Medicare Part D: Penalties for Brand-Name Drugs Hidden From Beneficiaries

Medicare is proposing to prohibit a little-known practice that some Part D drug plans are using to charge enrollees sometimes substantial penalties if they choose certain brand-name drugs instead of their generic equivalents. Under a formula known as reference-based pricing, Medicare currently allows plans to charge enrollees the full price of the brand-name drug plus the normal copay for that drug minus the full price of the generic.

If finalized, the ban will start Jan. 1, 2010, according to draft regulations published by the Centers for Medicare & Medicaid Services (CMS) on Jan. 8.

Last month AARP called on CMS to abolish referenced-based pricing after it became known that the inflated prices charged by several plans that use the mechanism are not apparent on Medicare’s online drug plan finder, which many beneficiaries use to determine how much their medications will cost under different plans.

“It is virtually impossible for the average Medicare beneficiary to ascertain whether they will be penalized for their current drug regimen,” AARP senior vice president David Sloane told CMS’s acting director Kerry Weems in a letter Dec. 16. With millions of beneficiaries using the plan finder to shop around to find their best deal, Sloane added, “it is imperative that they are given accurate and reliable information to help them choose.”

The reference-based pricing mechanism has been in place since the Part D program began in 2006, according to Abby Block, director of the Center for Drug and Health Plan Choice at CMS. “And we haven’t had a single beneficiary complaint about it,” she says.

But it wasn’t until last summer that the mechanism was mentioned on Medicare’s plan finder. Brand-name drugs affected by it in some plans were indicated in a footnote: “This drug may be subject to supplemental cost-sharing in addition to the price displayed. Please contact the plan for details.” On Dec. 17 CMS expanded the footnote to explain more fully what referenced-based pricing means.

But the plan finder still fails to show how much beneficiaries would actually pay for the footnoted drugs. “Unfortunately, the capability of [the] plan finder at this point in time is not up to displaying the actual out-of-pocket costs that would be incurred,” Block says.

Even if CMS’s proposed ban on referenced-based pricing starts in 2010, as expected, the mechanism will remain in place throughout 2009, because new rules governing Part D plans typically take a year to go into effect.  New Medicare beneficiaries using the plan finder to pick a Part D plan this year will still be unable to see their true costs under the plans that use this type of pricing, and must call those plans to find out.

The plan finder provides the only means for beneficiaries, and those who help them, to compare Part D plans head to head in order to learn what each plan will charge them according to the specific drugs they take. Customer representatives at Medicare’s telephone help line use the same system to perform searches for people without computer access.

Typically, after a beneficiary has entered details of his or her drugs, the available plans are displayed onscreen in ascending order of overall out-of-pocket costs. The least expensive appear first. But consumer advocates now warn that plans that charge penalties for certain brand-name drugs are showing up among the least expensive options because the extra charges are not counted in the comparison.

For example, an AARP Bulletin Today analysis ran the names of five common brand-name drugs that have generic versions through the plan finder. Out of 54 drug plans in Florida, three out of the four plans ranked “least expensive” were those using the reference-based pricing system—HealthNet Orange Option One, Sterling Rx and SilverScript Value. Each of those plans is sold in every state.

To take just one of the brand-name drugs: Lamisol—used to treat nail fungus infection—is shown as costing beneficiaries in Florida a monthly copayment of $98 in the initial coverage period under the SilverScript plan. According to the formula CMS describes in its current Part D manual of regulations, the plan can instead charge enrollees the $98 copay plus the full price of the drug ($401) minus the generic price ($134)—a total of $365 a month.

Under the actual formula used by SilverScript, according to company spokeswoman Christine K. Cramer, the price charged in this example would be lower, at $275, because the plan uses the $8 copay for the generic, not the brand, in its calculations.

Plans can use different calculations, but Medicare does not allow them to charge more than the full price of the brand-name drug.

Unless beneficiaries notice the fine-print footnote, those relying on the plan finder to choose the best deal for this set of brand drugs would not realize that they’d be charged significantly more for them until after they enrolled in one of the plans. At that point, they could switch to the generic versions.

Yet if the beneficiaries had chosen the generics in the first place, they’d have found cheaper plans. In the Bulletin analysis, entering the generics instead of the brand names into the plan finder resulted in the HealthNet plan slipping from first place to ninth in order of overall expense, Sterling from second place to 19th and SilverScript from fourth place to 46th.

“I think this is incredibly deceptive,” says Diane Paulson, a senior attorney for the Medicare Advocacy Project at Greater Boston Legal Services, a consumer help organization that was the first group to bring the issue to light nationally. “If somebody enrolls in good faith and finds out about these penalties only when they go to use the plan, it’s too late for them to change to another plan,” she says. They’ll be locked into it for the rest of the year.

AARP, the National Senior Citizens Law Center and 11 other consumer advocacy organizations are urging CMS to allow special enrollment periods next year so that beneficiaries who feel they’ve been misled can switch to another Part D plan that doesn’t use reference-based pricing.

CMS’s Block says this won’t happen. Instead, she says, with their doctors’ support enrollees can ask the plan for an exception to its policy. “If the drug is determined to be medically necessary,” she says, “the beneficiary would receive the brand-name drug at the preferred [copay] without any supplemental charge.” But beneficiaries cannot make this request until they’re enrolled in a plan.

Only one in 10 Part D plans currently use reference-based pricing, according to CMS. Among those that do, SilverScript and HealthNet Orange are the largest with, between them, more than 1 million beneficiaries enrolled nationwide in their most popular plans in 2008. SilverScript lists on its website 345 brand-name drugs that carry the pricing penalty.

CMS doesn’t currently require plans to post how much beneficiaries would actually pay for any drug of this type, other than on a case-by-case basis if they call the plans to find out. “CMS needs to make sure beneficiaries are aware of these penalties before they choose their plans,” the chairman of the House Ways and Means Committee, Pete Stark, D-Calif., wrote last month to Weems at CMS. “Part D coverage is confusing enough without plans continually adding more complexity to this benefit.”

“We share the concern for transparency,” responds Block. “We keep working this issue to try to do better in terms of informing beneficiaries.”

The draft regulations for 2010 that Block sent to all Part D plans on Jan. 8 explained CMS’s change of policy: “The basis for this decision is our belief that reference-based pricing may be inherently misleading to beneficiaries and inconsistent with our goal of improving transparency.”

Patricia Barry is a senior editor at AARP Bulletin Today.