CMS Issues Medicaid Average Manufacturer Price (AMP) Proposed Rule

On Friday, January 27, 2012, the Centers for Medicare & Medicaid Services (CMS) released a proposed rule revising Medicaid requirements for covered outpatient drugs. The purpose of the rule is to implement changes to Medicaid drug pricing and reimbursement requirements made by the Patient Protection and Affordable Care Act of 2010,¹  as amended by the Health Care and Education Reconciliation Act of 2010²(collectively referred to as the “ACA”). The proposed rule was published in the Federal Register on Thursday, February 2, 2012.  Comments to the proposed rule are due by 5 p.m. on April 2, 2012.

The proposed rule addresses a number of issues relevant to pharmaceutical manufacturers and pharmacies. The ACA increased the minimum rebate percentage for most single source and innovator multiple source drugs from 15.1 percent of the average manufacturer price (AMP) to 23.1 percent of AMP. However, until now, CMS had provided little guidance to manufacturers on the agency’s interpretation of the various revisions to AMP made by the ACA. The following are the highlights of the proposed rule, which are explained in more detail below—

• the definition of “retail community pharmacy”
• bundled sales
• moving away from the “default rule”
• bona fide service fees
• “5i” products
• the treatment of authorized generic drugs
• base date AMP recalculation
• line extensions
• rebates for drugs dispensed through Medicaid managed care organizations (MCOs)
• expanding rebate-eligible sales to include sales made to U.S. territories
• reporting revised pricing data
• AMP smoothing
• penalties for late filers
• pharmacy reimbursement.

Definition of “Retail Community Pharmacy”

The ACA eliminated the term “retail pharmacy class of trade” from the definition of AMP and replaced it with the term “retail community pharmacy.” This revision significantly narrowed the types of entities to which sales are included in a manufacturer’s AMP calculation. In the proposed rule, CMS defines retail community pharmacy to mean an independent pharmacy, a chain pharmacy, a supermarket pharmacy or a mass merchandiser pharmacy that is licensed as a pharmacy by the state and that dispenses medications to the general public at retail prices. The definition does not include a pharmacy that dispenses prescription medications to patients primarily through the mail, nursing home pharmacies, long-term care facility pharmacies, hospital pharmacies, clinics, charitable or not-for-profit pharmacies, government pharmacies or pharmacy benefit managers.

In addition, the language of the ACA suggests that there are entities (for example, specialty pharmacies, home infusion pharmacies and home health care providers) that are conducting business as wholesalers or retail community pharmacies, which could be included in the definition of AMP. In the proposed rule, CMS notes that certain covered outpatient drugs are dispensed primarily, if not solely, through entities such as specialty pharmacies, home infusion pharmacies or home health care providers and that these entities generally dispense medications to the general public (or specific segments of the general public) at retail prices and are licensed by the state as pharmacies. As such, CMS proposes that these pharmacies be considered entities conducting business as wholesalers or retail pharmacies and that sales of covered outpatient drugs to these entities be included in AMP.

Bundled Sales

In its pre-ACA regulation, CMS defined a “bundled sale” as an arrangement, regardless of physical packaging, under which the rebate, discount or other price concession is conditioned on the purchase of the same drug, drugs of different types or another product; some other performance requirement (i.e., formulary tier placement or achievement of market share); or instances in which the resulting discounts or other price concessions are greater than those that would have been available had the bundled drugs been purchased separately. Although not addressed in the ACA, CMS proposes to clarify for manufacturers the definition of “bundled sale” for the purposes of allocating the value of discounts across all the products in the bundled arrangement to determine the products’ AMPs. Specifically, the rule provides that “discounts in a bundled sale, including but not limited to those discounts resulting from a contingent arrangement, are allocated proportionally to the total dollar value of the units of all drugs sold under the bundled arrangement.” This language could be read as expanding the definition of bundled sale to include certain noncontingent sales, which is a departure from previous CMS guidance.

