Health Law Advisory Bulletin
Medicare Prescription Drug Contracts: One Key Term That Could Plunge Your Organization into the False Claims Morass
By Edwin D. Rauzi
[September 2005]
Centers for Medicare and Medicaid Services (CMS) announced it signed contracts with the new prescription drug plans on Sept. 15, 2005. Now that CMS has contracted with the plans, it is only a matter of time before the plans start asking hospitals and pharmacies to sign contracts to participate in those plans.
In addition to reviewing the business terms of the contracts, there is one item relating to claims submissions that deserves special scrutiny: whether eleven-digit NDC numbers are required for claims. Although a basic issue, it poses thorny compliance challenges about which CEOs and CFOs are rarely aware. On top of it all, the issue affects generic drugs, which are likely to have some of the slimmest margins from which to mine compliance resources.
The issue occurs because of the intersection of three major pieces of federal legislation, each from a different century. Representing the 21st century is the Medicare Modernization Act, which created the prescription drug benefit. Two features contribute to the problem, one obvious and one not. Obviously, the drug benefit involves the payment of money originating from the federal government to organizations that submit claims to be paid. Less noticed is the requirement that each drug plan define its own formulary, and that drugs missing from the plan’s formulary are not covered prescription drug benefit drugs.
In the 20th century, Congress enacted the administrative simplification provisions of HIPAA. That statute requires electronic transactions use approved code sets. For retail pharmacies, the eleven-digit National Drug Code numbers are the only approved code set for prescription drugs. Although no code set has been formalized for hospitals, the NDC code set seems likely to become the de facto code set because there is no comprehensive alternative available.
Given the volume of Medicare prescription drug claims that must be processed, most organizations will be unable to avoid electronic submissions. Hence, the contracts that the drug plans send to your organization are likely to require that claims be submitted electronically. Regardless of whether the contract makes it explicit, that probably means that eleven-digit NDC numbers are required. Therein lays the peril.
The use of generics is encouraged as a matter of national policy. By definition, what makes a generic is that a pill from one manufacturer may be substituted for a pill from a competing manufacturer because the active ingredient is the same. This concept of sameness is ingrained at all levels of pharmacy practice. That concept is antithetical, however, to the concept behind the NDC numbers, which is to assign a different number for not only every manufacturer, but every bottle size.
For a common generic, such as amoxicillin, there are literally hundreds of NDC numbers. Organizations typically buy the cheapest available generic. That means the NDC number for the generic being dispensed changes periodically. You may think that your organization’s automated dispensing system links each pill to its precise NDC number, but you likely would be wrong. That level of precision requires changes to the programming of the pharmacy computer system on a daily basis, which rarely (if ever) occurs.
To illustrate, consider the omnipresent Pyxis machine. Pills are taken from containers and placed in plastic bins, and are then dispensed automatically. If amoxicillin from Teva is placed in a bin containing amoxicillin from Glaxo SmithKline, the machine cannot tell which pills are from Teva and which are from Glaxo. Whatever NDC number has been programmed as the default in the computer is likely to be the NDC number that appears, possibly untouched by human hands, on the electronic claims sent to a prescription drug plan.
The third piece of the puzzle dates from the 19th century: the False Claims Act. Under that statute, a false statement made in pursuit of a federal claim is punishable by a fine of over $11,000 per claim. The statement does not have to be intentional; one made in reckless disregard of the truth or falsity of the statement will suffice.
The Act also allows disgruntled former employees and competitors, as well as regulators, to file lawsuits. Put it all together, and an organization may be at risk under the False Claims Act if it includes an erroneous NDC number on a prescription drug claim. If the same mistake is made on a recurring and routine basis, the potential penalties become astronomical.
The problem might be manageable if your organization contracted with only one prescription drug plan. Unfortunately, the Medicare Modernization Act promotes competition among plans, so you may wind up contracting with many. Unless the plans have identical formularies, matching different generics with members of different plans may pose a formidable challenge.
To recap, if these circumstances coalesce, there is a risk that your organization could be characterized as submitting a false claim:
- A prescription drug plan with whom your organization contracts covers only Teva amoxicillin (or a generic from one manufacturer)
- Your organization dispenses Glaxo amoxicillin (or a generic from another manufacturer)
- Your organization submits a claim with a Teva amoxicillin NDC number (or the wrong NDC number)
If you are a retail pharmacy, there is no solution on the horizon. The fix requires either legislation or adoption of a new, HIPAA-approved code set for pharmaceuticals. If you are a non-retail pharmacy, then there is some hope you can negotiate or contract around the problem.
For more information, please contact:
Other DWT Contacts:
Kathleen H. Drummy, Los Angeles, (213) 633-6870, KathyDrummy@dwt.com
M. Steven Lipton, San Francisco, (415) 276-6550, SteveLipton@dwt.com
Kent B. (Bernie) Thurber, Portland, (503) 778-5202, BernieThurber@dwt.com
This Health Law Advisory is a publication of the Health Law Group of Davis Wright Tremaine LLP. Our purpose in publishing this Advisory is to inform our clients and friends of developments in health care law. It is not intended, nor should it be used, as a substitute for specific legal advice as legal counsel may only be given in response to inquiries regarding particular situations.
Copyright 2005, Davis Wright Tremaine LLP.
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