On Nov. 8, 2023, the Senate Finance Committee voted 26-0 to approve the Better Mental Health, Lower Cost Drugs, and Extenders Act. Among its other provisions, the bill, for which final legislative text has not yet been released, would, for the first time, mandate minimum prices that Medicare Part D plans, and the pharmacy benefit managers (PBMs) with which they contract, must pay to certain types of pharmacies as reimbursement for the drugs they dispense to Part D plan enrollees.

This measure, together with new pharmacy contracting requirements and related enforcement provisions also included in the bill, would represent an important—albeit limited—modification to pharmacy network contracting rules under Part D, which have been limited by the statutory “non-interference clause” barring the Centers for Medicare and Medicaid Services (CMS) from interfering in contract negotiations between pharmacies and plans or their PBMs.

Floor on Reimbursement to Certain Pharmacies

Section 201 of the bill, entitled “Assuring Pharmacy Access and Choice for Medicare Beneficiaries,” would require that, beginning in 2028, the “total reimbursement” paid for a Part D covered drug to an “essential retail pharmacy” that is an “independent community pharmacy” may not be less than the “average National Average Drug Acquisition Cost (aNADAC)” for retail community pharmacies for such drug. When an aNADAC for retail community pharmacies is not available for the drug, the drug’s aNADAC for applicable non-retail pharmacies or wholesale acquisition cost (WAC) would be used to set the reimbursement floor.

For these purposes:

• “Essential community pharmacy” would be defined as a retail pharmacy that (1) is not an affiliate of a PBM or Part D plan sponsor, (2) is located in a medically underserved area, and (3) is designated as an essential retail pharmacy by CMS for a plan year, in a list published prior to the beginning of the plan year, based upon these criteria, subject to removals made by CMS when a pharmacy no longer satisfies these criteria.

• “Independent community pharmacy” would be defined as a retail pharmacy with fewer than four locations that is not affiliated with any person or entity other than its owners.  Franchisees and pharmacies associated with pharmacy services administrative organizations (PSAOs) that meet the relevant requirements can qualify as independent community pharmacies.

• “Affiliate” would mean “any entity that is owned by, controlled by, or related under a common ownership structure with a pharmacy benefit manager or [Part D plan] sponsor or that acts as a contractor or agent to such pharmacy benefit manager or [Part D plan] sponsor, if such contractor or agent performs any of the functions described” in the bill’s definition of “pharmacy benefit manager.”

• While “total reimbursement” is not defined in the description of the provision passed by the Committee, a separate discussion draft of the bill released prior to the markup would define it as the “negotiated price” for the drug (essentially, the reimbursement amount the pharmacy is entitled to receive for the drug, including any dispensing fees) plus any incentive payments the pharmacy is entitled to receive and less any fees, pharmacy price concessions, discounts or other forms of remuneration paid by the pharmacy.

Accordingly, the bill’s reimbursement floor would appear to apply only to pharmacies located in a medically underserved area which are part of a chain that includes no more than three pharmacies.  We expect that “medically underserved areas” will be based upon designations made by the Health Resources and Services Administration (HRSA) under Section 330(b)(e)(A) of the Public Health Service Act, which includes a significant portion of the United States, primarily in rural areas.  Further, since the floor is generally set at the aNADAC for the drug, the guaranteed reimbursement such pharmacies would be entitled to receive would only be an approximation of their drug acquisition cost, and not include any reimbursement for other costs of operating a pharmacy or pharmacy profit.

The bill does not specifically define “average NADAC” or “aNADAC,” but the discussion draft of the bill would implement it as the average NADAC for the most recent plan year, when such NADAC was published for the drug for a full plan year.  That draft bill would also provide that when a NADAC for a drug is available but has not been available for a full plan year, the ”most recent” NADAC would be used instead, and when no NADAC is available, the drug’s WAC (i.e., manufacturer list price) would be used.  However, it is not clear whether those provisions will be part of the final legislative text of the bill. 

CMS currently publishes NADACs for retail community pharmacies for Medicaid reimbursement purposes, based upon survey data collected from such pharmacies. In general, a single NADAC is calculated and published for each strength and dosage form of a brand name drug and separately for all generic drugs as a group (including authorized generics) of a given strength and dosage form, subject to availability of adequate survey data.  Section 202 of the bill would separately require that NADAC data also be collected and published for “applicable non-retail pharmacies,” defined to include mail order and specialty pharmacies but exclude long-term care, hospital and certain other types of pharmacies. Further, NADAC would be based upon pharmacy acquisition costs “net of all discounts and rebates (to the extent discount and rebate information is available)”; since current NADACs are based only upon pharmacy invoice prices, the inclusion of rebate data in the calculation potentially could reduce current NADACs for some drugs. While pharmacy submission of data in response to NADAC surveys is currently voluntary, the bill would require all retail community pharmacies and applicable non-retail pharmacies receiving any Medicaid reimbursement to provide information in response to such surveys.

New Preferred Pharmacy Network Contracting Requirements

Under the Part D statute and implementing regulations, a plan sponsor is subject to an “any willing pharmacy” obligation to contract with any pharmacy willing to agree to the plan’s standard terms and conditions for participation in its pharmacy network. However, CMS has indicated that this pharmacy contracting right does not extend to participating in a plan’s network as a “preferred pharmacy,” where enrollee cost-sharing for some or all drugs is lower than the cost-sharing they must pay at non-preferred pharmacies. Since many Part D enrollees have a strong financial incentive to use preferred pharmacies where they will pay less for their drugs, many pharmacies have complained that their statutory right has been undermined and they are disadvantaged to preferred pharmacies, including those that are affiliated with the plan sponsor or its PBM.

