In a recent report, “Medicaid Drug Pricing in State Maximum Allowable Cost Programs,” the OIG examines options for controlling state Medicaid prescription drug costs, particularly given a surge in Medicaid enrollment expected in the coming years as a result of the ACA. The OIG highlights the value of state Maximum Allowable Cost (MAC) programs as an alternative to federal upper limit (FUL) pricing, especially since CMS is years behind in implementing AMP-based federal upper limit (FUL) amounts under the ACA. The OIG found that aggregate pre-ACA FUL amounts were on average nearly double state MAC prices in January 2012, although the post-ACA FUL amounts (which have not been implemented) were lower than MAC prices on average. The OIG also notes that states could achieve additional cost savings by using more aggressive MAC pricing formulas and inclusion criteria, particularly along the lines of Wyoming’s program, which sets MAC prices by considering (1) acquisition cost plus a markup, (2) wholesale acquisition cost (WAC) minus a percentage, (3) average wholesale price (AWP) minus a percentage, or (4) AMP plus a markup. According to the OIG, 39 states would have saved $483 million (excluding dispensing fees) in the first half of 2011 if they had used Wyoming’s MAC criteria. The OIG recommends that CMS complete implementation of the post-ACA FUL amounts; CMS concurred and said it plans to finalize these FULs in the near future. CMS also concurred with OIG's recommendation to encourage states to reevaluate their Medicaid programs to identify additional cost saving opportunities, and noted its plans to release a related informational bulletin to the states in the near future.
CMS has posted the draft February 2013 FULs and Draft February 2013 Three-Month Rolling Average FULs. CMS will continue to accept comments on the draft average manufacturer price-based FULs and the draft three-month rolling average FULs, along with the methodologies used to calculate them.
Today, the Obama Administration released its proposed federal budget for fiscal year 2014. As widely reported, the budget incorporates an offer the President made to Congress in December 2012 to achieve nearly $1.8 trillion in additional deficit reduction over the next 10 years, including $401 billion in health savings (the Administration observes that this level of cuts would “provide more than enough deficit reduction to replace the damaging cuts required by the Joint Committee sequestration”).
Virtually all provider types – and drug manufacturers – would be impacted by the budget provisions, if adopted as proposed. The budget proposal is certainly subject to change during the legislative process, particularly as the House and Senate leadership pursue alternative budget frameworks, and indeed, gridlock could prevent significant action on entitlement reform this year. Nevertheless, the proposals bear careful monitoring because they could eventually be included in any long-elusive “grand bargain” to reform the Medicare program and reduce the federal debt.
Highlights of the Administration’s Medicare and Medicaid proposals include the following:
Medicare Provider Payments
- Reform the Medicare physician fee schedule/sustainable growth rate (SGR) formula to provide stable payments followed by payment linked to participation in an “accountable payment model.”
- Reduce Medicare coverage of bad debts from 65% generally to 25% over three years starting in 2014.
- Reduce Medicare indirect medical education add-on payments by $11 billion over 10 years.
- Reduce payment for post-acute care services in several ways.
- Reduce payment updates for inpatient rehabilitation facilities (IRFs), long-term care hospitals (LTCHs), skilled nursing facilities (SNFs), and home health agencies (HHAs) by 1.1 percentage points, beginning in 2014 through 2023 (the update could not fall below 0%). This provision would save $79 billion over 10 years.
- Adjust the standard for classifying a facility as an IRF (at least 75% of patient cases admitted to an IRF must meet one or more of 13 designated severity conditions), saving about $2.5 billion over 10 years.
- Equalize IRF and SNF payments for three conditions involving hips and knees, pulmonary conditions, as well as other conditions selected by the Secretary, saving $2.0 billion over 10 years.
- Reduce by up to 3% payments to SNFs with high rates of care-sensitive, preventable hospital readmissions, beginning in 2017, saving $2.2 billion over 10 years.
- Implement bundled payments for post-acute care providers (LTCHs, IRFs, SNFs, and HHAs) beginning in 2018. Payments would be bundled for at least half of the total payments for post-acute care providers. Rates based on patient characteristics and other factors would be set to produce a permanent and total cumulative adjustment of -2.85% by 2020. Beneficiary coinsurance would equal levels under current law. This provision would save $8.2 billion over 10 years.
- Align Medicare payments to rural providers with the cost of care, saving $2 billion over 10 years.