Default Rule

In the proposed rule, CMS moves away from the current “default rule” approach, which provides that sales to wholesalers are included in AMP calculations unless manufacturers had adequate documentation showing that the drugs were subsequently resold to AMP-ineligible entities. In deciding against “presumed inclusion,” the agency cites concerns that it would affect the calculation of federal upper limits (FULs) for multiple source drugs because it would potentially permit the inclusion of lower AMPs in that calculation based on sales that may not have been actually distributed to retail community pharmacies. Under the proposed approach, manufacturers would only include in their calculation of AMP those sales for which the manufacturer had adequate evidence or documentation showing the drug was actually distributed to a retail community pharmacy. Noting that this approach would likely result in a number of eligible sales not being included in the AMP calculation, however, the agency is seeking comments on this proposed methodology.

Bona Fide Service Fees

The ACA revised the definition of “bona fide service fees” to explicitly include “distribution service fees, inventory management fees, product stocking allowances and fees associated with administrative services agreements and patient care programs (such as medication compliance programs and patient education programs).”³In the rule, CMS proposes to update its current definition to include these fees paid by manufacturers to wholesalers or retail community pharmacies. In addition, the proposed rule notes that administrative fees and other fees that are not explicitly excluded from AMP by the ACA but that meet the definition of bona fide service fees should also be excluded. CMS reiterates its longstanding concern that these fees could be used as a vehicle to provide discounts. Consequently, the preamble to the rule provides that manufacturers “should appropriately determine fair market value and make reasonable assumptions consistent with adequate documentation that will support their payment for these services at fair market rates sufficient that an outside party can determine the basis for the fair market value determination.”

5i Products

Following the passage of the ACA, Congress also passed the Education, Jobs, and Medicaid Assistance Act,⁴which implemented an alternative AMP for inhalation, infusion, instilled, implanted or injectable drugs not generally dispensed through a retail community pharmacy (“5i drugs”). To identify such 5i drugs, CMS proposes to use the Food and Drug Administration’s (FDA) defined “Routes of Administration” as a guide. Under the rule, manufacturers would determine whether their product qualifies as a 5i drug based on this list of Routes of Administration.

To determine whether a 5i product is “not generally dispensed through a retail community pharmacy,” CMS proposes to adopt the Department of Veterans Affairs’ nonfederal average manufacturer price “90 percent” rule. Specifically, if 90 percent or more of the manufacturer’s sales for the drug were to an entity other than a wholesaler for distribution to retail community pharmacies or retail community pharmacies that purchase drugs directly from the manufacturer, then the 5i drug would be classified as “not generally dispensed through a retail community pharmacy.” The proposed rule further provides that manufacturers must evaluate a 5i drug’s status as “not generally dispensed” through retail community pharmacies on a monthly and quarterly basis.

CMS proposes that the AMP for 5i drugs would include all sales, rebates, discounts and other financial transactions included in the determination of non-5i AMP, as well as the sales, rebates, discounts and other transactions provided to a variety of non-retail community pharmacy entities, including: direct sales to physicians; sales to pharmacy benefit managers (including mail-order); sales to HMOs; sales, discounts and rebates paid directly to insurers; sales to hospitals; sales to clinics and outpatient facilities; sales to long-term care providers; sales to hospices; and sales to other manufacturers that conduct business as wholesalers or retail community pharmacies.

Authorized Generics

For the purposes of determining AMPs that reflect the sale of authorized generic products, CMS proposes to define the terms “primary manufacturer” and “secondary manufacturer.” A “primary manufacturer” would refer to a manufacturer that holds the new drug application (NDA) of the authorized generic drug. A “secondary manufacturer” would refer to a manufacturer that does not hold the NDA, but is authorized by the primary manufacturer to sell the drug. The proposed rule provides that a primary manufacturer must include the transfer price of an authorized generic drug to the secondary manufacturer in the brand drug’s AMP “when the secondary manufacturer is acting as a wholesaler.” The rule also incorporates the ACA statutory definition of “wholesaler,” which reads “a drug wholesaler that is engaged in wholesale distribution of prescription drugs to retail community pharmacies, including (but not limited to), manufacturers, repackers, distributors, own-label distributors, private label distributors, jobbers, brokers, warehouses (including manufacturer’s and distributor’s warehouses, chain drug warehouses and wholesale drug warehouses), independent wholesale drug traders and retail community pharmacies that conduct wholesale distributions.”⁵The proposed rule, however, does not include a discussion of what the terms “repackers,” “own-label distributors” and “private label distributors” mean or what it means to “act as a wholesaler.”

