Legal Matters

Compliance Is Now the Focus Under the Medicare Drug Discount Card Program

Posted 08/26/2004

By Jeffrey G. Micklos, JD

From Drug Benefit Trends®

The Centers for Medicare & Medicaid Services (CMS) began implementing the Medicare drug discount card and transitional assistance program on June 1. With discounts on prescription drugs now available through the cards, more attention is being paid to the program's regulatory compliance issues.

During the past several months, CMS has focused on implementing rules to administer the drug discount card program[1] and on soliciting applications from PBMs and others interested in seeking CMS endorsement to sponsor a drug card. In late March, CMS announced its list of endorsed sponsors;[2] their discounted prices are now being posted on the CMS Web site.[3]

Drug Card Scams

Even before the launch of the drug discount card program, CMS warned beneficiaries of drug card scams that had surfaced.[4] On March 25, CMS endorsed 28 private drug card sponsors who are marketing their cards to Medicare beneficiaries through advertising and direct mailings. CMS has reported, however, that persons from non-endorsed organizations have approached beneficiaries either in person or by telephone offering access to Medicare drug discount cards.

In some cases, persons involved in the scams posed as Medicare officials and requested that beneficiaries enroll in their Medicare drug discount card program. The impostors requested personal information from the beneficiaries under the guise of confirming program eligibility. However, their true intent was to use the personal information for other illegal and unauthorized purposes. CMS is strongly committed to working with law enforcement agencies to develop methods to deter these practices and to prosecute those engaged in scams.

Drug Discount Cards and Fraud and Abuse Laws

Compliance concerns that are more traditional in the health care industry also apply to the drug discount card program. As sponsors develop their Medicare business, questions have arisen about structuring these arrangements in light of applicable fraud and abuse laws. In April, the Office of Inspector General (OIG) issued a bulletin addressing the applicability of fraud and abuse statutes to the drug discount card program.[5] Specifically, the OIG presented its views on the legality of education and outreach activities of network pharmacies directed or supported by discount card sponsors under the antikickback statute.

The impetus for the OIG notice was CMS' receipt of questions from sponsors about permissible operating structures and delegation of regulatory duties. Sponsors wanted to know whether they could pay their network pharmacies to provide certain beneficiary education and outreach services (including enrollment assistance) related to their drug discount card program. Because the direct nexus between patients and their pharmacies is a developed relationship, sponsors are interested in using this relationship for purposes of administering the beneficiary outreach function.

The OIG recognizes the need for beneficiaries to obtain information on Medicare drug discount card options and supports bona fide educational efforts that promote informed beneficiary choices based on full, accurate, and impartial information. Because beneficiaries may rely on sponsors' education and outreach activities, it is essential that the information provided be accurate and unbiased. The OIG has the authority to protect beneficiaries by imposing a $10,000 civil money penalty (CMP) against a sponsor that provides misleading information in educational or outreach materials.[6]

Pharmacists are likely to be a natural point of inquiry for beneficiaries about the Medicare drug discount card program. The tension involved in using this relationship is the fine line between providing education versus marketing a particular program. The OIG has expressed concern that arrangements under which sponsors compensate pharmacies for submitting completed enrollment applications or for directing a patient to a specific drug card may trigger the federal criminal antikickback statute. The OIG's chief concern is that the pharmacy's financial incentives under such an arrangement "could distort or inhibit the flow of information to beneficiaries and thereby convert the education process into a mechanism for steering beneficiaries to a particular drug card without regard to the individual's best interest."[5]

The OIG directive does not prevent sponsors from contracting with network pharmacies to provide patient education and outreach services. In fact, the OIG recognizes that certain educational and outreach arrangements may qualify for the personal services safe harbor described in the antikickback statute.[7] However, the personal services safe harbor does not protect any financial arrangements based on per-application, per-enrollment, or similarly structured fees. Pharmacies may incur expenses related to educational and outreach activities, and they are entitled to a fair market value payment for the services provided. Payments can be problematic if they contain "success fees"—payments for the volume of business generated—or other incentives intended to steer patients.

