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Interfering With the Meaning of Noninterference: CMS Seeks 'More Perfect' Medicare Part D Competition

Friday, February 21, 2014
By William G. Schiffbauer, Esq.

Schiffbauer is a health-care attorney in private practice in Washington. He is a member of the Advisory Board for BNA's Health Insurance Report. He can be contacted at wgslaw@erols.com.  

On Jan. 10, the U.S. Department of Health and Human Services, Centers for Medicare & Medicaid Services (“CMS”) issued a behemoth proposed rule titled Medicare Program: Contract Year 2015 Policy and Technical Changes to the Medicare Advantage and Medicare Prescription Drug Benefit Programs. Among the 38 “clarifying” proposals is a provision for “interpreting” the Medicare Part D noninterference requirement. After nearly 14 years of noninterfering clarity, the agency has concluded that this noninterference clause gives the agency an affirmative duty to seek “more perfect” Part D market competition.

The “noninterference” provision was enacted in the Medicare Prescription Drug Improvement and Modernization Act of 2003 (“MMA”). Section 1860D-11(i) of the MMA is headnoted by the single word “Noninterference.” The statutory language of the subsection provides that: “In order to promote competition under this part and in carrying out this part, the Secretary: (1) may not interfere with the negotiations between drug manufacturers and pharmacies and PDP sponsors; and (2) may not require a particular formulary or institute a price structure for the reimbursement of covered Part D drugs.”

As discussed below, this CMS “quest” for a “more perfect” and “fair” competitive Medicare Part D market makes all of the players in that market--drug manufacturers and pharmacies and PDP sponsors--fair game for the agency's self-divined permissible “perfecting” interference.

Proposed Interpretation--Seeking 'More Perfect’ Market Competition

The CMS explains that because of the “many questions that continue to arise” the agency and Part D stakeholders would benefit from a clear, formal interpretation of the “noninterference” provision. The agency then proposes that the statutory noninterference language that begins “in order to promote competition” really means that competition does not sufficiently exist in the market on its own, and so the Secretary has “a duty” to affirmatively act to promote competition in the private market for Medicare Part D drugs in the selection of drugs for Part D formularies. See, 79 Fed. Reg. at 1969.

The agency goes on to explain that economic theory on competitive markets suggests that the CMS has a duty “to ensure” a competitive market and to encourage certain features that promote “more perfect” competition. As a result, inherent in this rationale is a newly acquired power to define the meaning of “more perfect” and “fair” competition.

As examples of a more proactive bureaucratic effort under this newly discovered authority, the agency cites the need to: decrease the transaction cost of acquiring information; increase the transparency of prices; ensure a large number of buyers and sellers; and minimize barriers to entry to the Part D market.

This article briefly reviews the several elements of this new and dark CMS “quest” for “more perfect” and “fair” Part D market competition under the light of legislative history and prior interpretations.

Noninterference Simply Means What It Says

One word--“noninterference”--is the headnote and first word of section 1860D-11(i). It is not defined because it is not ambiguous and so its plain meaning rules. The term does not say “certain” noninterference or noninterference “exceptions.” It is plain and means simply to not interfere (i.e., obstruct, bar, hamper, meddle, restrain, inhibit, or interpose) in market competition. The MMA conference report plainly explains that the Secretary is prohibited from taking certain actions for the purpose of promoting the market to decide the outcome of competition. It is the prohibition against government action that is the promoter of competition.

The noninterference provision was included in nearly all introduced versions of the Medicare drug benefit legislation. First introduced on behalf of the Clinton administration by Sen. Daniel Patrick Moynihan (D-N.Y.), the provision stated that “Nothing in this section or in this part shall be construed as authorizing the Secretary to authorize a particular formulary or to institute a price structure for benefits, or to otherwise interfere with the competitive nature of providing a prescription drug benefit through benefit managers.” See S. 2342, 106th Cong., 2d Sess. at new section 1859G(i).