Under the proposed rule, the primary manufacturer would have to include the best price of an authorized generic drug in its computation of best price for an innovator multiple source product when such drug is being sold by the primary manufacturer to the secondary manufacturer. Also, the secondary manufacturer of an authorized generic must provide a rebate based on its sales of authorized generics and must calculate its own AMP and best price pursuant to the requirements of the regulation.

Base Date AMP Recalculation

In addition to paying a basic rebate under the Medicaid Drug Rebate Program, manufacturers may also be subject to an “additional rebate.” The additional rebate is the amount by which the manufacturer’s AMP for the drug in the calendar quarter for which the rebate is being calculated exceeds the AMP for the July 1, 1990, calendar quarter or, for subsequently approved drugs, the first full calendar quarter after the day on which the drug was first marketed—also known as the “base date AMP”—adjusted for inflation.⁶

Because the ACA and the proposed rule are anticipated to result in higher AMP values, comparing these AMPs to manufacturers’ current base date AMPs, calculated using the pre-ACA methodology, would likely result in additional rebate obligations. As a result, CMS proposes to provide manufacturers the option to recalculate base date AMP in accordance with the revised AMP rules. Given that some manufacturers may lack the actual data needed to recalculate the base date AMP or may find the administrative burden to be more costly than the savings gained, CMS is proposing that such recalculation be optional. Under the proposed rule, a manufacturer may choose to recalculate the base date AMP on a product-by-product basis, but must use “actual and verifiable pricing records” for the calculation.

Line Extensions

CMS proposes to define “line extension” as a single source or innovator multiple source drug that is an oral solid dosage form that has been approved by the FDA as a change to the initial brand name listed drug. According to this definition, the change must represent a new version of the previously approved drug, such as a new ester, a new salt or other noncovalent derivative; a new formulation of a previously approved drug; a new combination of two or more drugs; or a new indication for an already marketed drug. In applying this definition, CMS will rely on FDA’s list of “Chemical Types,” which are classifications given to products during the FDA review process and when the NDA is approved. Significantly, even if the initial brand drug and the line extension drug are manufactured by different entities, the manufacturers of both drugs are responsible for ensuring that all necessary product and pricing data are exchanged to allow the manufacturer of the line extension drug to correctly calculate the appropriate rebate.

Under the proposed rule, the unit rebate amount for the line extension drug would be the greater of: i) the standard unit rebate amount; or ii) the “alternative” unit rebate amount, which is calculated as the product of the AMP of the line extension and the highest additional rebate (calculated as a percentage of AMP) for any strength of the original drug.

Rebates for Drugs Dispensed through Medicaid MCOs

The ACA eliminated the exemption for sales to Medicaid MCOs from the Medicaid drug rebate calculation. As a result, manufacturers that participate in the Drug Rebate Program are now required to pay rebates for drugs dispensed to individuals enrolled in a Medicaid MCO if the MCO is responsible for coverage of such drugs. States are required to obtain utilization data from Medicaid MCOs in order to request rebates from manufacturers. CMS proposes to incorporate these requirements in the proposed rule. Drugs dispensed by health maintenance organizations (including Medicaid MCOs) and subject to 340B discounts are excluded from this requirement.

Expanding Rebate Eligible Sales to Include Sales Made to U.S. Territories

The proposed rule would expand the definition of “States” to include the 50 states, the District of Columbia and the territories (Puerto Rico, the Virgin Islands, Guam, the Northern Mariana Islands and American Samoa). Thus, manufacturers would be required to extend Medicaid drug rebates to the territories and include applicable sales in AMP and best price calculations.

