Pharmacy Law: Immediate Termination of Medicare D Plan Sponsor

Joseph L. Fink III, BSPharm, JD
Published Online: Tuesday, May 13, 2014
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When an insurance company's administration of a Medicare Part D prescription drug insurance program generates numerous complaints to the Centers for Medicare & Medicaid Services, is immediate termination of the contract appropriate?
Issue of the Case
When an insurance company’s administration of a Medicare Part D prescription drug insurance program generates numerous complaints to the Centers for Medicare & Medicaid Services (CMS), is immediate termination of the contract appropriate?

Facts of the Case
Early during 2010, the CMS, the federal agency that administers the Medicare program, including the prescription drug insurance portion, received complaints from enrollees as well as physicians that an insurance company in a western state was improperly denying the enrollees access to critical medications needed for very serious conditions. Examples of the therapeutic categories involved included medications for HIV/AIDS as well as for treating various forms of cancer. The insurance underwriter was notified of the complaints by CMS, and the agency sought additional information.

The insurer represented to CMS that the errors causing the denials had been remedied, but the agency conducted a further investigation and suspended the firm’s authorization to enroll Part D beneficiaries as well as its authority to market its Plan D program.

CMS followed up with an on-site audit at the offices of the insurance company, uncovering a number of actions that were questionable (at best): they found (A) denials of coverage of medications used to treat cancer, treat HIV/AIDS, prevent seizures, and prevent organ rejection in transplant patients; (B) that the firm required unnecessary, invasive, and costly procedures as preconditions to approving coverage for medications, such as cardiac catheterizations or positron-emission tomography scans; (C) that the firm had no internal compliance plan or structure in place to ensure compliance with federal requirements; and (D) that the insurer had not monitored its business operations or conducted an internal audit even after the questions had been raised. The agency concluded that the insurance company had demonstrated “a blatant and reckless disregard for the health and welfare of the beneficiaries” it was supposed to serve. CMS immediately terminated its contract with the insurer. Moreover, the agency demanded repayment of the prorated capitation payment for the portion of the month after the firm was notified of the termination.

The insurer exhausted a number of possible remedies at the level of the administrative agency and then filed 2 separate lawsuits in federal court, 1 challenging the repayment demand and another questioning the propriety of the immediate termination. The firm lost in both lawsuits and filed appeals with the US Court of Appeals, seeking review of the lower judge’s decisions.

The Court’s Ruling
The US Court of Appeals upheld the ruling of the trial court judge in both matters, dealing a dual loss to the insurance company.

The Court’s Reasoning
The appellate court identified the federal statute that authorized CMS to use immediate termination in certain very serious circumstances. Congress had decreed that immediate action is appropriate if delay “would pose an imminent and serious risk” to those enrolled in the plan. The agency had conducted the on-site audit and expressly concluded that the firm’s conduct exposed enrollees to an imminent and serious risk to their health. CMS had used that as the basis for the immediate termination.

The court also considered an argument made by the firm that the termination was improper because it had made changes to be in substantial compliance prior to completion of the CMS audit. The court noted the extensive record of activities not in compliance with expectations and rejected this argument as well. It emphasized that merely taking steps to improve does not meet the definition of “substantial compliance” as that phrase is used in regulations governing the Medicare program.

Next, the firm had argued that it had received different treatment from the agency than that accorded other insurers offering Part D plans that were deemed to be not performing their obligations as expected. That argument also was rejected by the appellate court, pointing out that the focus here was on the activities of this particular insurer and the federal agency had concluded that the firm could not correct the problems that had been identified. The judges of the court of appeals saw no reason to second-guess that determination by the agency possessing expertise in the field.

Finally, the court rejected an argument by the firm that the amount of the agency’s financial recovery should be offset by the amount owed to the firm based on a regulation covering financial reconciliation. The court concluded that CMS had properly identified an applicable regulation that dictated immediate repayment of the capitation amount it had paid the firm per enrollee.

This was the first occasion that a federal appellate court had to address CMS’s use of its immediate termination authority.


Dr. Fink is professor of pharmacy law and policy and Kentucky Pharmacists Association Endowed Professor of Leadership at the University of Kentucky College of Pharmacy, Lexington.


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