Because the inquiry will be case-specific, the OIG notice provides an analytic framework with respect to evaluating promotional arrangements.[5] In such cases, the OIG considers several factors, including:

  • Identity of the party engaged in the promotional activity and nature of its relationship with audience.

  • Nature of the product or service being promoted.

  • Demographics of the target audience.

  • Structure and form of the compensation paid for the activity.

  • Nature of the activity and degree to which it may be coercive or perceived to be coercive.

The presence or absence of any particular factor does not make the promotional arrangement illegal per se under the antikickback statute. Rather, the OIG considers these factors and other relevant concerns when assessing the level of risk presented by the activity.

As an alternative for outsourcing the beneficiary outreach function, the OIG has suggested that card sponsors consider contracting with neutral, independent third parties (eg, a not-for-profit charitable organization) to "marshal industry resources and promote objective access to care."[5] When properly structured, such arrangements pose little risk for sanction under the antikickback statute and have been successful in addressing similar concerns in other health care industry sectors.

Drug discount card education and outreach effects are not the only compliance issues likely to be scrutinized. The drug discount card regulations identify several types of sanctionable conduct that could be punished by suspension of a sponsor's beneficiary enrollment activities or information and outreach services or even CMPs.[8] Moreover, the drug discount card regulations also expressly authorize the OIG to impose CMPs for certain types of sanctionable conduct. In May, the OIG issued regulations implementing its CMP authority related to the drug discount program.[9] This authority permits the OIG to fine sponsors up to $10,000 per violation when a sponsor knowingly: (1) misrepresents or falsifies information in outreach or similar informational materials, (2) charges a program enrollee in violation of the sponsor's endorsement contract, or (3) uses transitional assistance funds in a manner that is inconsistent with the purpose of the program.

The drug discount card program will have a relatively short life (18 to 20 months) as it gives way to the new outpatient prescription drug benefit under Medicare Part D, beginning in 2006. Because of the limited operational period, some have questioned whether the government will invest the necessary resources on the compliance and enforcement side to study the discount card program and investigate sponsors with regard to their level of compliance. Given the significant sanction authority under the program, sponsors should not count on lax enforcement and instead should be proactive in ensuring that their Medicare drug discount cards are administered in an effective, efficient, and compliant way.

The OIG states that there is an increasing need to scrutinize pharmacy benefit programs given their prominence under the new Medicare law. The OIG intends "to monitor the operation of drug card sponsor-funded education and outreach programs to determine whether they result in program or patient abuse."[5] As a result, drug card sponsors and their business partners can expect close government scrutiny of their operations. Given that many sponsors may be participating to position themselves for an important role in Medicare Part D, sponsors should ensure that their operations are efficient, effective, and compliant with all legal and regulatory requirements, including antikickback and CMP statutes.


  1. Medicare Prescription Drug Discount Card and Transitional Assistance Program, 42 CFR part 403, subpart H.
  2. Centers for Medicare & Medicaid Services. HHS gives seal of approval to Medicare drug discount cards. March 25, 2004. Available at: Accessed May 27, 2004.
  3. Centers for Medicare & Medicaid Services. Find available Medicare-approved drug discount cards, and compare prices for your prescriptions. Available at: Accessed June 2, 2004.
  4. Centers for Medicare & Medicaid Services. Medicare beneficiaries warned about drug card scams. April 22, 2004. Available at: Accessed May 27, 2004.
  5. Office of Inspector General. Education and outreach arrangements between Medicare-endorsed discount drug card sponsors and their network pharmacies under the anti-kickback statute. April 8, 2004. Available at: Accessed May 27, 2004.
  6. 42 CFR §403.820(b)(1)(i).
  7. 42 CFR §1001.952(d).
  8. 42 CFR §403.820(a)(3).
  9. 69 Federal Register 28842-28846 (May 19, 2004).

Mr Micklos is a partner in the Washington, DC, office of Foley & Lardner LLP, the nation's 10th largest law firm, which has a nationally recognized health law department.

Drug Benefit Trends 16(7):357-358, 2004.
© 2004 Cliggott Publishing, Division of CMP Healthcare Media

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