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

On March 4, 2005, the Centers for Medicare & Medicaid Services ("CMS") published a Proposed Rule to implement the competitive acquisition program ("CAP") for outpatient drugs and biologicals covered under Medicare Part B (the "CAP Proposed Rule"),¹ as mandated by the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("MMA").

The MMA requires CMS to establish the CAP for the acquisition of and payment for competitively-biddable Part B covered drugs and biologicals effective January 1, 2006. Under CAP, physicians will make an annual election to obtain drugs from vendors selected through a competitive bidding process ("CAP contractors") or continue to directly purchase drugs and be reimbursed under the average sales price ("ASP") system. Physicians who participate in CAP will obtain drugs from CAP contractors and will bill the Medicare program only for the physician administration component associated with delivering a drug. The CAP contractor will bill Medicare for the actual drug or biological and also will collect applicable beneficiary copayments.

In the CAP Proposed Rule, CMS sets forth a number of different proposals for organizing and implementing CAP and invites public comment on these options by April 26, 2005. CMS acknowledges that CAP may provide "opportunities for Federal savings to the extent that aggregate bid prices are less than 106 percent of ASP" but states that "CAP has other purposes than the potential to achieve savings."² These purposes include, according to CMS, providing opportunities for physicians who do not wish to be in the business of drug acquisition due to the financial burden presented by the ASP system (e.g., employing working capital and bearing financial risk in the event of non-payment for drugs).

Key provisions of the CAP Proposed Rule are summarized below. We would be pleased to provide you with additional information about the CAP Proposed Rule upon request, or to assist you in preparing comments on the CAP Proposed Rule.

In the CAP Proposed Rule, CMS is proposing that the CAP apply only to Part B drugs that are furnished "incident to" a physician’s service, because the specific mechanisms described under Section 1847B of the MMA (which pertains to the CAP) relate to the provision of and payment for drugs provided in this manner. However, CMS notes that the MMA provides for CAP to cover all Part B drugs that are not paid on a cost or prospective payment basis. Therefore, under the language of MMA, CAP could cover a wider range of Part B drugs than just those administered "incident to" a physician’s service (i.e., durable medical equipment drugs or drugs specifically covered by statute such as immunosuppressives, certain oral anti-cancer drugs, and certain oral anti-emetics). CMS is soliciting comments on its proposed limitation of CAP to Part B drugs furnished "incident to" a physician’s service.

CMS has set forth the following alternatives for phase-in of CAP:

(1) including all physician-administered Part B drugs furnished "incident to" a physician’s service; or

(2) phasing in CAP by (a) initially including all drugs typically administered by oncologists or (b) including a limited set of drugs typically administered by one or more other physician specialties (e.g., urologists).

CMS is soliciting comments on its proposed phase-in approaches but, based on the language in the CAP Proposed Rule, appears to be expressing an initial preference for initially including all drugs typically administered by oncologists in CAP.

The CAP Proposed Rule does not include a list of the drugs that would be included and excluded under each of the phase-in approaches.³ However, the CAP Proposed Rule illustrates a potential category that could be used if CMS limits the phase-in of the CAP program to oncology drugs. The potential category lists the "most commonly used HCPCS by oncologists."⁴ For those HCPCS codes included within a category, the CAP Proposed Rule would require CAP contractors to bid on all of them. The CAP Proposed rule also clarifies that CAP contractors would not be required to provide every National Drug Code associated with a HCPCS code. CMS’s determination of the drug categories included and excluded from CAP has the potential to create a de facto formulary under CAP and bears careful monitoring and potential comment.

Neither the MMA nor the CAP Proposed Rule explicitly state whether manufacturers must include prices negotiated with a CAP contractor in the calculation of ASP, average manufacturer price and best price under the Medicaid rebate program, and Federal Supply Schedule and non-federal average manufacturer price calculations under the Veterans Health Care Act. Similarly, MMA and the CAP Proposed Rule do not provide guidance on the extent to which the Office of Inspector General of the Department of Health and Human Services would consider CAP prices for purposes of determining the "widely available market price" under the ASP system. In all likelihood, CMS would require manufacturers to include prices offered under the CAP program in these other government pricing calculations. Manufacturers of products that potentially may be included in CAP may want to submit comments on this issue.

CMS is soliciting comments on several potential approaches to defining competitive acquisition areas for contract award purposes, including nationwide, regional (which could include multi-state areas based on existing markets of regional distributors and specialty pharmacies, or four large CAP areas), or statewide competitive acquisition areas.

Under the CAP Proposed Rule, CMS would review bids submitted by prospective CAP contractors for both price and non-price (i.e., quality of service and financial qualifications) components.

