Final Rules Clarify RDS Reporting by Employer Plan Sponsors

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Summary: CMS (Centers for Medicare & Medicaid Services) has published a final regulation clarifying certain reporting requirements and options for plan sponsors under the RDS (Retiree Drug Subsidy) program.

Affected Plans: The final rules will affect employer plan sponsors participating in the RDS program under Part D of Medicare. There is no impact on non-RDS employers.  

Timing: The regulations are effective March 12, 2012.

Key Implications: Employer plan sponsors have flexibility in how they report amounts paid to an entity (such as a pharmacy benefit manager [PBM]) for ingredient and dispensing costs, and amounts paid to manage the drug benefit plan (referred to as “lock-in pricing”). CMS will permit employers to include or exclude administrative costs in their RDS reporting. Plan sponsors also may report either lock-in or “pass through” prices and can choose whether or not to report PBMs’ retained rebates. However, plan sponsors must document the method of reporting drug costs and rebates, whether they choose to report drug costs on a lock-in or pass-through basis, or whether they report retained rebates. Also, if an employer plan sponsor includes in its contracts with an intermediary (such as a PBM) specific payments for specific administrative services, the plan sponsor cannot include those payments in the calculation of RDS payments. 

General Discussion and Observations: The Medicare Prescription Drug, Improvement and Modernization Act of 2003 authorized payment of a subsidy to employer-sponsored retiree plans that provide prescription drug benefits at least as generous or more generous than the value of the Medicare Part D prescription drug benefit. Employers may receive the RDS from the federal government for continuing to offer the coverage to those eligible for Medicare Part D. The government pays approximately 28% of the amount of qualified prescription drug expenses for Part D-eligible individuals who do not enroll in the Medicare Part D prescription drug program. Employers must comply with certain cost data reporting requirements under the RDS program as a condition of receiving the subsidy. The Patient Protection and Affordable Care Act (PPACA) changed the federal tax law to eliminate a plan sponsor’s income tax deduction for the amount of the RDS subsidy received, effective for tax years beginning after December 31, 2012.

Under the final rule published January 12, 2012, employer plan sponsors will be permitted to choose whether to report drug costs on a pass-through or lock-in basis. They may also decide whether to report rebates and other price concessions that are retained by a PBM or other intermediary. This outcome differs from the approach of a May 2008 proposed rule that would have required that RDS-participating employers report the pass-through negotiated price. Under lock-in pricing, a Part D plan sponsor agrees to pay a PBM a set rate for a particular drug, and the PBM then negotiates the lowest possible price for the drug, which is typically less than the amount the PBM receives from the plan. CMS says in the new final rule of January 12, 2012, that reporting the lock-in payment will be sufficient for CMS to calculate the subsidy payment, excluding discounts, chargebacks and average percentage rebates. In the new rule, CMS also declined to change the definition of “actually paid” in a way that would have required RDS plan sponsors to report retained rebates.

This is good news for employer plan sponsors participating in the RDS program because it confirms flexibility in the data on retiree drug costs that must be reported to CMS. It also helps clarify that the differences between the cost data that must be reported by Part D plans (i.e., commercial insurers selling Part D plans) and the cost data that is reported by employer plan sponsors in the RDS program is intentional and consistent with CMS’ regulatory authority.