Reporting Revised Pricing Data

In the rule, CMS proposes to revise the 12-quarter rule filing limitation currently in place for manufacturers to report revisions to pricing reports. Any request from manufacturers submitted to CMS to revise monthly and quarterly AMP, best price, customary prompt pay discounts or nominal prices that are outside of the 12-quarter filing deadline will be considered only if such request falls within one of the following categories—

• The change is a result of the drug category change or a market date change.
• The change is an initial submission for a product.
• The change is due to termination of a manufacturer from the Medicaid Drug Rebate Program for failure to submit pricing data, and such manufacturer must submit pricing data to reenter the program.
• The change is due to a technical correction (such as a keying error), i.e., not based on any changes in sales transactions or pricing adjustments from such transactions.
•  The change is to address specific underpayments to states or potential liability regarding those underpayments, as required by CMS, applicable law or regulations or an Office of Inspector General or Department of Justice investigation.

Separate from pricing data revision requests, CMS also proposed an option for manufacturers to submit a recalculation request outside of the 12-quarter time limit based on “good cause.” Finally, a manufacturer must report revisions to AMP within the 12-quarter time period except when the revision would be solely as a result of data pertaining to lagged price concessions.

AMP Smoothing

CMS proposes to adopt a smoothing methodology for AMP in which manufacturers would use a 12-month rolling percentage to estimate the value of lagged price concessions in their calculations of monthly and quarterly AMPs. Specifically, this estimate is calculated by dividing the total lagged price concessions over the most recent 12-month period by the total sales included in AMP for the same period. 

Civil Penalties for Late Filers

Under the proposed rule, any manufacturer that fails to timely submit and certify monthly and quarterly AMP and monthly AMP units by the 30^thday after the end of each applicable quarter or month will be reported to the Office of Inspector General. Furthermore, CMS proposes that the manufacturer would be subject to civil monetary penalties of $10,000 per drug per day for each product not reported on the 31^stday. The rule also states that CMS is considering regulatory guidance on suspension and termination for manufacturers that fail to report AMPs on a timely basis.

Pharmacy Reimbursement

States generally reimburse pharmacies for covered outpatient drugs under their Medicaid programs based on “estimated acquisition cost” (EAC) plus a dispensing fee. In the proposed rule, CMS retains the current definition of “dispensing fee,” but proposes to replace the term with “professional dispensing fee” to reinforce the agency’s position that once the reimbursement for a drug is properly determined, the dispensing fee should reflect the pharmacist’s professional services and costs.  In addition, as states change their payment for ingredient costs, CMS also proposes to require states to reconsider the dispensing fee methodology consistent with the revised requirements.

Citing the problems associated with using average wholesale price as a benchmark for pharmacy reimbursement and the need for more accurate pricing, CMS proposes to replace EAC with a different reference price, termed “actual acquisition cost” (AAC). The proposed rule defines AAC as the actual prices paid by pharmacy providers to acquire drug products marketed or sold by manufacturers. In the rule, CMS acknowledges that states may not be able to determine the actual price of each individual drug, but notes that an average of actual acquisition costs from a sample of representative pharmacies would fit within the proposed definition of AAC.

The proposed rule sets FUL reimbursement at 175 percent of the weighted average of monthly AMPs in the aggregate. Although the ACA gave CMS the authority to calculate the FUL above 175 percent of the weighted average of AMPs, CMS stated that it believed that 175 percent of weighted AMP was “more than adequate” reimbursement to pharmacies.

CMS also considered whether to implement a smoothing process applicable to the FUL calculation. Although the agency noted that there is some variability in the FULs from one month to the next and examined various approaches for smoothing, CMS ultimately decided against proposing a specific methodology for smoothing, but invites comments on this issue.

¹Pub. L. No. 111-148 (2010).

²Pub. L. No. 111-152 (2010).

³Pub. L. No. 111-148 § 2503(a)(2)(B).

⁴Pub. L. No. 111-226 (2010).

⁵Pub. L. No. 111-148, § 2503(a)(4) (emphasis added).

⁶42 U.S.C. § 1396r-8(c)(2).

Contact Information

If you have any questions regarding this alert, please contact—