Regulating Formularies: OIG Wants Closer Scrutiny of Process; CMS Says Focus on Results

The HHS Inspector General is concerned about lax oversight of conflict-of-interest standards on formulary committees for Medicare Part D plans. CMS is defending its approach, which emphasizes review of the formularies themselves, rather than the process to construct them. For biopharma companies, the “right” regulatory model for formulary oversight is an important issue as health care reform evolves.

As biopharma companies prepare to comply with the new “Sunshine” rules for reporting financial relationships with health care providers, they might want to glance at a new report from the HHS Office of the Inspector General on conflict of interest and Medicare Part D Pharmacy & Therapeutic Committees.

From the IG’s perspective, at least, P&T committees need a healthy dose of sunshine: the Inspector General reviewed the policies and procedures in place at most Part D plans and concluded that nearly half do not meet the statutory requirements for conflict of interest screening on their face. The Centers for Medicare & Medicaid Services, on the other hand, notes that the recently finalized Sunshine regs will help plans monitor for conflicts by making public more information about payments to physicians (including those who serve on P&T committees).

But don’t led the terminology fool you: this is not a call for more investigation of potential influence by Big Pharma on the selection of therapies in the US.

In this case, the IG is not primarily concerned about relationships between P&T committee members and Big Pharma, but rather between P&T committee members and plan sponsor or pharmacy benefit management companies. By IG’s own analysis, the overwhelming majority of P&T committees (93%) consider manufacturer relationships to be potential conflicts. But more than half (52%) do not consider relationships with plan sponsors to be a potential source of conflict.

In other words, “sunshine” for P&T committees looks like a rare example where enhanced conflict of interest oversight would focus on bias against brand name pharmaceuticals.

The report by itself probably won’t bring that new oversight; CMS clearly is not eager to wade too deeply into another new regulatory area with so much already on its plate.

However, as the federal government’s role in formulary oversight expands with the implementation of the Affordable Care Act, the importance of federal standards governing the P&T committee process will only expand. That makes the IG report important reading for biopharma sponsors.

Two Visions of Formulary Regulation

At its heart, the report highlights two very different perspectives on how to regulate formularies in the context of conflicts of interest.

The bottom line for OIG is pretty straightforward: there is insufficient oversight of the P&T committees that operate in Medicare Part D drug plans. OIG acknowledges that it found no specific examples of conflicts, but stresses what it sees as a lack of programmatic controls needed to prevent problems arising from conflicts of interest.

CMS, on the other hand, emphasizes the results, noting that it reviews the actual plan formularies to assure that they are appropriate for Part D beneficiaries. In addition, CMS suggests it has much more faith in the plans to watch out for conflicts as part of the rigors of the bidding process.

The main conclusion of OIG’s study, released March 5, is that “both [drug plan] sponsors and CMS conduct limited oversight of P&T committee conflicts of interest, compromising their ability to ensure that financial interests do not influence formulary decisions. Specifically, we found that without direction and oversight from CMS, many sponsors’ P&T committees have limited oversight of members’ conflicts of interest. Additionally, we found that CMS does not adequately oversee compliance with the federal requirement that at least one physician and at least one pharmacist on each committee be free of conflict.”

While saying that limited oversight does not necessarily mean financial interests are influencing formulary decisions, OIG argues that “it does expose sponsors to that possibility.” It recommends that CMS improve its oversight of P&T committee conflicts and set minimum standards for sponsor oversight of committee conflicts of interest.

CMS, in comments on the OIG’s findings before the report’s publication, pushed back against OIG’s findings and recommendations, citing its strong emphasis on formulary oversight as protection against CoI. “CMS devotes extensive resources to plan formulary oversight – and reserves the right to reject them – to ensure compliance with industry best practices for development and management and to ensure beneficiaries’ access to clinically appropriate therapies,” the agency said in a Feb. 7 letter to OIG.

Fundamentally, CMS asserts that the competitive dynamics of the Part D model help assure that plans have a strong interest in policing conflicts.

“If a P&T committee were to create a formulary while operating under a potential conflict of interest,” CMS said, “because a discriminatory formulary would not be approved, the only potential impact would be that the [drug plan’s] bid [to offer Part D coverage] could be more expensive and, therefore, less competitive. … As a result, we could expect that any authentic conflicts of interest, given our level of formulary review, would disadvantage the sponsor and not the beneficiary or Medicare program.”

