[Federal Register Volume 60, Number 181 (Tuesday, September 19, 1995)]
[Proposed Rules]
[Pages 48442-48490]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-22860]



=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Parts 441 and 447

[MB-046-P]
RIN 0938-AF42


Medicaid Program; Payment for Covered Outpatient Drugs Under Drug 
Rebate Agreements With Manufacturers

AGENCY: Health Care Financing Administration (HCFA), HHS.

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: This proposed rule would specify requirements for State 
Medicaid agencies and conditions under which Federal payments would be 
made under Medicaid for covered outpatient prescription drugs. The rule 
would also specify the conditions for approval and renewal of rebate 
agreements with drug manufacturers participating in the Medicaid 
program.
    The proposed rule would interpret sections 1902(a)(54), 
1903(i)(10), and 1927 of the Social Security Act, as added by section 
4401 of the Omnibus Budget Reconciliation Act of 1990, and amended by 
section 13602 of the Omnibus Budget Reconciliation Act of 1993, and 
section 601(b) of the Veterans Health Care Act of 1992. We consider 
this rule necessary to adequately implement the provisions of section 
1927 of the Act.

DATES: Written comments will be considered if we receive them at the 
appropriate address, as provided in the ``Addresses'' section below, no 
later than 5:00 p.m. on November 20, 1995.

ADDRESSES: Mail written comments (an original and 3 copies) to the 
following address: Health Care Financing Administration, Department of 
Health and Human Services, Attention: MB-046-P, P.O. Box 7518, 
Baltimore, MD 21207-0518.
    If you prefer, you may deliver your written comments (an original 
and 3 copies) to one of the following addresses: Room 309-G, Hubert H. 
Humphrey Building, 200 Independence Avenue, SW., Washington, D.C., or 
C5-09-26, 7500 Security Boulevard, Baltimore, Maryland 21244-1850.
    Due to staffing and resource limitations, we cannot accept comments 
by facsimile (FAX) transmission. In commenting, please refer to file 
code MB-046-P. Written comments received timely will be available for 
public inspection as they are received, beginning approximately 3 weeks 
after publication of this document, in room 309-G of the Department's 
offices at 200 Independence Ave., SW., Washington, D.C., on Monday 
through Friday of each week from 8:30 a.m. to 5:00 p.m. (telephone: 
(202) 690-7890).
    If you wish to submit comments on the information collection 
requirements contained in this rule, you may submit written comments 
to: Office of Information and Regulatory Affairs, Attention: Laura 
Oliven, Office of Management and Budget, Room 3002, New Executive 
Office Building, Washington, D.C. 20503.

FOR FURTHER INFORMATION CONTACT: Estelle Chisholm, (410) 786-3286.

SUPPLEMENTARY INFORMATION:

I. Background

A. Overview of the Drug Rebate Provisions

    Under section 1927 of the Social Security Act (the Act), 
manufacturers that have entered into a national rebate agreement must 
provide each State Medicaid program with rebate period payments (or 
other periodic rebate payments, as determined by the Secretary). The 
rebate must be calculated in accordance with sections 1927(b) and (c) 
of the Act, using manufacturing pricing data and State drug utilization 
information as outlined in the statute.
    The requirements concerning rebate agreements apply to drugs 
dispensed and paid for under Medicaid on or after January 1, 1991. For 
manufacturers who entered into rebate agreements before March 1, 1991, 
section 1927(a)(1) of the Act provided for Federal financial 
participation (FFP) retroactively calculated as if the agreement had 
been entered into on January 1, 1991. For agreements that are entered 
into on or after March 1, 1991, Medicaid coverage and FFP begin, as 
specified in section 1927(a)(1), the first day of the rebate period 
that begins more than 60 days after the date the agreement is entered 
into. We are interpreting the term ``entered into'' to mean the date 
the agreement is postmarked by the U.S. Postal Service or other common 
mail carrier. We will not consider the date stamped by a postage meter 
to be a postmark.
    Although the statute provides specific deadlines for manufacturers 
to sign rebate agreements, section 1927(a)(3) of the Act provides, in 
part, for payment of drugs not covered under rebate agreements if the 
Secretary determines that in the first calendar quarter of 1991 there 
were extenuating circumstances. Therefore, in light of the deadlines 
imposed by the statute for signing the agreement, and in accordance 
with the extenuating circumstances clause in section 1927(a)(3) of the 
Act, HCFA extended through April 30, 1991, the deadline for 
manufacturers to enter into Medicaid rebate agreements that are 
retroactive to January 1, 1991. Therefore, rebate agreements entered 
into on or after May 1, 1991, are effective on the first day of the 
calendar quarter that begins more than 60 days after the date the 
agreement is entered into.
    The statute does not specify whether the drug provisions are 
applicable in areas other than the 50 States and the District of 
Columbia. However, in the 