Prospective bidders would be required to bid on all drugs in a category. The submitted bid price would be required to include all costs related to the delivery of the drug to the selecting physician, and the costs of dispensing (including shipping) of the drug and management fees. Costs related to the administration of the drug or wastage, spillage, or spoilage would be excluded from the submitted bid. Note that inclusion of costs associated with drug distribution has the potential to create a benchmark fair market value that may be relied upon by distributors seeking to restructure arrangements outside of CAP to incorporate service fees.

CMS would require prospective vendors to submit a "composite bid" consisting of the bid prices for the individual drugs in the CAP category, weighted for each HCPCS code’s share of volume (generally based on 2004 data). CMS would select up to the five lowest qualified bidders for a drug category in each area, although CMS would not select any bid for the category that is higher than 106 percent of the weighted ASP for the drugs in that category. CMS invites comments on this proposal, and recommendations for alternative approaches. CMS proposes to establish a single price for each drug in a competitive acquisition area based on the median bid of the winning bidders, although it also invites comments on this approach. Because CMS’s median bid approach has the potential to flatten bids submitted by prospective vendors, they should work closely with antitrust counsel throughout the bid process.

CAP contracts would be for a three-year period. CMS would update the CAP prices for each drug in a category in year 2 and year 3 based on the vendor’s "reasonable, net acquisition costs" for that category as determined by CMS based, in part, on information disclosed by the vendor to the Secretary and limited by the weighted payment amount for all drugs in that category.⁵ CMS proposes that each vendor disclose to the Secretary its reasonable, net acquisition costs for the drugs covered under the contract annually during the period of its contract. CMS invites comments regarding an appropriate disclosure schedule.

CMS would use the net reasonable cost information to determine whether the CAP contractor has experienced significant increases or decreases in the reasonable, net acquisition costs across a category of drugs. For this purpose, CMS would establish a threshold percentage (for example, 5 percent) to determine whether the changes warrant computing an adjustment to the single prices for the drugs in that category. If the change in the costs reported by a particular CAP contractor met this threshold, CMS would use a two-step process to recompute the single price for each drug in that class. First, CMS we would adjust the bid price that the vendor originally submitted by the percentage change indicated in the information that the vendor disclosed. Next, CMS would recompute the single price for the drug as the median of these adjusted bid prices. CMS notes that this mechanism would apply in the case of any significant change in reasonable, net acquisition costs, whether those changes reflect increase or decreases in costs. As a result, the single price for a drug could decrease in the second or third year of a contract if, for example, acquisition costs for the drug have decreased because of the introduction of a generic equivalent.

CMS would define "reasonable, net acquisition costs" as costs actually incurred by the CAP contractor that are necessary and proper for acquiring the drugs that the CAP contractor is obligated to provide under a CAP contract. Actual acquisition costs would be net of all discounts and rebates provided by the CAP contractor’s own suppliers. CMS would require full disclosure of the CAP contractor’s acquisition costs for drugs included in the CAP contract, including purchases of these drugs from all manufacturers and the total number of units purchased from each manufacturer. The CAP contractor would be required to submit full documentation reflecting these purchases, including contracts, invoices, and other agreements that reflect the actual purchase prices, along with all records reflecting discounts that result in a reduction of actual cost to the CAP contractor (i.e., volume discounts, prompt pay discounts, cash discounts, free goods that are contingent on any purchase requirement, chargebacks, rebates, refunds, and other price concessions). Note that while the MMA provides that the bids submitted under the CAP are protected from disclosure, the CAP Proposed Rule does not discuss how the confidentiality provisions would be applied.

CMS invites comments on all aspects of these provisions of the CAP Proposed Rule, particularly CMS’s proposed collection of cost information and its methodology to calculate the changes in single drug prices.

The CAP Proposed Rule also addresses several other aspects of the CAP. CMS outlines options for several operational issues, including claims processing requirements, delivery systems, dispute resolution, the physician election process, and related education efforts. The CAP Proposed Rule also addresses the application of fraud and abuse requirements to the CAP by setting forth general guidelines needed to implement the MMA requirement that CAP contractors comply with a code of conduct that includes standards relating to conflicts of interest and with applicable provisions relating the prevention of fraud and abuse. The CAP Proposed Rule does not address the application of the discount safe harbor regulation to manufacturer relationships with CAP contractors (e.g., whether manufacturers may provide private payors with different pricing than what they make available to CAP contractors (e.g., based on formulary expectations). The CAP Proposed Rule also does not provide guidance concerning the extent to which such differential pricing would be analogous to and permitted under the Robinson Patman Act.

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