Medicare Preferred Pharmacy Networks

Medicare Preferred Pharmacy Networks

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Updated April 5, 2016
Medicare Preferred Pharmacy Networks
Overview
Part D sponsors generally contract with pharmacy benefit
managers (PBMs) to manage the drug benefit. PBMs carry
The Issue: Private insurers that participate in the Medicare
out functions such as negotiating drug prices with
Part D prescription drug program offer reduced cost sharing
manufacturers; creating a formulary, or list of drugs to be
to enrollees who agree to patronize a limited number of
“
covered by a plan; and contracting with a network of
preferred pharmacies.” Insurers say they can negotiate
pharmacies in a plan’s service area that agree to accept the
price concessions from pharmacies that want to join the
insurer’s prices and other reimbursement policies. The
narrow preferred networks, providing savings to Medicare
MMA requires that Part D pharmacy networks provide
beneficiaries and the federal government. But independent
convenient access to retail pharmacies for all enrollees.
druggists say their pharmacies have been excluded from the
Further, a Part D sponsor must permit any pharmacy willing
preferred networks, which have been dominated by national
to accept its standard contracting terms and conditions to
drug chains. The Centers for Medicare & Medicaid
participate in the sponsor’s pharmacy network. This is
Services (CMS) has increased oversight of preferred
known as the “any willing provider” requirement.
pharmacies, saying its data indicate some Part D plans do
not always offer lower drug prices at preferred pharmacies
Once Part D sponsors have met the “any willing provider”
or do not have a sufficient number of preferred retailers in
and other requirements, they may differentiate among
certain geographic areas, potentially violating Part D rules.
contracting pharmacies. Insurers may offer plans that
designate a subset of network pharmacies as preferred if the
Current Status: In January 2014, CMS proposed rules that
pharmacies charge lower enrollee cost sharing than non-
would have required Part D insurers to have consistently
preferred or other network pharmacies. For example, an
lower drug prices and cost sharing in preferred networks
enrollee may be charged a $10 prescription co-payment at a
and to contract with any pharmacy willing to meet such
preferred pharmacy and a $20 co-payment at a non-
pricing terms. CMS decided not to issue a final preferred
preferred pharmacy. A Part D plan may not designate a
pricing rule in May 2014 after insurers and the Federal
pharmacy as preferred unless it designates other
Trade Commission (FTC) warned that doing so could
pharmacies as non-preferred or other network pharmacies.
hamper market competition. For the 2016 plan year, CMS
Part D preferred pharmacy plan enrollees may still use non-
worked with Part D plans to improve geographic access to
preferred pharmacies in their plan’s network, but they
preferred pharmacies, and it required plans with low access
would face higher cost sharing than at the preferred
to add a special disclaimer to their marketing materials.
locations. However, cost sharing for Part D low-income
During the 114th Congress, lawmakers have introduced
beneficiaries (those with incomes up to 150% of the federal
legislation to require that preferred pharmacy plans have an
poverty level) is set by CMS each year under a national
adequate number of retail locations, with a focus on
formula. Sponsors may not charge low-income enrollees
medically underserved areas.
cost sharing above set 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
plans (PDPs) that offer only drug coverage or through
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