[[Page 48443]]
legislative history, the Congress specifically noted that the drug 
rebate provisions ``[r]equire drug manufacturers to comply with the 
rebate requirements in all States and the District of Columbia.'' (H. 
R. Conf. Rep. 964, 101st Cong., 2d Sess. 822 (1990).) Therefore, in 
accordance with our understanding of Congressional intent, we are 
applying the drug rebate requirements only to the 50 States and the 
District of Columbia.
    Section 1115 of the Act contains provisions for State demonstration 
projects that are likely to assist in promoting the objectives of 
certain Federal programs, including the Medicaid program. Specifically, 
under the authority of section 1115(a)(1), the Secretary may waive 
compliance with the requirements of section 1902 of the Act for any 
State that is operating an experimental, pilot or demonstration 
project. Under section 1115(a)(2), the Secretary may also make payments 
notwithstanding restrictions under section 1903. In accordance with 
these provisions, a State operating under a section 1115(a) 
demonstration project waiver may have the requirements of section 
1902(a)(54) of the Act, concerning compliance with applicable 
requirements of section 1927, waived. In addition to the extent that 
section 1927 requirements act as conditions under section 1903 for 
Federal matching funds to such a State, these conditions may be 
excused.
    We note that section 1115(a) does not provide authority to waive or 
excuse requirements applicable to States other than the waiver State. 
Thus, there is no authority to waive inclusion of manufacturer sales 
within a waiver State from the calculation of best price or average 
manufacturer price applicable to other States.
    Section 1927(j) of the Act specifies that the provisions of the 
drug rebate program do not apply to covered outpatient drugs dispensed 
by (1) health maintenance organizations (HMOs), including those 
organizations that contract to provide services to Medicaid recipients 
under section 1903(m) of the Act; and (2) hospitals that dispense 
covered outpatient drugs using drug formulary systems and bill the 
Medicaid program no more than the hospitals' purchasing costs for these 
drugs as determined under the State plan. Even though HMOs and certain 
hospitals are exempt from the requirements of the rebate program, 
section 1927(j) specifically states that its provisions should not be 
construed as providing that the amounts paid by these organizations 
should be excluded from the best price calculations. (Section V.B.2.a. 
of this preamble contains a discussion on best price.)
    On February 15, 1991, we made available to drug manufacturers a 
national rebate agreement developed in response to section 1927 of the 
Act. Prior to that date, we held extensive discussions with 
representatives from States and drug manufacturers. These parties 
reviewed and commented on the proposed language of the national rebate 
agreement. We also provided information to the public regarding the 
national drug rebate agreement through a notice with comment period in 
the Federal Register on February 21, 1991 (56 FR 7049). The February 
1991 notice reprinted the text of the national drug rebate agreement. 
We received a number of timely public comments in response to this 
notice.
    A detailed discussion of the public comments and the Department's 
responses appear under section X. of this preamble. We have given these 
public comments full consideration and have incorporated certain 
provisions in this proposed rule based on that consideration. We are 
not amending the national rebate agreement at this time. We will amend 
the national rebate agreement in the future, as necessary, to conform 
the agreement with the regulations and to take into consideration 
public comments received on the February 21, 1991, notice that are not 
addressed in this rule and public comments that we receive on this 
proposed rule.
    This proposed rule would interpret in regulations the amendments 
made by section 4401 of the Omnibus Budget Reconciliation Act of 1990 
(OBRA '90), Public Law 101-508, enacted on November 5, 1990; section 
601(b)(1) of the Veterans Health Care Act of 1992 (VHCA), Public Law 
102-585, enacted on November 4, 1992; and section 13602 of the Omnibus 
Budget Reconciliation Act of 1993 (OBRA '93), Public Law 103-66, 
enacted on August 10, 1993, as discussed below.

