Politics, Law Delay Federal Rx Discount Card

Published January 1, 2002

If you’ve flipped through a copy of Reader’s Digest lately, you’ve probably come across an advertisement for the Reader’s Digest-Merck Medco YourRxPlan. The plan offers “savings on thousands of prescription drugs at more than 40,000 participating pharmacies, even greater savings when ordering by mail, and additional automatic cash-back bonuses on ‘Extra-Savings Drugs'”—all for a “modest enrollment fee” of $25.00 per person or less.

The discount plan teams a recognizable name, Reader’s Digest, with a nationwide pharmacy benefits manager (PBM), Merck Medco.

The Department of Health and Human Services (HHS) and the Centers for Medicare & Medicaid Services (CMS) sought to replicate this dynamic—advertised with the slogan “Savings. Convenience. Security.”—by partnering the name recognition of the Medicare program with a consortium of pharmacy benefits managers (or other pharmacy entities) in its own “Medicare Prescription Drug Discount Card Program.”

Politics Derails Rx Relief

The HHS initiative sparked a lawsuit by chain and independent pharmacies to stop its implementation. The initiative is now being reformulated. The lawsuit’s success was largely a result of the speed with which HHS and CMS introduced the initiative.

The initiative was introduced quickly because HHS and CMS felt pressured to produce some tangible action on prescription drugs before year-end 2001. Other efforts earlier in the year had been stymied. Congressional leaders declared “dead on arrival” the Bush administration’s “Immediate Helping Hand Program,” designed to give block grants to states to expand prescription drug coverage for low-income seniors beyond Medicaid. And it looked like a prescription drug plan for Medicare wouldn’t be passed until at least 2002.

Plan Summary

The Medicare discount card would have worked much like current, private-sector discount cards. It would largely rely on PBMs, who currently handle administrative functions for prescription drug benefits in private insurance plans, help design formularies for such plans, and operate drug discount card programs.

Under the HHS proposal, PBMs would enroll people in networks designed to generate volume discounts for cardholders at the retail pharmacy level. Pharmacies would be induced to participate, and thereby offer the required discounts, by market pressures and promises of higher sales volume.

In addition, PBMs could offer discounts through their own or affiliated mail order pharmacies. The PBMs would generate revenue from cardholders’ enrollment fees, as well as rebates from drug manufacturers. The PBMs would be permitted, but not required, to pass those rebates on to their pharmacy networks.

In order to be endorsed by Medicare, the PBM would have to have over a million members, 90 percent of whom live within 10 miles of a pharmacy in the network; have experience relevant to operating a drug discount card program; limit its enrollment fee to no more than $25; disclose pricing information for commonly prescribed medications; and participate in an exclusivity scheme designed to ensure that no cardholder is enrolled in more than one program.

Entities other than PBMs could apply for Medicare endorsement so long as they met all these requirements. HHS and CMS hoped cardholders would shop for the plan offering the best savings for their prescriptions, resulting in discounts of 25 percent or more.

Legal Snags

The program’s implementation was blocked by a federal judge after the pharmacy industry, joined by Congressman Pete Stark (D-California), filed suit claiming several legal and procedural flaws.

The lawsuit made five specific complaints about the Medicare Prescription Drug Discount Card Program:

  • HHS and CMS did not have the authority to create the program.
  • HHS and CMS did not follow proper procedures in implementing the program.
  • the program’s eligibility requirements were arbitrary and an abuse of HHS’ discretion to execute the laws.
  • meetings HHS and CMS held with PBMs in order to design the plan violated federal law regarding advisory committees.
  • HHS and CMS unlawfully delegated too much government power to run the program to private PBMs.

The judge presiding over the lawsuit focused mainly on the first two arguments in making his decision to block the plan.

No Authority, Notice

The pharmacy groups prevailed on their contention that HHS and CMS did not have authority to implement the plan, a significant victory.

An administrative agency like HHS, or a subsidiary agency (in this case CMS), is tasked with executing the laws passed by Congress. With the exception of certain powers reserved to the President (mostly relating to foreign policy and military affairs), administrative agencies cannot simply act on their own, without any semblance of a Congressional mandate, to address social or economic ills they perceive.

The pharmacy groups charged, and the judge agreed, this is precisely what HHS and CMS did in establishing the Medicare Prescription Drug Discount Card Program.

In defending themselves against the charge, the agencies cited their legal authority to “establish a health insurance advisory service program to assist Medicare-eligible individuals with the receipt of services under the Medicare and Medicaid programs and other health insurance programs.”

The pharmacy industry pointed out HHS and CMS never mentioned that authority when they announced the program. Moreover, they argued, the authority does not support a program so divorced from current Medicare coverage as a discount card for prescription drugs.

The judge agreed, emphasizing Congress probably did not have such a program in mind when it granted authority to establish an “advisory service program.”

The pharmacy groups’ second successful argument against implementation of the program was that HHS and CMS did not follow the law requiring advance notice to the public and opportunity for the public to provide input.

The government claimed those requirements were inapplicable, as HHS and CMS were not implementing a new program so much as issuing a general opinion about what kinds of prescription drug discount cards it might recommend. The judge ultimately did not buy that argument, emphasizing a program of the expected scale and impact of the prescription drug discount initiative should be subjected to public scrutiny.

What the Future Holds

Although HHS and CMS initially promised to appeal the judge’s decision to block the program pending a full trial on the merits, it has instead decided to re-evaluate the program and follow the administrative procedures regarding advance notice and public comment. In doing so, the agencies promised to articulate a legitimate and adequate legal authority for the program that will eventually result from the new process.

In light of that promise, the judge agreed, over the objections of the pharmacy industry, to postpone further proceedings regarding whether the plan could eventually go forward. The Department of Justice, however, has indicated it may still go ahead with its appeal.

Meanwhile, several members of Congress have taken significant interest in the discount card program. Some are working to pass legislation that will provide specific legal authority for the program, while others worked—unsuccessfully—to add to the HHS appropriations bill language prohibiting any use of government funds to implement the program.

Democrats in the House of Representatives have specifically criticized the discount card program. They consider it a poor substitute for a Medicare prescription drug benefit, worry it creates false expectations of savings for seniors, and contend it raises serious fraud and privacy concerns. They have asked the General Accounting Office to investigate and report on those issues.

The litigation over the Medicare Prescription Drug Discount Card Program has been a significant setback for the Bush administration . . . but it has offered some valuable lessons as well.

The litigation has made it clear industry groups will not simply roll over in the ongoing debate over Medicare coverage for prescription drugs. Policymakers must learn to tread carefully in this arena. If they want to achieve a public debate over the merits of their proposals, they must first ensure those proposals are beyond reproach in the administrative and procedural details.

Demetrios L. Kouzoukas is a lawyer at Gardner, Carton & Douglas and specializes in health law. The views expressed and implied herein are solely those of the author, and they are not to be attributed to Gardner, Carton & Douglas, nor copied or distributed without this disclaimer.