While the bill would not create an any-willing-pharmacy right for any individual pharmacy to participate in a plan’s network as a preferred pharmacy, it would create new aggregate network contracting obligations for Part D plans. Specifically, beginning in 2028, a Part D plan sponsor using a preferred pharmacy network would be required to contract with, as preferred pharmacies:

• At least 80 percent of the “essential retail pharmacies” in its service area that are also “independent community pharmacies”; and

• At least 50 percent of the “essential retail pharmacies” in its service area that are not also “independent community pharmacies.”

Consequently, taken together with the reimbursement floor noted above, essential retail pharmacies that are also independent community pharmacies (i.e., in a medically underserved area and part of a chain of three pharmacies or less) would have a good chance of being included in a preferred network as a preferred pharmacy (and thereby less disadvantaged in obtaining Part D enrollees’ business), and the plan must generally pay them reimbursement at or above their pharmacy acquisition cost. While pharmacies in medically underserved areas that are part of larger chains would not have any guaranteed reimbursement terms, the plan (or the PBM contracting on its behalf) would have to offer good enough terms to incentivize enough of such pharmacies to participate to meet the 50 percent threshold.

Clarification of “reasonable and relevant” any willing pharmacy contract terms

CMS has stated in guidance that the pharmacy network “standard terms and conditions” which a Part D plan sponsor must offer to any willing pharmacies must be “reasonable and relevant” to the given type of pharmacy, with additional explanation of what that means, but it has not codified those details in regulation. The bill would require that it undertake a notice-and-comment rulemaking to promulgate standards for such reasonable and relevant terms and conditions, to take effect beginning in plan year 2028, and for such purposes issue a request for information on those contract terms and conditions, as well as contracting practices between pharmacies and Part D plan/PBMs (including with respect to information on reimbursement and dispensing fees), by no later than Jan. 1, 2025.

Enforcement and Reports to Congress

Part D plans that violate these requirements would be subject to civil monetary penalties, in addition to an obligation to make a pharmacy whole for any failure to provide required reimbursement. Further, PBMs would be required to reimburse plan sponsors for any violations related to responsibilities the plan delegated to the PBM. CMS would establish a process by which pharmacies could submit an allegation, via a standardized template, that a plan was in violation of the standards for reasonable and relevant contract terms and conditions or the protections for essential retail pharmacies that are independent community pharmacies. 

These requirements would significantly enhance CMS policing of plans’ and their PBMs’ compliance with their any willing pharmacy contracting obligations, as well as ensure enforcement of these new contracting and reimbursement obligations. Additionally, CMS would be required to brief Congress and publish periodic reports, beginning no later than 90 days after the enactment of the bill, on topics relating to the implementation of the CMS negotiated price regulation that takes effect in 2024 (requiring that negotiated prices used to determine cost sharing reflect the lowest possible reimbursement payable to the pharmacy, taking into account post-adjudication pharmacy price concessions (“DIR fees”)). Topics to be covered include: (1) monitoring of changes to contract terms and conditions offered to pharmacies for preferred network participation; (2) CMS enforcement or oversight activities related to any willing pharmacy provisions; and (3) CMS plans, strategies or initiatives to address or mitigate concerns relative to convenient pharmacy access.

Implications for pharmacies, plan sponsors and PBMs

These provisions of the bill reflect a bipartisan interest to take actions to help “mom and pop” community pharmacies, particularly in rural areas where many pharmacies have closed, citing low levels of reimbursement from PBMs. That said, these measures represent relatively modest steps—e.g., a requirement to pay a portion of pharmacies at least their drug acquisition costs is hardly a bonanza for pharmacies—presumably reflecting the Committee’s interest in keeping the cost of the provision manageable. The Congressional Budget Office has scored this provision as increasing Federal expenditures by slightly more than $1 billion over the ten-year period 2024-2033, with most of its requirements taking effect in 2028.

In addition to the points noted above, these provisions could affect pharmacy network contracting for pharmacies that are not essential retail pharmacies. In particular, the reimbursement rates negotiated by larger pharmacy chains are sometimes based upon the number of competing pharmacies in a given network, with deeper discounts provided in exchange for a narrower network that drives more of the enrollees’ business to that chain. The requirements to contract with 80 percent/50 percent of essential retail pharmacies as preferred pharmacies would limit some plan and PBM flexibility to design such narrow networks.

More generally, many of the details of this provision remain to be finalized, ranging from details which will be fleshed out in the legislative text of this bill to further amendments that may be made, and of course implementation by CMS—assuming the provision is enacted into law in the first place. While the overall Finance Committee bill appears to have strong bipartisan support in the Senate, it is not clear what level of support it would have in the House of Representatives. Among other factors, there are other bills in the House that would impose various requirements on health plans and PBMs with respect to prescription drug pricing, which also have bipartisan support, presumably reflecting the desire of various Representatives to claim credit for taking action in this area.

Reed Smith will continue to track developments with respect to this legislation as well as other developments relating to regulation of drug pricing and coverage. If you have any questions about this bill or any other topic related to prescription drug coverage, please reach out to the authors of this post or to the health care lawyers at Reed Smith.