On July 6, 2005, CMS published interim final regulations to implement a competitive acquisition program (CAP) for Part B drugs and biologicals scheduled to become effective January 1, 2006. 70 Fed. Reg. 39,022 (to be codified at 42 C.F.R. §§ 414.900-920). CMS accepted comments to the rule through September 6, 2005. However, by a notice of August 3, 2005 on its website, CMS announced that it has decided to suspend the CAP vendor bidding process and delay the overall implementation date of CAP until about July 2006 in order to more completely analyze the public comments.

Created by section 303(d) of the Medicare Modernization Act, which added new section 1847B to the Social Security Act (the Act), 42 U.S.C. § 1395w-3b, CAP is an optional program that allows a physician to receive drugs from a vendor selected by CMS. Basically, the physician would order and receive the drugs from the CAP vendor, then submit a claim to the local Part B carrier on or after the date of service. Pursuant to this claim, the CAP vendor would bill Medicare and the beneficiaries (for the applicable coinsurance). Physicians may choose to not participate in CAP, continue to buy drugs in the market, and receive Medicare payment of generally 106 percent of the average sales price (ASP) for the drugs.

Although Part B drugs include drugs administered through durable medical equipment and drugs specifically listed in the Act (e.g., certain oral anti-cancer drugs), CMS decided to kick off CAP by including those drugs that are furnished incident to a physician's service (i.e., physician-administered drugs). CMS plans to include other Part B drugs in the future, but chose to phase in CAP with incident-to drugs because they account for more than 80 percent of Part B drugs covered by Medicare. Specifically, of the 440 incident-to drugs, CAP will include 169 drugs (12 additional drugs will be subject to the competitive bidding process in 2006), which represent about 85 percent of the Medicare expenditure for all Part B drugs. In addition, because each HCPCS code denotes a category of drugs and a HCPCS code may constitute more than one drug, CMS is requiring CAP vendors to stock at least one drug for each HCPCS category.

CMS also has decided to establish one national competitive acquisition area to include all 50 states, the District of Columbia, Puerto Rico, and the U.S. territories. Eventually, CMS plans to break down the CAP areas into regions, states, or other smaller geographic areas. Fortunately, CMS is permitting CAP vendors to hire subcontractor distributors to service the CAP physicians nationwide.

CMS will select at least two CAP vendors. All vendors must have at least three years of experience furnishing Part B injectable drugs and, within two days, be able to ship drugs five days per week. Each vendor also must submit to CMS information about its financial status, corporate compliance program, codes of conduct, and grievance procedures. The other regulatory requirements are similar to those that are currently applicable to wholesalers and pharmacies (e.g., state licensure). Once selected, a CAP vendor enters into a three-year agreement with CMS. The application form for prospective CAP vendors is available on the CMS website at www.cms.hhs.gov/providers/drugs/compbid/
bid_form_announ.asp. CMS will list on its website a directory of the CAP vendors by October 1, 2005.

Beginning 2005, physicians may choose to participate in CAP effective January 1 of the following year by making its annual election between October 1 and November 15 of each year. The CAP physician must obtain all drugs for Medicare patients from the CAP vendor. A physician practice group must enroll as an entire group. Thus, the entire group must order drugs from the vendor.

However, a CAP physician may purchase a drug outside of CAP and receive payment under the ASP methodology if a specific formulation is medically necessary for a particular beneficiary and the vendor does not supply that formulation. In addition, the physician could use a drug from his or her own inventory and receive a replacement drug from the vendor if (1) the drug was required immediately, (2) the physician could not have anticipated the need for the drug, (3) the CAP vendor could not have delivered the drug in time, and (4) the drug was administered in an emergency situation. More importantly, during the participating year, a CAP physician may choose a different vendor or opt out of CAP under certain circumstances (e.g., physician leaves the practice group, vendor refuses to ship drugs for a particular beneficiary).

Interestingly, CMS is allowing the CAP vendors to deliver the drugs to the physicians in more than one appropriately spaced shipment even though the physician has requested, for example, the entire course of chemotherapy treatment in one order. No doubt, this will raise concerns among physicians regarding potential liability for delayed delivery. Likewise, although the CAP drugs do not need to be stored separately from other drugs, physicians must maintain a separate electronic or paper inventory for each CAP drug obtained. However, CMS has explicitly declined to provide additional reimbursement to physicians for such administrative activities that are required for participation in CAP.

Curiously, if a drug is delivered by the CAP vendor but not administered by the physician, CMS requires the physician and the vendor to reach an agreement on how to handle the unused drug, consistent with applicable state and federal law, including using the drug at a later time for another Medicare beneficiary as appropriate. Indeed, this will raise a few eyebrows among physicians with patients each of whom requires a unique formulation.

Furthermore, each CAP vendor may file a complaint with its local carrier if an individual physician generates losses that exceed an acceptable threshold amount. In turn, the carrier would counsel the physician to submit clean claims and to appeal denied claims. Moreover, the carrier could recommend that CMS suspend the physician from CAP.

The most puzzling aspect of CAP is that CMS plans to accept the five lowest qualified bids for each CAP drug per the J-code; however, CMS would not accept any vendor applicant whose composite bid exceeded 106 percent of ASP for the drug. Although CMS will employ weighting factors for the composite bid, the intent of CMS to set the Medicare payment amount for the drug at the median bid price among the winning bids does not appear to afford much, if any, financial incentive or opportunity for the CAP vendor. Because of this ceiling of ASP plus six percent, CAP vendors may not find much relief even when CMS adjusts the rates on a quarterly basis (to account for new brand or generic drugs or shortages) using the drug acquisition costs reported by the vendors every year.

CMS plans to provide updates of the bidding timeline and additional information about the implementation of CAP through its website.