The noninterference clause had bipartisan support. The leading Republican version of the legislation proposed administering the program through a new Medicare Benefits Administration. The proposed bureaucracy was strictly prohibited from: requiring a particular formulary; or instituting a price structure for reimbursement; or interfering in any way with negotiations between PDP sponsors, Medicare+Choice organizations, drug manufacturers, wholesalers, and other suppliers of prescription drugs; or to otherwise interfere in any way with the competitive nature of providing such coverage. See H.R. 4680, 106th Cong., 2d Sess. at new section 1807(c)(1)(C).

Duty to Act and Promote Does Not Exist in the MMA

The conference report to the final enacted version of the MMA affirms the notion that the purpose of the noninterference clause is to promote competition by keeping the Secretary out of negotiations. The conferees state that “in order to promote competition, the Secretary is prohibited from interfering with the negotiations between drug manufacturers and pharmacies and PDP sponsors.” The clear meaning of the conference agreement explanation is not, as the CMS contends, to ordain the federal bureaucracy to “divine” and to seek “more perfect” Part D market competition. Rather, it is to keep the bureaucracy out of the market.

The law says nothing about the Secretary of HHS having a duty to act to promote competition. If anything the duty is to leave the market alone--that is to “not” intervene (in all of its meanings). The Federal Trade Commission has the duty to ensure fair competition from a federal perspective. The MMA separately defines explicit rules for contracts between the HHS and PDP sponsors but not for marketplace negotiations.

For the government to become actively involved and affirmatively “promote” its view of what is “fair” private market competition is itself an interference and clearly at odds with the plain statutory directive of “noninterference.”

Duty to Refrain From Acting Is More Absolute in the MMA

The agency admits to some restraint inherent in the noninterference provision that it characterizes as a “duty to refrain from acting” in limited instances. The plain meaning of “noninterference” is much stronger than the term “refrain” (i.e. to avoid, restrain, or forebear) and means much more than mere “restraint” or “avoidance” of government action. The Secretary is expressly prohibited from taking any action that may obstruct, bar, hamper, meddle with, restrain, or inhibit the competitive forces of the market and in fact the Congress intended that the Secretary not act to interfere in the expressed negotiations “in any way.”

The “noninterference” clause is a general rule with specific directives to not interfere in negotiations, or in requiring a formulary or price structure for covered Part D drugs. The negotiations that take place in the Medicare Part D market involve a myriad of interactive and interrelated activities and private players that Congress intended to be influenced solely by competition in the marketplace.

The agency argues that because the MMA establishes numerous and specific requirements with respect to “access to network pharmacies and negotiated prices” that the federal bureaucracy has “a role in negotiations” that is not prohibited by--and is thus excepted from--noninterference.


For the government to become actively involved and affirmatively “promote” its view of what is “fair” private market competition is itself an interference and clearly at odds with the plain statutory directive of “noninterference.”

However, the numerous and specific requirements established in the MMA are not designed to interfere with the negotiation processes in the Medicare Part D market. The MMA establishes standards that are enforced through the HHS and PDP contracting process with respect to: who is eligible; what the benefits must provide; what cost-sharing is permitted; the beneficiary choice of plans, information, and access to covered drugs, quality assurance, state licensure, and appeals.

These are statutory standards that are designed to provide uniformity in the contracting requirements between PDPs and the government. These numerous and other specific contracting requirements do not provide the basis for exception to the noninterference clause.

MMA Does Not Differentiate Part D Market Transactions

Under the MMA, the HHS is generally prohibited from interfering in the market competition, and is specifically prohibited (Congress says “especially in these areas”) from interfering with negotiations between manufacturers, pharmacies, and PDP sponsors. These are the three major players; however, each has its own service provider arrangements to assist in carrying out the respective roles in the negotiations. The HHS and the FTC, for example, recognize the role of pharmacy benefit managers for PDP sponsors and for the government to ignore these service providers would itself be prohibited market interference.

However, in marked contrast to its expansive and liberal interpretation of the “noninterference” clause, the CMS turns abruptly into a strict “textual” construction of the clause to argue that the statute concerns itself only with certain types of negotiations. Specifically, the agency believes that the noninterference clause only applies to negotiations either: (1) between plan sponsors (or intermediary contracting organizations) and drug manufacturers; or (2) drug manufacturers and pharmacies. The agency concludes that any negotiations between Part D plan sponsors and pharmacies is not covered by the noninterference clause.