OIG, however, is not convinced.

“If conflicts of interest among P&T committee members are not addressed, beneficiaries may receive inferior therapies when safer or more effective therapies are available, limited Medicare dollars may be wasted to pay for inappropriate treatment, and public confidence in the Federal Government may be undermined,” the agency declares.

“In contrast, CMS asserts that conflicts of interest would not disadvantage beneficiaries or the Federal Government because it believes that formulary decisions influenced by conflicts would result in higher premiums and the plan would be priced out of the marketplace. This position assumes that beneficiaries select health insurance based only on cost. This does not consider beneficiaries’ concerns about remaining with their current health care team, access issues, or the opportunity cost of having to select a new health insurance plan.”

Federal Role in Formularies

Regardless of the actual findings, the first noteworthy element of the OIG report is that it exists; the Medicare Modernization Act that created Part D marked the first time that federal law recognized the existence of managed care formularies and stipulated some ground rules for their activities. (Also see "P&T Committees Would Be Powerful Force Under Medicare Rx" - Pink Sheet, 16 Aug, 2004.)

The Part D law directs P&T committees to make drug coverage decisions based on scientific evidence and standards of practice. However, those “standards” are not themselves well defined—and, in the first decade since MMA was enacted, have not been the focus of much regulatory attention.

The Medicare Part D P&T Committee Landscape

• 117 P&T Committees Identified by OIG
• 113 Respond to Survey
• 22 are PBM-run
• 88% have members employed by the plan sponsor
• 38% is the average portion P&T committee members who are employees of the plan sponsor
• 93% consider manufacturer relationships a conflict
• 52% do NOT consider sponsor relationships a conflict
• 33% do NOT consider PBM relationships a conflict
• 66% of PBM-run P&T committees do NOT consider PBM relationships a conflict

Source: HHS Inspector General Report, “Gaps in Oversight of Conflicts of Interest in Medicare Prescription Drug Decisions”

That, in fact, is one way to summarize the IG report: as HHS’ official watchdog group, IG is concerned about the lack of standards and oversight on its face.

That is an important message from the report, and one that may gain added resonance as the federal government’s oversight of the formulary process extends into the commercial market with the launch of health insurance exchanges in 2014.

Results of OIG Survey

The specific focus of the report is on compliance with conflict-of-interest standards, a hot topic for oversight in the “Sunshine” era.

Under Part D, P&T committees are required to prevent conflicts-of-interest from influencing members’ decisions and must ensure that at least one physician and one pharmacist on each committee be independent and free of conflict relative to the sponsor and pharmaceutical manufacturers. OIG’s study analyzed CoI policies and procedures, but did not look for specific cases where CoI may have influenced formulary decisions.

One interesting component of the report is the portrait it draws of the landscape of P&T committees involved in Part D.

OIG reviewed all 682 Part D plan contracts from plan year 2010; those plans were associated with 117 different P&T committees (a single P&T committee often makes formulary decisions for multiple plans). Of those committees 113 participated in the survey conducted by IG. Of those, 22 P&T committees are run by third-party pharmacy benefit management companies rather than directly by a Part D plan sponsor.

IG did not provide any details on the variability in impact among the different committees; presumably only a small subset of the 113 P&T committees make formulary decisions that affect Part D plans with significant enrollment.

Still, the data underscore the fragmented nature of the Part D model; a feature that (for biopharma sponsors) has one key virtue: there are many independent points of decision-making about coverage for drugs, and no single center with the power to exclude a therapy from the program overall.

As for conflict-of-interest policy, the IG survey found incredible variability in practices across the 113 respondents.

Federal law and regulations say financial interest in sponsors and drug manufacturers are potential sources of CoI. However, since guidelines are not more specific, each P&T committee develops its own CoI guidelines, which OIG found has resulted in inconsistencies across Part D plans.

The survey found that half of P&T committees’ definitions of CoI did not address the conflicts prohibited in federal regs. That bottom line finding, however, obscures the reality that the overwhelming majority of plans do consider manufacturer relationships as potential conflicts (although apparently 7% do not). Instead, where IG sees failings are in the inclusion of sponsor interests as potential conflicts.

Most CoI definitions (68%) also do not address employment by the entity that maintains the committee, although 88% have such employees serving as members. Furthermore, while many sponsors’ formularies are managed by pharmacy benefit managers and their P&T committees, 33% of committees reported that they did not define any financial interest in PBMs as CoI.

