This post was also written by Vicky G. Gormanly. 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, Bob Hill (202-414-9402 or, Vicky Gormanly (202-414-9277 or, 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.