Attorneys Have Concerns With Final Medicaid Drug Rule

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By Bronwyn Mixter

Jan. 27 — Attorneys recently told Bloomberg BNA that they have some concerns with the final rule that makes changes to how the government pays for outpatient prescription drugs in the Medicaid program, including its extension of the Medicaid rebate program to U.S. territories.

Stephanie Trunk, an attorney with Arent Fox LLP in Washington, said the extension of the program to U.S. territories could face legal challenges by drug manufacturers. She also said another area of concern is the definition of single course innovator and non-innovator drugs in the final rule, which raises questions for manufacturers of generic drugs approved under new drug applications (NDAs).

Donna Lee Yesner, of Morgan Lewis & Bockius LLP in Washington, said more clarity is needed on the definition of line extensions, which refer to new formulations of a drug.

Meanwhile, a generic industry group praised the final rule, saying it would give patients access to more affordable medicines.

The Centers for Medicare & Medicaid Services released the final rule on outpatient drugs (CMS-2345-FC; RIN 0938-AQ41) Jan. 21. The rule is set for publication in the Federal Register Feb. 1. Even though it's a final rule, the agency is accepting comments for 60 days. States have until June 30, 2017, to submit a state plan amendment incorporating the rule that's effective retroactively no later than April 1, 2017 (14 HCDR, 1/22/16).

The CMS said the proposal, which would use the average manufacturer price (AMP) model, would implement provisions in the Affordable Care Act. The final rule also establishes a definition of AMP for so-called 5i drugs: inhalation, infusion, instilled, implanted or injectable drugs. The agency said these 5i drugs are not generally dispensed through a retail community pharmacy. By establishing the definition, states can collect rebates on “more expensive infused and injected drugs, which are an increasing expense to the Medicaid program,” a fact sheet on the rule said. 

Possible Legal Challenge

Trunk told Bloomberg BNA Jan. 26 that “overall CMS did a pretty good job of listening to the comments” on the proposed rule.

Trunk said one aspect of the final rule that may face a legal challenge from drug manufacturers is the extension of the Medicaid drug rebate program to U.S. territories (Puerto Rico, Virgin Islands, Guam, American Samoa and the Northern Mariana Islands). She said it isn't clear whether the CMS has the authority to do this and drug companies will be assessing the financial impact of this part of the rule before determining whether to challenge it.

Trunk said another area of concern in the final rule is the definition of single source innovator and non-innovator drugs.

According to the final rule, the CMS changed the definition of single source drugs and innovator multiple source drugs by including a reference to an original NDA. The final rule said the term “original NDA” is an NDA, other than an abbreviated new drug application (ANDA).

Trunk said there are generic drugs that were approved under an NDA before the ANDA process was created by the Hatch-Waxman Act.

Trunk said manufacturers with generic drugs approved under NDAs can apply to the CMS to justify their position. However, they will have to determine what information the CMS needs and “there is a question about what will happen if CMS disagrees with the company's interpretation.”

The CMS also didn't address the category of drugs that are dispensed through specialty pharmacies that aren't 5i drugs, Trunk said. These products may not have an AMP, she said.

Trunk said the CMS has indicated that it may issue more guidance for this group of drugs.

AMP Calculations

Yesner told Bloomberg BNA in a Jan. 26 e-mail that “much of what CMS did was fairly consistent with the literal way it has previously interpreted in the MDRP [Medicaid Drug Rebate Program] statute with some pragmatic exceptions.”

“For example, it yielded to concerns that manufacturers don't have good data to enable them to calculate AMP using CMS' preferred build up method and thus is allowing continuation of the presumed inclusion method using chargeback data,” Yesner said. “This will save manufacturers a lot of administrative cost.”

Yesner said the CMS “also compromised on the original NDA issue, allowing manufacturers of pre-Hatch Waxman drugs with paper NDAs to submit documentation to support classification as non-innovator drugs” and the CMS “is giving manufacturers an extra year to make adjustments in connection with the expansion of the program to the territories.”

“Most surprising to me is that [CMS] punted on the definition of line extension,” Yesner said. “Clarity here is really necessary for companies with new strengths that were proposed to be excluded and changes to the chemical such as a salt or ester by a different manufacturer that were proposed to be included.”

The CMS didn't make aspects of its proposed rule final in the area of line extensions. The agency said it's “still considering the comments received on the definition of line extension and has decided not to finalize that portion of the regulation.”

Positive Aspects of Rule

Yesner said positive aspects of the rule from an administrative perspective include:

• manufacturers are permitted to use the presumed inclusion method to calculate AMP and to determine the percentage of units wholesalers sell to retail community pharmacies for purposes of the 70-30 split;
• manufacturers are allowed to presume service fees are retained by the recipient in determining whether they are bona fide service fees (BFSFs), unless they have evidence to the contrary;
• manufacturers are allowed to exclude prices to 340B entities regardless of whether the sale is a 340B program sale; and
• specialty pharmacies are excluded from the definition of retail community pharmacy (RCP) if they dispense primarily through the mail.


Yesner also said using 70 percent instead of 90 percent as the standard for the 5i AMP, allowing manufacturers to smooth monthly units and averaging the three monthly AMPs to calculate quarterly AMP regardless of methodology “will help avoid significant fluctuation in methodology.”

“Also, even though CMS punted on the definition of line extension, it indicated that drugs would not be considered line extensions if sold by a different manufacturer than the manufacturer selling the original drug, which puts to rest concerns about competitors sharing information about prices,” Yesner said.

Yesner said another positive change “is that CMS made it clear that various manufacturer programs intended to reduce patient's out-of-pocket cost are excluded from both AMP and best price.”

“There are a number of programs that provide copay assistance but are not coupons, such as programs that use software to automatically reduce the patient cost share at the pharmacy,” Yesner said. “The proposed rule was confusing because it only excluded these if the drug was free to the patient, but the final rule excludes vouchers for free drugs and copay assistance which just reduce the patient share as long as the entire benefit goes to the patient, and also makes it clear that manufacturers can reimburse the pharmacy in cash or in kind.”

Drug Industry Comments

Christine Simmon, senior vice president of policy and strategic alliances at the Generic Pharmaceutical Association (GPhA), told Bloomberg BNA in a Jan. 27 e-mail that GPhA “is pleased that CMS, in issuing its final rule impacting Medicaid reimbursement for prescription drugs, chose to preserve the ‘presumed inclusion' method of calculation, consistent with agency precedent and the position shared by the vast majority of supply chain stakeholders and leading generic manufacturers.”

“This policy is a positive step that will help foster an environment conducive to patient access to more affordable medicines” Simmon said. “GPhA appreciates the agency's recognition that traditional generic medicines should not be subject to brand level rebates. While the proposed rule would have created significant strain on manufacturers of some classes of generics, the final rule recognizes the importance of a reimbursement framework that enhances taxpayer savings and ensures access to more affordable medicine for millions of Medicaid beneficiaries.”

In a Jan. 22 statement provided to Bloomberg BNA, the Pharmaceutical Research and Manufacturers of America (PhRMA) said it is in the process of reviewing the final rule.

“PhRMA, along with many other stakeholders, had concerns with many of the proposals in the 2012 proposed rule and hope that CMS took into account these concerns in finalizing the rule,” it said.

To contact the reporter on this story: Bronwyn Mixter in Washington at

To contact the editor responsible for this story: Janey Cohen at

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