January 6, 2015
Medicare Preferred Pharmacy Networks
Overview
out functions including negotiating drug prices with
manufacturers, creating a formulary or list of drugs to be
The Issue: Private insurers participating in the Medicare
covered by a plan, and contracting with a network of
Part D prescription drug program offer reduced cost-sharing
pharmacies in a plan’s service area that agree to accept the
to enrollees who agree to patronize a limited number of
insurer’s prices and other reimbursement policies. The
“preferred pharmacies.” Insurers say they can negotiate
MMA requires that Part D pharmacy networks provide
price concessions from pharmacies that want to join the
convenient access to retail pharmacies for all enrollees.
narrow preferred networks, providing savings to Medicare
Further, a Part D sponsor must permit any pharmacy willing
beneficiaries and the federal government. But independent
to accept its standard contracting terms and conditions to
druggists say their pharmacies are often excluded from the
participate in the sponsor’s pharmacy network. This is
preferred networks, which have been dominated by national
known as the “any willing provider” requirement.
drug chains. The Centers for Medicare & Medicaid
Services (CMS) has increased oversight of preferred
Once Part D sponsors have met the any willing provider
pharmacies, saying its data indicate some Part D plans do
and other requirements, they may differentiate among
not always offer lower drug prices at preferred pharmacies,
contracting pharmacies. Insurers may offer plans that
or do not have a sufficient number of preferred retailers in
designate a subset of network pharmacies as “preferred” if
certain geographic areas, potentially violating federal rules.
the pharmacies charge lower enrollee cost-sharing than
“non-preferred” or “other network” pharmacies. For
Current Status: CMS in January 2014 proposed rules that
example, an enrollee may be charged a $10 prescription co-
would have required Part D insurers to have consistently
payment at a preferred pharmacy, and a $20 co-payment at
lower drug prices and cost sharing in preferred networks
a non-preferred pharmacy. A Part D plan may not designate
and to contract with any pharmacy willing to meet such
a pharmacy as preferred unless it designates other
pricing terms. CMS decided not to issue a final preferred
pharmacies as non-preferred or other network pharmacies.
pricing rule in May 2014 after insurers and the Federal
Part D preferred pharmacy enrollees may still use non-
Trade Commission (FTC) warned it could hamper market
preferred pharmacies in their plan’s network, but face
competition. In December 2014, CMS released a study that
higher cost-sharing than at the preferred locations.
found some preferred networks did not meet Part D
However, cost-sharing for Part D low-income beneficiaries
convenient access standards. During the 113th Congress,
(those with incomes up to 150% of the federal poverty
lawmakers introduced legislation to require that preferred
level) is set by CMS each year under a national formula.
pharmacy plans have an adequate number of retail
Sponsors may not charge low-income enrollees cost-sharing
locations, with a focus on rural areas (H.R. 4577).
that exceeds Part D limits.
Preferred Pharmacy Networks
Figure 1. Annual Medicare Part D Spending
Background: Congress created Medicare Part D in the
Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 (MMA, P.L. 108-173), effective
January 1, 2006. The MMA provides a voluntary,
outpatient prescription drug benefit for Medicare
beneficiaries. Part D coverage is provided through private
insurance plans (PDPs) that offer only drug coverage, or
private Medicare Advantage (MA) plans (MA-PDs) that
offer drug coverage as part of a broader, Part C managed
care benefit. All Part D insurers (sponsors) must provide a
specified, minimum level of coverage, though they may
offer more generous benefits. Enrollee premiums cover

about 25.5% of the cost of the standard Part D benefit, with
Source: Medicare Trustees Report, 2014. Figures are in nominal
the federal government subsidizing the rest. According to
dollars.
the 2014 Medicare Trustees Report, total Part D
expenditures in 2013 were approximately $69.7 billion (see
CMS rules also specify that the difference in enrollee costs
Figure 1). Total Part D spending has been lower than
between preferred and non-preferred pharmacies cannot be
forecast at the beginning of the program.
set at a level that discourages Medicare beneficiaries in
certain locations, such as inner cities or rural areas, from
Part D sponsors generally contract with pharmacy benefit
enrolling in that Part D plan. Further, the creation of
managers (PBMs) to manage the drug benefit. PBMs carry
preferred pharmacy networks must not result in increased
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Medicare Preferred Pharmacy Networks
federal payments to a Part D plan. CMS does not have
Key Issues
detailed guidance on constitutes increased plan payments,
but has said sponsors should be negotiating lower drug
CMS has acted to ensure that beneficiaries understand
prices for drugs dispensed by preferred pharmacies, not just
preferred network pricing and that sponsors comply with
providing lower enrollee cost-sharing. (Part D plans that
program rules. In 2012, CMS altered its Medicare Part D
offer a CMS-defined standard benefit may not create
Plan Finder tool to help enrollees identify differences in
preferred networks. About 2% of Part D enrollees are in
cost sharing at preferred and non-preferred pharmacies.
standard benefit plans.)