- Align Medicare payment for clinical laboratory services with private sector rates and encourage electronic reporting of laboratory results.
Prescription Drug Provisions
- Reduce payment for physician-administered Medicare Part B drugs from 106% of average sales price to 103% of average sales price. Manufacturers would be required to provide a specified rebate in certain instances as determined by the Secretary “to preserve access to care.”
- Provide Medicaid-level drug rebates for brand name and generic drugs provided to beneficiaries who receive Part D low-income subsidies, saving $123 billion over 10 years.
- Close the Medicare Part D donut hole by 2015, rather than 2020, by increasing manufacturer discounts to from 50% to 75% beginning in plan year 2015.
- Lower Medicaid drug costs by clarifying the definition of brand drugs, excluding authorized generic drugs from average manufacturer price calculations for determining manufacturer rebate obligations for brand drugs, making a technical correction to the Affordable Care Act (ACA) alternative rebate for new drug formulations, and calculating Medicaid federal upper limits based only on generic drug prices. These proposals are projected to save $8.8 billion over 10 years.
- Encourage the use of generic drugs by Part D low-income subsidy beneficiaries by modifying copayments, saving approximately $7 billion over 10 years.
- Improve program integrity for Medicaid drug coverage by directing states to track high prescribers and utilizers of Medicaid prescription drugs; requiring manufacturers to make full restitution to states for any covered drug improperly reported by the manufacturer on the Medicaid drug coverage list; allowing more regular audits and surveys of manufacturers to ensure compliance with Medicaid drug rebate agreement requirements; requiring drugs to be electronically listed with the FDA to receive Medicaid coverage; and expanding penalties for reporting false information for the calculation of Medicaid rebates.
- Increase the availability of generic drugs and biologics by authorizing the Federal Trade Commission to stop companies from entering into “pay for delay” agreements and modifying the length of exclusivity on brand name biologics.
Program Integrity/Efficiency Provisions
- Provide $640 million in combined mandatory and discretionary program integrity funding to implement activities that reduce payment error rates, prevent fraud and abuse, target high-risk services and supplies, and enhance civil and criminal enforcement for Medicare, Medicaid, and CHIP.
- Authorize civil monetary penalties or other intermediate sanctions for providers who do not update enrollment records and permit exclusion of individuals affiliated with entities sanctioned for fraudulent or other prohibited actions from federal health care programs.
- Expand authority to investigate and prosecute allegations of abuse or neglect of Medicaid beneficiaries in additional health care settings.
- Exclude radiation therapy, therapy services, and advanced imaging from the in-office ancillary services exception to the prohibition against physician self-referrals (Stark law), except in cases where a practice meets certain accountability standards, as defined by the Secretary.
- Require prior authorization of advance imaging services.
- Require prepayment review or prior authorization for power mobility devices.
- Allow the Secretary to create a system to validate practitioners’ orders for certain high-risk items and services.
Other Medicare Provisions
- Revise beneficiary cost-sharing requirements, including increased income-related premiums under Parts B and D, a new home health copayment, and increased premiums for beneficiaries with Medigap policies with particularly low cost-sharing requirements.
- Increase the minimum Medicare Advantage (MA) coding intensity adjustment (which decreases MA plan payments to reflect differences in coding practices between Medicare fee-for-service and MA) and align employer group waiver plan payments with MA bids, saving $19 billion over 10 years.
- Strengthen the Independent Payment Advisory Board (IPAB) by reducing the target rate of Medicare cost growth from gross domestic product plus one percentage point to plus 0.5 percentage point.
- Expand the availability of Medicare data released to physicians and other providers for performance improvement, fraud prevention, value-added analysis, and other purposes.
- Base Medicaid rates for durable medical equipment on Medicare rates to save $4.5 billion over 10 years.
- Align Medicaid Disproportionate Share Hospital (DSH) payments with expected levels of uncompensated care to save $3.6 billion over 10 years.
- Affirm Medicaid’s position as a payer of last resort when another entity is legally liable to pay claims.
A 131-page Department of Health and Human Services (HHS) “Budget in Brief” summary discusses these provisions in greater detail, and also addresses other HHS agency budget proposals and discusses HHS’s implementation of private health insurance protections and programs under the ACA.
CMS has posted the September 2012 draft average manufacturer price (AMP)-based Medicaid federal upper limit (FUL) files, along with updated three-month rolling average FUL file consisting of the weighted average of the current and two previous monthly draft AMP-based FULs. CMS continues to accept comments on the monthly and three-month rolling average draft AMP-based FULs and the methodologies used to calculate them.
