The Centers for Medicare and Medicaid Services (“CMS”) has historically used its authority to immediately terminate Part D plan sponsors only sparingly.  In fact, it has done so only once.  However, when it chooses to exercise this authority, plan sponsors should not count on courts to come to their aid.  In Fox Insurance Co., Inc. v. Centers for Medicare and Medicaid Services, the Ninth Circuit displayed a strong deference to CMS in its first ever exercise of its authority to terminate immediately its contract with a Part D plan sponsor and set a high bar for a challenge to a termination to be successful. 
Fox’s Multitude of Mistakes
Fox Insurance Company, Inc. (“Fox”) entered into a contract with CMS to operate a Medicare Part D prescription drug plan beginning on January 1, 2006.  By early 2010, CMS began receiving complaints from Fox’s enrollees and network providers.  Through a subsequent on-site audit, CMS identified a long list of deficiencies in Fox’s operations, including:

  • Implementing unapproved utilization management criteria (e.g., prior authorization and step therapy) for protected class drugs and part D drugs covered on Fox’s formulary, resulting in the improper denial of coverage of critical HIV, cancer and seizure medications.
  • Failing to make coverage determinations for expedited requests within the required 24-hour timeframe (e.g., in one instance, taking over 120 hours to approve a needed HIV therapy) and failing to forward the request to an independent review entity upon failing to meet the deadline.
  • Failing to provide transition coverage of drugs that enrollees had been on in the prior year and requested prior authorization for such coverage in violation of CMS’ transition policy.

In addition to the foregoing deficiencies, during its on-site audit of Fox, Fox’s compliance officer admitted that Fox “had no compliance plan or structure in effect and no internal auditing or monitoring of Fox’s business operations is conducted, including no processes to oversee their first tier, downstream or related entities compliance with CMS program requirements.”  The deficiencies in Fox’s compliance program were themselves many, such as:

  • Not having an independent compliance officer, but instead Fox’s general counsel served as the compliance officer, reported to three senior managers and had no position description specific to the role of a compliance officer.
  • Not developing written compliance policies or procedures and standards of conduct.
  • Not having a compliance committee or board compliance oversight committee.
  • Not offering compliance education and training program for its employees and/or first tier, downstream or related entities (“FDRs”).
  • Not establishing lines of communication for employees and FDRs to report suspect compliance violations.
  • Not establishing any disciplinary guidelines for its employees and FDRs.
  • Not monitoring or auditing activity to test and confirm compliance.

The compliance officer further admitted that Fox’s fraud, waste and abuse plan was provided merely to satisfy regulatory requirements.  It had neither been presented to or approved by Fox’s board of directors nor implemented.
In its notice of termination , CMS concluded harshly, “CMS has no confidence that Fox has the necessary administrative capabilities and infrastructure to redress the severe deficiencies that CMS has uncovered.”  CMS proceeded, for the first and to date only time, to terminate immediately its contract with Fox on the basis that a delay in terminating the contract would pose an imminent and serious risk to the health of Fox’s enrollees.
Ninth Circuit’s Unconditional Approval of CMS’ Termination
When Fox’s challenge reached the Ninth Circuit, Fox found no sympathy.  The court dismissed multiple arguments from Fox, including problems with then-existing regulations that appear to have exceeded the scope of CMS’ statutory authority and, in Fox’s opinion, the unique treatment of Fox, given that CMS had never immediately terminated any other plan sponsor for alleged deficiencies.  Having dismissed all of Fox’s arguments, the court found, “The government’s actions were more than justified, as Fox had risked permanent damage to its enrollees by, inter alia, improperly denying coverage of critical HIV, cancer, and seizure medications, and having no compliance structure in place.”
“What It Did Was Too Little, Too Late”
Among all of the mistakes that led to the termination of Fox’s contract with CMS, nothing appears more remarkable than its actions (or inaction) after receiving CMS’ first notification of problems, including CMS’ suspension of Fox’s ability to enroll or market.  As noted by the Ninth Circuit, “CMS found that Fox imposed unauthorized prior-authorization and step-therapy as conditions on various drugs up through the audit that took place March 2-4.” (emphasis added)  In other words, even after CMS warned Fox of its deficiencies and set a time for an audit, Fox continued the improper conduct even during the CMS audit.  As put by the Ninth Circuit, “There is no indication that Fox could have become compliant in the foreseeable future.  What it did was too little, too late.”
The Unspoken Issue at the Heart of It All
The Ninth Circuit opinion walks us through the factual background of the case and the applicable regulatory scheme in quite a bit of detail.  So, its silence on one critical element of the case serves to emphasize how irrelevant that same element is to winning a challenge to a termination decision.  Fox had delegated its claims processing systems to a subcontractor, ProCare Pharmacy Benefit Manager Inc (“ProCare”).  Given the list of deficiencies, and as alleged by Fox in its breach of contract and negligence suit against ProCare, it appears that ProCare may have been operationally responsible for the coverage deficiencies.  However, ProCare is not mentioned a single time in the Ninth Circuit opinion.  Regardless of any liabilities that ProCare has incurred or may incur with respect to its services provided on behalf of Fox, the court’s silence emphasizes the fact that CMS and the courts will hold the plan sponsor (here, Fox) solely responsible for its FDRs’ failures.
Important Lessons Learned
The lessons to be learned from Fox’s mistakes are many.  These lessons extend well beyond Part D plan sponsors and the realm of Part D.  All Medicare contractors and providers should pay attention.

  1. Do not use in-house counsel as your compliance officer and ensure the compliance officer’s independence.
  2. Prepare and implement a compliance plan, as well as policies and procedures, not only for fraud, waste and abuse prevention but also for compliance with the plethora of Medicare regulations.
  3. Take compliance training seriously, and do not forget to train your FDRs.
  4. Monitor, Monitor, Monitor; Audit, Audit, Audit.
  5. Discipline bad behavior.
  6. Be open to reports of noncompliance.
  7. Establish a culture of compliance, beyond mere rhetoric.
  8. Actively involve your board of directors and senior management in compliance activities.
  9. If you use a subcontractor, know that the buck will always stop with you.

Lastly, in all cases, even if CMS appears to be the only agency involved, remember that the Department of Justice, the Office of Inspector General, and perhaps various state agencies are just around the corner.  So, here’s lesson Number 10:
     10.  When you receive a deficiency notice from CMS, take it seriously, act promptly, and know when to seek expert counsel.