Officer and Compliance Committee. CMS notes that the corporate Compliance Officer may serve as the Part D Compliance Officer, but "strongly recommends" having two separate positions. A Sponsor cannot delegate the Part D FWA Compliance Officer or the Compliance Committee functions to a subcontractor. The guidance outlines, in great detail, the Part D Compliance Officer’s duties as well as the Compliance Committee’s responsibilities.

Training and Education. A Sponsor must provide training and education for its Compliance Officer, Compliance Committee, employees, subcontractors, agents, and directors involved in the Part D benefit. In addition, the Sponsor must provide specialized training to employees based on their job functions. This training may cover issues such as calculating TrOOP, submitting Part D data to CMS, negotiating pharmacy network agreements, reconciling payments, and managing employer group plans and the retiree drug subsidy. CMS also recommends offering specialized training to subcontractors. Unlike the compliance guidance issued for various sectors of the health care industry by the Office of Inspector General (OIG) for the Department of Health and Human Services, the CMS guidance makes specific recommendations regarding the length and methods of training.

Effective Lines of Communication. Effective lines of communication must exist among the Compliance Officer, employees, and subcontractors. In addition, each Sponsor must develop a system to field compliance questions and reports of misconduct, such as a hotline or a similar anonymous, easily accessible mechanism. Sponsors must have and make available to CMS or its designee its processes for screening enrollee complaints, results of the complaint tracking system, and methods for educating enrollees about FWA.

Enforcement of Standards Through Well-Publicized Disciplinary Guidelines. CMS expects a Sponsor’s senior management to be involved in the development of standards of conduct. In addition, Sponsors should ensure that disciplinary guidelines are widely disseminated using any of the four methods specified by CMS. Sponsors also should distribute to senior management, employees, and subcontractors the procedures for making FWA reports and for asking compliance questions. Subcontractors should be aware that violations may result in contract termination.

Monitoring and Auditing. Sponsors have broad responsibilities regarding monitoring and auditing, as set forth in both the Part D rules and the guidance. Sponsors must develop a monitoring and auditing workplan that addresses risks associated with the Part D benefit and outlines the Sponsor’s system for responding to all monitoring and audit results, including reporting to MEDICs as necessary. Sponsors must document the process and development of the workplan and, upon request, make such documentation available to CMS or its designee, such as the MEDICs. CMS recommends creation of an independent, objective internal audit department if the sponsor does not already have such a department.

The guidance goes into great detail about development of a strategy for monitoring and auditing subcontractors involved in the Part D benefit. Audits should include a review of subcontractor contracts, as well as rebate, discount, and all other relevant agreements and supporting data. In addition, a Sponsor should collect routine reports from subcontractors to monitor payment, drug utilization, and prescription patterns among physicians and enrollees who obtain multiple prescriptions from providers located outside of a normal distance for care. The workplan should state the number of subcontractors the Sponsor will audit each year and how it will identify the subcontractors for such auditing. Where subcontractors perform their own audits, Sponsors should ensure that subcontractors have an adequate audit workplan in place and that corrective measures are taken when appropriate. A Sponsor should receive these audit results regularly.

Prompt Reponses to Detected Offenses. Where evidence suggests misconduct has occurred that is related to payment or delivery of prescription drug items or services under the Part D contract, a Sponsor must make timely and reasonable inquiries into such conduct. CMS describes a "timely and reasonable" inquiry as occurring no later than two weeks after conduct identification and including a preliminary investigation of the matter by the Part D Compliance Officer and/or the Special Investigative Unit (SIU) for the Sponsor. The guidance describes the role of the SIU, which is an internal investigative unit that already may exist under a different name in some plans. Sponsors that do not have the time or resources to investigate potential misconduct should refer the matter to the MEDIC within two weeks of identification of the conduct.

Corrective Action Procedures. Whenever an underlying problem results in one or more program violations, a Sponsor must take appropriate corrective action through a corrective action plan tailored to address the particular misconduct identified. The plan should provide structure and time frames to prevent continued misconduct. The Sponsor should detail any elements of this plan that affect subcontractors in a written agreement with the subcontractor.


The guidance emphasizes the importance of self-reporting. A Sponsor with an SIU is responsible for investigating potentially fraudulent activity and, when necessary, for timely (within 30 days) referring any determined or suspected fraud, waste, or abuse to the appropriate MEDIC. The MEDICs have contracted with CMS to perform prevention and detection activities and to manage CMS’s audit, oversight, and anti-fraud and abuse efforts in the Part D benefit. When making a referral to a MEDIC, the Sponsor must compile a referral package that includes certain information required by CMS. The MEDIC then may request additional information, which the Sponsor must furnish within 30 days, unless the MEDIC specifies otherwise. The Sponsor must provide updates to the MEDIC as new information regarding the matter is identified.

Sponsors also are encouraged to consider self-reporting to government authorities such as the OIG. Providers can self-report using the OIG’s Provider Self Disclosure Protocol.

Potential Fraud Schemes/Risk Areas

The guidance gives various examples of fraud, waste, and abuse in which Part D stakeholders could engage. For Sponsors, risk areas include duplicate payments, excessive premiums, incorrect eligibility calculations, and coordination of benefits in a way that leads to waste or inaccurate data submissions. The guidance also alerts Sponsors to potential actions that could constitute less obvious forms of fraud. For instance, CMS prohibits the falsification of TrOOP calculations to keep beneficiaries within the coverage gap or to advance beneficiaries through the coverage gap into catastrophic coverage. Sponsors also may be liable for subcontractors who inadequately fulfill duties to beneficiaries, by, for example, incorrectly denying a beneficiary’s right to appeal, failing to reimburse a beneficiary following a retroactive low income subsidy determination, charging a beneficiary a higher than expected amount for a drug at the point of sale, or steering a beneficiary to a particular drug or plan.


All parties connected to the Part D benefit are affected by CMS’s comprehensive proposed guidance on controlling fraud, waste, and abuse. Because the final guidance likely will not differ in substantive respects from the proposed guidance, all Part D stakeholders should take immediate steps to comply. Sponsors, in particular, should act quickly to ensure compliance with CMS’s guidance and expectations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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