CMS Medicaid Drug Pricing Webinar: Draft Federal Upper Limits and Draft Survey of Retail Prices (Dec. 5)
On December 5, 2012, CMS is hosting a webinar on various Medicaid drug pricing issues. The webinar will cover the CMS draft three-month rolling average FUL file; draft National Average Drug Acquisition Cost (NADAC) file; draft National Average Retail Price (NARP) file; and draft Monthly New Drug Report. A taping of the event and slides will be available for one week after the webinar. (This webinar originally was scheduled for Nov. 15).
The OIG has issued a report on Medicaid pharmacy reimbursement that compares FUL amounts based on published prices to FUL amounts based on AMP and pharmacy acquisition costs. According to the OIG, FUL amounts based on published prices (from the fourth-quarter 2011 Redbook file) were more than four times greater than sampled pharmacy acquisition costs. Moreover, FUL amounts based on AMPs were 61 percent lower than FUL amounts based on published prices, at the median, but still exceeded sampled pharmacy acquisition costs by 43 percent in the aggregate. Notably, however, the study was subject to a number of limitations, including use of AMP-based FULs that have not been published by CMS (data for November 2010 was used, whereas CMS began releasing draft FULs in September 2011). While CMS has been issuing draft AMP-based FUL amounts for review and comment, the OIG recommends that CMS complete implementation of AMP-based FUL amounts, in conformance with the ACA. CMS concurred, and stated that it plans to implement FUL amounts based on AMPs “in the near future.”
CMS has posted the August 2012 draft average manufacturer price (AMP)-based Medicaid federal upper limit (FUL) files, along with updated three-month rolling average FUL file consisting of the weighted average of the current and two previous monthly draft AMP-based FULs. CMS continues to accept comments on the monthly and three-month rolling average draft AMP-based FULs and the methodologies used to calculate them.
On October 5, 2012, CMS released a number of draft Medicaid drug pricing files and related documents for review and comment. Among other things, CMS has posted the June 2012 and July 2012 draft average manufacturer price (AMP)-based Medicaid federal upper limit (FUL) files. Based on comments that month-to-month fluctuations in the AMP-based FULs “may create problems for pharmacies because they will be unable to predict resulting state reimbursement rates,” CMS has developed a draft three-month rolling average FUL file consisting of the weighted average of the current and two previous monthly draft AMP-based FULs. CMS is posting these draft files, and the draft methodology used to calculate the draft three-month rolling average FUL, for review and comment only. While CMS expects three-month rolling average FULs to fluctuate less than monthly FULs, CMS observes that “the draft three-month rolling average FULs incorporates pricing data older than the current monthly pricing that may be less reflective of pharmacies’ current purchase prices.” CMS is accepting comments on the monthly and three-month rolling average draft AMP-based FULs and the methodologies used to calculate them.
CMS also released for comment draft National Average Retail Price (NARP) data, which reflects prices paid for drugs to retail community pharmacies for individuals with Medicaid, cash paying customers, and those with certain third party insurance. CMS expects the reference pricing to assist states in comparing their current pricing policies to that reflected in the draft NARP. In addition, CMS has posted for comment draft National Average Drug Acquisition Cost (NADAC) data, which is based on a voluntary survey of pharmacy invoices, and a draft Monthly New Drug Report that shows newly marketed single source drugs that are currently generally available through wholesalers. CMS states that after it considers comments on all of these files (a comment deadline is not specified), the agency plans to release these data files in final form, with updated files posted on at least a monthly basis. States can use the monthly AMP-based FUL, or the three-month rolling average FUL, once finalized, to develop a pharmacy reimbursement methodology that will allow their pharmacy payments to remain within the FUL in the aggregate. CMS points out that any state that wants to change its pharmacy reimbursement methodology must submit a state plan amendment to CMS for review and approval.
CMS has posted updated draft Medicaid drug federal upper limit (FUL) files, reflecting May 2012 average manufacturer price data. CMS invites comments on the draft FUL files, but a comment deadline is not specified.
CMS has posted updated draft Medicaid drug federal upper limit (FUL) files, reflecting April 2012 average manufacturer price (AMP) data. CMS continues to invite comments on the draft FUL files; a comment deadline is not specified.
CMS has posted updated draft Medicaid drug federal upper limit (FUL) files, reflecting March 2012 average manufacturer price (AMP) data. CMS continues to invite comments on the draft FUL files.