However, this “schizophrenic” approach to statutory interpretation by the agency wholly ignores the language and intent of the noninterference clause. Even a literal or “textual” read of the statute demonstrates that the Congress was merely listing in general the principal players in the Medicare Part D market universe as “drug manufacturers and pharmacies and PDP sponsors.” Clearly, Congress did not say negotiations between drug manufacturers and pharmacies, or drug manufacturers and PDP sponsors. Such a ridiculous reading is arbitrary and capricious at best and inserts absent language in order to reach this tortured conclusion.

CMS Ignores Factors of Medicare Part D Competition

CMS cites one sentence from the MMA conference report in support of this twisted reading. The report states that “conferees expect PDPs to negotiate price concessions directly with manufacturers.” Nowhere in this explanatory sentence does it say that the only negotiations subject to protection from the bureaucracy's interference are those with drug manufacturers and PDP sponsors, or drug manufacturers and pharmacies. The explanatory report to the House version of the MMA describes this provision as protecting “negotiations between PDPs, MA-EFFS sponsors, drug manufacturers, wholesalers, or other suppliers of covered drugs.” See H.R. Rept. 178, 108th Cong., 1st Sess. at 251 (report to accompany H.R. 2473).


The agency's schizophrenic approach to interpreting the noninterference clause employs both a liberal reading of a duty to act in promoting competition, and a strict and textual reading of the limitations that is at best arbitrary and capricious.

Furthermore, the CMS interprets the noninterference clause as expressly making a differentiation between specific types of transactions that take place in the Medicare Part D market. The agency notes that a “process” is involved between drug manufacturers and distribution channel participants that is different from the “process” between drug manufacturers and ultimate purchasers. The agency argues that because these processes are distinct, this difference supports a literal or “textual” reading of the noninterference clause as protecting only negotiations between a drug manufacturer and pharmacies, or the drug manufacturer and PDPs.

It is unreasonable to read the plain words of the statute in such a tormented manner so as to ignore the real functions and activities that take place in the Medicare Part D market. The Congress did not expressly limit the application of the noninterference clause to these specific kinds of “processes” but rather any market activities involving the three named entities---drug manufacturers, pharmacies, and PDP sponsors---and their service providers and intermediaries however structured in the competitive private market. Only a twisted interpretation and schizophrenic approach to statutory construction could reach the agency's conclusion.

In the 2005 final rule implementing the MMA, the CMS itself recognized a much broader array of participants and interrelated transactions in the Medicare Part D market. For example, the agency expressly recognized the role of pharmacy benefit managers (“PBMs”) in the “process” of negotiating drug benefit supplies and prices between drug manufacturers and PDP sponsors, and PDP sponsors and pharmacies, acting as a subsidiary of a PDP or as the contract service-provider of the PDP sponsor. The CMS noted that PBMs substantially improve the ability of a PDP to achieve savings. See, 70 Fed. Reg. 4509-10 (Jan. 28, 2005) (Regulatory Impact).

The CMS cites a CBO report, “Prescription Drug Pricing in the Private Sector (January 2007),” for the proposition that “competition for prescription drugs is a complex process.” The agency ignores the remainder of the report describing the “competition” factors in the market. CBO describes factors such as the availability of a brand-name or generic version of a drug, the volume of drugs purchased, how drug prices are measured, and the bargaining power of purchasers. The report notes that “PBMs play a key role in negotiating the final price that manufacturers and pharmacies receive on a prescription drug sale.” See CBO report at page 10.

Conclusion

The CMS “quest” to implement a “more perfect” competitive Medicare Part D market will put all of the players in that market--drug manufacturers and pharmacies and PDP sponsors--at risk of overreaching new regulations under the agency's newly self-defined and self-anointed role in the pursuit of “perfecting” interference. The CMS crusade to make the factors for competition in the Medicare Part D market “more perfect” will touch all aspects of the supply and distribution chain.

The agency's schizophrenic approach to interpreting the noninterference clause employs both a liberal reading of a duty to act in promoting competition, and a strict and textual reading of the limitations that is at best arbitrary and capricious.

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