CMS does not currently cite employment by a sponsor or interest in a PBM as potential sources of conflict; OIG thinks they should. “Although regulations do not specify employment as a conflict, P&T committees that do not address employment could be overlooking potential conflicts among their P&T committee members,” OIG said. In addition, “because PBMs perform Part D functions on behalf of sponsors, they can benefit from formulary decisions in the same way that sponsors can benefit from formulary decisions. For example, financial interests in the PBM that maintains the P&T committee and negotiates price concessions on behalf of the sponsors could influence a committee member to favor drugs made by pharmaceutical manufacturers with which the PBM has negotiated an arrangement advantageous to the PBM.”

In many cases, P&T members make their own CoI determinations and their own decisions regarding recusal from discussions and votes. Overall, 65% of committees allowed their members to determine whether their financial interests constituted CoI, and 79% of committees relied on members to recuse themselves when they had a conflict related to a particular drug.

As for CMS, OIG said CMS staff reported that they do not look at information submitted by sponsors and PBMs regarding P&T members’ CoI, which is part of every Part D plan bid application. “Without reviewing this information, CMS cannot know whether a minimum of two members on each P&T committee are free of conflict with sponsors and pharmaceutical manufacturers, as required,” the report says.

It further criticizes CMS for rarely auditing P&T committee CoI statements.

OIG Recommendations And CMS Responses

OIG proposed five specific actions CMS should undertake to improve CoI oversight:

• Define PBMs as entities that could benefit from formulary decisions and therefore trigger conflicts-of-interest determinations;
• Establish minimum standards requiring sponsors to ensure that safeguards are established to prevent improprieties related to employment by the entity that maintains the P&T committee;
• Establish minimum standards requiring sponsors to ensure that an objective process is used to determine whether disclosed financial interests are conflicts;
• Establish minimum standards requiring sponsors to ensure that an objective process is used to manage recusals because of conflicts;
• Oversee compliance with federal P&T committee conflict-of-interest requirements and guidance.

CMS said in its response that it did not concur with the first two recommendations, citing its faith in the competitive Part D model. “Given that sponsors mush balance both quality and costs in developing formularies, and that PBMS are the entities that negotiate for price concessions on behalf of sponsors, we believe the PBM should have an interest in formulary decisions.”

As for employees, “corporations—including private drug plans—are able to obtain a competitive edge in the marketplace by managing their most valuable asset, their employees,” CMS said. In the hospital sector, the agency notes, “it is an accepted industry standard that employees should act with their employers’ best interests in mind.”

That response clearly does not satisfy OIG.

“It is precisely because PBMs have an interest in formulary decisions that we continue to recommend that CMS include PBMs in the definition of entities that could benefit from formulary decisions,” the IG report states. “The delegated responsibility to negotiate price concessions means that PBMs have financial interests in formulary development, yet those financial interests may not be aligned with those of the sponsors that contracted with them. Because their financial interests may not be aligned, PBMs may not be constrained by the same competitive market forces as sponsors.”

As for plan employees: “We agree that employees of private health plans would likely act in the best interest of their employers—interests that may not align with the interests of the Part D program—which is why we continue to recommend that CMS establish minimum standards requiring sponsors to address employment.”

Regarding the third and fourth recommendations, while CMS agrees that P&T committees should have clear and objective standards to determine whether financial interests represent CoI and for managing recusals, it does not agree that CMS is responsible for setting those standards. Instead, CMS indicated that it intends to continue to allow plan sponsors to develop and apply their own standards, and define its regulatory role as assuring that standards are in place – and that the formularies themselves are appropriate.

The agency did concur with the last recommendation—although largely implying that it already does what IG recommends. In part, that is because CMS added audit review elements for 2012 that focus on CoI standards.

More significantly, however, CMS again asserts the importance of the formulary review process and the competitive dynamics of Part D: “We believe that the potential effects of conflicts of interest would result in discriminatory or inefficiently priced plans.”

Translation: don’t expect CMS to crack down on conflict-of-interest policies in P&T committees any time soon.

However, biopharma sponsors can also anticipate that there will be continued interest in regulating the P&T committee process as the federal role in the health care system continues to evolve – and that they are likely to benefit from any restraints put on the flexibility of plans in running their formulary committees.