On May 8, 2012 CMS posted the latest draft Medicaid drug federal upper limit (FUL) files (relating to February 2012 AMP data). CMS continues to invite comments on the draft FUL files (note that the formal comment period on CMS’s February 2, 2012 proposed rule implementing ACA Medicaid drug payment provisions has closed).
CMS has posted the December 2011 and January 2012 draft Medicaid drug federal upper limit (FUL) files. Comments are invited but a comment deadline is not specified. This informal comment opportunity is separate from the formal comment period associated with CMS’s February 2, 2012 proposed rule implementing ACA provisions relating to Medicaid drug payment policy; comments on the proposed rule are due April 2, 2012.
CMS has posted the November 2011 draft Medicaid drug federal upper payment limit files. CMS continues to invite comments on the draft FUL files, although a comment deadline is not specified. Note that this feedback opportunity is separate from the formal comment period associated with CMS’s February 2, 2012 proposed rule implementing ACA provisions relating to pharmaceutical manufacturer payment of Medicaid rebates on covered outpatient drugs and limits on Medicaid reimbursement to pharmacies. Comments on the proposed rule are due April 2, 2012.
CMS Releases Long-Awaited Proposed Rule to Implement ACA Medicaid Manufacturer Rebate and Pharmacy Reimbursement Provisions
On Friday, January 27, 2012, the Centers for Medicare & Medicaid Services (“CMS”) released its long-awaited proposed rule to implement the provisions of the Affordable Care Act (“ACA”) relating to pharmaceutical manufacturer payment of Medicaid rebates and limits on Medicaid reimbursement to pharmacies. The proposed rule addresses a number of important policy issues relevant to pharmaceutical manufacturers, pharmacies, and other providers, and also would pose significant operational challenges for pharmaceutical manufacturers with respect to the Medicaid Drug Rebate Program (“MDRP”).
The official version of the proposed rule, titled “Medicaid Program; Covered Outpatient Drugs” (the “Proposed Rule”), will be published in the Federal Register on February 2, 2012. Comments on the Proposed Rule are due no later than 5:00 PM EST on April 2, 2012. Notably, the CMS Press Release indicates that CMS plans to issue a final rule in 2013.
We have identified below some of the key items addressed in the Proposed Rule, and we will be issuing a more detailed health care client bulletin in the near future.
MDRP Related Items
- “Build-up” – Manufacturers typically calculate average manufacturer price (“AMP”) by beginning with the universe of wholesaler sales, and then carving out the AMP-excluded sales, which the manufacturer identifies based on chargeback data. In the Proposed Rule, CMS noted that it considered proposing this so-called "presumed inclusion" policy, however ultimately decided against such a proposal and instead is proposing a “build up” approach where only specifically identified retail community pharmacy (“RCP”) sales may be included.
- RCP – CMS is proposing to include specialty pharmacies, home infusion pharmacies, and home health care providers to the definition of retail community pharmacy (“RCP”), as it believes such entities conduct business as wholesalers or RCPs which should be included in AMP. The agency did not propose to define specialty pharmacy, however.
- Baseline AMP Restatements – In light of the significant changes to AMP resulting from the ACA, CMS is proposing to allow manufacturers the option, on a product-by-product basis, to recalculate base AMP in accordance with the new regulatory definition, for a period of four calendar quarters following the publication of the final rule.
- Covered Outpatient Drugs – CMS appears to be suggesting that a product manufactured pursuant to a New Drug Application (“NDA”) automatically falls into the category of an “S” (single-source) or an “I” (innovator multiple source) drug. This appears to contrast with the agency’s historical positions, and may create “brand” rebate liability with respect to pre-1962 drugs which are subsequently approved through expedited procedures in response to FDA’s unapproved drug initiative, even where the products are not innovators in the traditional sense.
- 5-I Drugs – The statute calls for an alternative AMP calculation for inhaled, infused, instilled, implanted, or injected drugs that are not generally dispensed through a RCP. CMS is proposing to adopt a 90% standard for manufacturers’ determinations as to what constitutes “generally” dispensed through a RCP. Unlike the 90% policy related to non-federal average manufacturer price, CMS is proposing that manufacturers make a determination each month and quarter as to whether a drug meets the standard. Such a policy has the potential to raise concerns for manufacturers with respect to the additional rebate (also known as the “inflation penalty”) which is derived from a product’s base AMP.