the federal government subsidizing the rest. According to
Source: Medicare Trustees Report, 2015.
the 2015 Medicare Trustees Report, total Part D
Notes: Figures are in nominal dollars. 2015 figures are projected, the
expenditures in 2014 were approximately $78 billion (see
rest are actual.
Figure 1). Total Part D spending has been lower than was
forecast at the beginning of the program.
CMS rules also specify that the difference in enrollee costs
between preferred and non-preferred pharmacies cannot be
set at a level that discourages Medicare beneficiaries in
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Medicare Preferred Pharmacy Networks
certain locations, such as inner cities or rural areas, from
Key Issues
enrolling in that Part D plan. The creation of preferred
CMS has acted to ensure that beneficiaries understand
pharmacy networks must not result in increased federal
preferred network cost sharing and sponsors comply with
payments to a Part D plan. CMS does not have detailed
program rules. In 2012, CMS altered its Medicare Part D
guidance on what constitutes increased plan payments but
Plan Finder tool to help enrollees identify differences in
has said that sponsors should be negotiating lower prices
cost sharing at preferred and non-preferred pharmacies.
for drugs dispensed by preferred pharmacies, not just
(See www.medicare.gov/find-a-plan/questions/home.aspx.)
providing lower enrollee cost sharing. (Part D plans that
In April 2013, CMS released a study of preferred pharmacy
offer a CMS-defined standard benefit may not create
networks, based on 2012 PDP data. The study found that
preferred networks. About 2% of Part D enrollees are in
although drug prices were generally lower in preferred
standard benefit plans.)
networks, about 11% of Part D enrollees were in plans in
Economic Significance
which preferred pharmacies had higher average drug prices
than non-preferred pharmacies. CMS said the data indicated
During the past several years, the number of Part D plans
that some plans might be increasing federal Part D
offering preferred pharmacy networks has steadily
payments, which could violate regulations.
increased (see Figure 2). In 2015, 87% of Medicare Part D
PDPs offered preferred networks, compared to 15% of
In January 2014, CMS proposed rules that would have
PDPs in 2010. (More than 27% of MA-PDs had preferred
allowed plan sponsors to offer plans with preferred cost
networks in 2015, compared to 5% in 2010.) According to
sharing (meaning lower cost sharing for Part D-covered
the Medicare Payment Advisory Commission (MedPAC),
drugs at certain network pharmacies) only if (1) any willing
about 30% of pharmacies in Part D plan networks, on
pharmacy able to meet a sponsor’s pricing was allowed to
average, were preferred in 2013.
participate and (2) the preferred networks had both lower
cost sharing and “consistently lower negotiated prices,”
Figure 2. Part D PDPs Offering Preferred Networks
meaning lower negotiated prices on all covered drugs.
The proposed regulations were opposed by many insurers
on the basis that the regulations could make it more difficult
to negotiate price concessions, make it harder to maintain
quality standards within preferred pharmacies, and 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 program. CMS did
not include preferred pharmacy changes when it published
final Part D rules in May 2014.

Source: CMS 2015 Final Call Letter and Medicare Part D Data.
In April 2015, CMS released a final report on beneficiary
access to preferred pharmacies. CMS found that, on
As a condition for joining a preferred network, a pharmacy
average, beneficiaries in most rural and suburban areas had
may receive lower reimbursement from plan sponsors, such
relatively robust geographic access to a preferred pharmacy,
as smaller drug-dispensing fees. In return, preferred
but beneficiaries in urban settings had more limited access
pharmacies have the potential to gain a larger volume of
or, in some cases, no access. CMS announced that it would
drug sales and the ability to sell other merchandise and
work with Part D plans to improve geographic access to
services to plan enrollees who come through their doors (or
preferred pharmacies for the 2016 plan year, including
use a mail-order pharmacy option). Many large pharmacy
requiring underperforming plans to disclose their lower
chains and retailers participate in preferred networks,
access in marketing materials. In February 2016, CMS said
including CVS, Walgreens, Rite Aid, and Walmart.
preferred pharmacy access had improved dramatically, with
89 plans identified as geographic “outliers” required to
Some Part D plans have lower premiums and reduced co-
carry marketing disclaimers. By comparison, 175 plans did
payments for less expensive brand-name and generic drugs
not provide sufficient geographic access in 2014.
at preferred locations. But enrollees may face similar
coinsurance for expensive drugs at both preferred and non-
More Information
preferred pharmacies. (For example, Part D plans may
For more information see CRS Report R40611, Medicare
charge enrollees up to 33% of the price of so-called
Part D Prescription Drug Benefit.
specialty drugs, which cost $600 per month or more.)
Under Part D rules, cost sharing is reduced for enrollees
who reach a set level of annual out-of-pocket spending:
Suzanne M. Kirchhoff, Analyst in Health Care Financing
$4,850 for 2016. After that point, the enrollee is in the
IF10037
catastrophic phase of the benefit and is charged the greater
of 5% coinsurance or a $2.95 co-payment for generic and
multisource drugs and a $7.40 co-payment for other drugs.
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Medicare Preferred Pharmacy Networks

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