(See www.medicare.gov/find-a-plan/questions/home.aspx.)
In April 2013 CMS released a study of preferred pharmacy
Economic Significance
networks, based on 2012 PDP data. The study found while
drug prices were generally lower in preferred networks,
During the past several years, there has been a steady
about 11% of Part D enrollees were in plans in which
increase in the number of Part D plans offering preferred
preferred pharmacies had higher average drug prices than
pharmacy networks (see Figure 2). In 2015, more than 86%
non-preferred pharmacies. CMS said the data indicated that
Medicare Part D PDPs offer preferred networks, compared
some plans might be increasing federal Part D costs, which
to 15% of PDPs in 2010. (More than 27% of MA-PDs have
could violate regulations.
preferred networks in 2015, compared to 5% in 2010.)
According to the Medicare Payment Advisory Commission
In January 2014, CMS proposed rules that would have
(MedPAC) about 30% of pharmacies in Part D plan
allowed plan sponsors to offer plans with preferred cost
networks, on average, were preferred in 2013.
sharing (meaning lower-cost sharing for Part D covered
drugs at certain network pharmacies) only if (1) any willing
Figure 2. Part D PDPs Offering Preferred Networks pharmacy able to meet a sponsor’s pricing was allowed to
participate, and (2) the preferred networks had both lower
cost sharing and “consistently lower negotiated prices,”
meaning lower negotiated prices on all covered drugs.
The proposed regulations were opposed by many insurers
on the basis that they could make it more difficult to
negotiate price concessions, could make it harder to
maintain quality standards within preferred pharmacies, and
could lead to higher beneficiary costs. The FTC in a March
2014 letter to CMS said the proposed rules threatened the
effectiveness of selective contracting with pharmacies as a
tool for reducing costs. Independent pharmacies said the
proposal would increase competition within the Part D
Source: CMS 2015 Final Call Letter and Medicare Part D Plan
program. In March 2014 CMS said it planned to drop the
Data.
changes and did not include preferred pharmacy changes
when it published final Part D rules in May 2014.
As a condition for joining a preferred network, a pharmacy
may receive lower reimbursement from plan sponsors, such
In December 2014 CMS released a study of beneficiary
as smaller drug dispensing fees. In return, preferred
access to preferred pharmacies. CMS found that, on
pharmacies have the potential to gain a larger volume of
average, beneficiaries in most rural and suburban areas had
drug sales and the ability to sell other merchandise and
convenient access to a preferred pharmacy, but for those in
services to plan enrollees who come through their doors (or
urban settings access was “substantially below” Part D
use a mail-order pharmacy option). Many large pharmacy
standards. According to CMS, 54% of preferred networks
chains and retailers participate in preferred networks
did not meet the requirement that 90% of urban
including CVS, Walgreens, Rite Aid, and Walmart.
beneficiaries have access to a retail pharmacy within two
miles of their home. In suburban areas, 13% of networks
Some Part D plans reduce co-payments for less expensive
missed the requirement that 90% of enrollees have access
brand-name and generic drugs at preferred locations. But
within five miles. In rural areas, 5% of preferred networks
enrollees may face similar co-insurance for expensive drugs
missed the requirement that 70% of enrollees have access
at both preferred and non-preferred pharmacies. (Part D
within 15 miles.
plans may charge enrollees up to 33% of the price of so-
called specialty drugs that cost $600 per month or more.)
More Information
Under Part D rules, cost-sharing is reduced for enrollees
who reach a set level of annual out-of-pocket spending:
For more information see CRS Report R40611, Medicare
$4,700 for 2015. After that point the enrollee is in the
Part D Prescription Drug Benefit Medicare Part D
catastrophic phase of the benefit and is charged the greater
Prescription Benefit.
of 5% co-insurance or a $2.65 co-payment for generic and
Suzanne M. Kirchhoff, skirchhoff@crs.loc.gov, 7-0658
multi-source drugs or a $6.60 co-payment for other drugs.
IF10037
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