- Line Extensions / New Formulations – The ACA established an alternative unit rebate amount calculation for line extensions of an S or I drug that is an oral solid dosage form. Although CMS’s discussion on this topic raises a number of new questions, some questions raised by the statutory language itself have been clarified. For example, CMS notes that both the initial and new drugs must be oral solid dosage forms, and also that a new strength does not constitute a new formulation.
- Bona Fide Service Fees (“BFSFs”) – CMS is retaining the traditional definition for BFSFs, while specifically referencing those types of fees described in the ACA. However, the agency expressed concern that certain fees may be “used as a vehicle to provide discounts”, and declined to define “fair market value”, noting that manufacturers should make appropriate reasonable assumptions in this regard.
- “Smoothing” – CMS is proposing that manufacturers be required to use a 12-month rolling percentage to estimate the value of lagged price concessions in their calculations of the monthly and quarterly AMPs.
- Geographic scope – CMS is proposing to add the territories (i.e. the Commonwealth of Puerto Rico, the Virgin Islands, Guam, the Northern Mariana Islands and American Samoa) to the definition of “States” and “United States” for purposes of rebate payments as well as price reporting.
The Proposed Rule also addresses a myriad of other MDRP related items not discussed above, e.g. authorized generics, nominal pricing, bundling, best price, pricing recalculations, penalties for non-compliance, 340B issues as they relate to the MDRP, etc.
State Pharmacy Reimbursement Related Issues
- Actual Acquisition Cost (“AAC”) – CMS is proposing to replace the defined term “estimated acquisition cost” (“EAC”) with AAC in the regulations governing maximum pharmacy reimbursement under State Medicaid programs. The agency is also proposing to replace the defined term “dispensing fee” with “professional dispensing fee”, and proposes to require states to reconsider their dispensing fee methodologies as they change their payment for ingredient cost. The provisions relating to AAC would provide that, when proposing changes to the ingredient cost reimbursement or professional dispensing fee reimbursement, "States must provide [to CMS] adequate data, including, but not limited to, a State or national survey of retail pharmacy providers or other reliable data which reflects the pharmacy's actual or average acquisition cost as a base to support any proposed change in ingredient cost reimbursement." CMS does not elaborate on what "adequate data" means with respect to the professional dispensing fee element. These provisions would govern Medicaid reimbursement for brand drugs—changes which were not mandated by the ACA.
- Federal Upper Limit (“FUL”) Provisions – CMS would establish the FULs governing reimbursement for most generic drugs based upon 175% of monthly AMPs, with no upward adjustment in any situation. According to the Proposed Rule, CMS believes that calculating FULs at weighted AMP times 175% represents “more than adequate reimbursement to the pharmacies.”
- Nationwide Availability – The statute requires that a drug product be “available on a nationwide basis” in order for an FUL to be established. Consistent with its previously released draft FUL methodology, CMS proposes to address this requirement only by disregarding the AMP of a national drug code (“NDC”) which has been terminated, and does not propose to incorporate any provisions to address the issue of drug shortages.
- FUL Smoothing – CMS considered but declined to propose a specific methodology to smooth the FULs. CMS noted that because AMPs are based on prices paid to manufacturers by wholesalers for drugs distributed to RCPs and by RCPs that purchase drugs directly from the manufacturer, they are subject to fluctuations and variances in the generic drug market, which likewise may result in fluctuations in the AMP-based FUL from month to month. CMS asserts that such changes may exist even if a smoothing process is implemented.
Notably, CMS did not provide any information as to when the AMP-based FULs would be effective. CMS noted that four draft FUL files as well as comments and responses had been posted, yet the agency failed to address most of the important issues that have been raised in publicly available comments submitted to the agency regarding the draft FUL methodology and files.
A number of other items not noted above were also discussed in the Proposed Rule, such as the federal offset of rebates for states, and rebates and utilization relating to Medicaid managed care organizations.
CMS invites comments on many of the issues discussed above. Reed Smith is in the process of conducting a full review of the Proposed Rule and will release shortly a client bulletin providing a detailed analysis of the proposal. In the meantime, please contact Joe Metro (202-414-9284 or firstname.lastname@example.org), Bob Hill (202-414-9402 or email@example.com), Vicky Gormanly (202-414-9277 or firstname.lastname@example.org), or any other member of the Reed Smith Health Care Group with whom you work, if you would like additional information or if you have any questions.