B. Changes Made by the Omnibus Budget Reconciliation Act of 1990

    Under the Medicaid program, States may provide coverage of 
prescription drugs as an optional service under section 1905(a)(12) of 
the Act. Section 1903(a) of the Act provides for FFP in State 
expenditures for these drugs.
    Section 4401 of OBRA '90 added a Medicaid State plan requirement 
under section 1902(a)(54) of the Act to provide that: (1) if a State 
elects to cover outpatient prescription drugs, the State plan must 
provide that any formulary or similar restriction, except as provided 
in section 1927(d) of the Act, shall permit coverage of covered 
outpatient drugs of any manufacturer that enters into and complies with 
a rebate agreement under section 1927 of the Act, if the drugs are 
prescribed for a medically accepted indication; and (2) the State must 
comply with certain reporting and other coverage requirements specified 
in section 1927 of the Act.
    Section 4401 of OBRA '90 also redesignated the existing section 
1927 of the Act as section 1928 and added a new section 1927. New 
section 1927 provides that for payment to be made under section 1903 of 
the Act for covered outpatient drugs, the manufacturer must enter into 
and have in effect a rebate agreement with the Secretary of the 
Department of Health and Human Services (HHS) on behalf of the States 
(except that the Secretary may authorize a State to enter directly into 
agreements with manufacturers). (Section I.D. of this preamble contains 
a description of changes to sections 1902(a)(54) and 1927 made by 
section 13602 of the OBRA '93.)
    Section 1927 of the Act specifies the requirements for the rebate 
agreements with manufacturers of covered outpatient drugs, the terms 
and length of the agreement, the requirements for States to provide 
State Medicaid drug utilization information to HCFA and the 
manufacturers, the requirements for manufacturers to provide pricing 
information to HCFA, the formulas to be used to determine the amount of 
the drug rebate, and the limitations on coverage of drugs. Section 1927 
of the Act also contains provisions on termination procedures for 
agreements, and the imposition of civil money penalties on 
manufacturers that fail to comply with the requirements concerning 
pricing data submissions.
    Section 4401 of OBRA '90 also amended section 1903(i) of the Act by 
adding a new paragraph (10) to provide for the denial of FFP in 
expenditures for covered outpatient drugs of a manufacturer dispensed 
in any State if, except as specified in section 1927(a) of the Act 
(whereby the Secretary may authorize a State to enter directly into 
agreements with a manufacturer), the manufacturer does not comply with 
the rebate requirements specified in section 1927; and, effective 
January 1, 1993, if the State does not provide for drug use review in 
accordance with section 1927(g) of the Act. (Section I.D. of this 
preamble contains a description of changes to section 1903(i)(10) made 
by section 13602 of OBRA '93.) 

[[Page 48444]]


C. Changes Made by the Veterans Health Care Act of 1992

    The VHCA amended section 1927 of the Social Security Act in several 
areas. This proposed regulation reflects the self-implementing 
amendments required under VHCA.
    One major change required by VHCA affects the conditions that 
manufacturers must meet so that payment can be made under Medicaid for 
a manufacturer's covered outpatient drugs. Section 601(b)(1) of VHCA 
amended section 1927(a)(1) of the Act to provide that a manufacturer 
must meet the requirements of section 1927(a)(5) (with respect to drugs 
purchased by a covered entity on or after December 1, 1992) and section 
1927(a)(6) of the Act (with respect to drugs purchased by the 
Department of Veterans Affairs (DVA) and certain other Federal 
agencies).
    A manufacturer meets the requirements of section 1927(a)(5)(A) of 
the Act if it has entered into an agreement with the Secretary that 
meets the requirements of section 340B of the Public Health Service 
(PHS) Act with respect to covered outpatient drugs purchased by a 
covered entity on or after December 1, 1992. The term ``covered 
entity'' means an entity described in section 340B(a) of the PHS Act. 
In general, VHCA amended section 1927 of the Act to require that drug 
manufacturers enter into pharmaceutical pricing agreements with the PHS 
and offer discounts on covered outpatient drugs to PHS covered entities 
that are at least as great as the rebates (both basic and additional 
rebates) received by State Medicaid agencies.
    A manufacturer meets the requirements of section 1927(a)(6) of the 
Act if it complies with the provisions of section 8126 of title 38 of 
the United States Code, including the requirement of entering into a 
master agreement with the Secretary of the DVA under such section. In 
general, effective January 1, 1993, a manufacturer must enter into a 
pharmaceutical pricing agreement (master agreement) with the DVA for 
all single source drugs, innovator multiple source drugs, biologicals, 
and insulin. Generally, beginning January 1, 1993, the prices that 
manufacturers charge Federal agencies listed in the master agreement 
may not exceed the annual Federal ceiling prices specified for such 
drugs.
    In accordance with these amendments to section 1927(a) of the Act, 
a manufacturer must enter into a pharmaceutical pricing agreement with 
the PHS and, if necessary, the DVA in order for a manufacturer's drugs 
to be paid for under Medicaid. Manufacturers that do not enter into and 
comply with these agreements are subject to termination of the Medicaid 
national rebate agreement.
    Section 1927(b)(4)(B)(ii) of the Act specifies that a manufacturer 
may terminate its rebate agreement for any reason. Section 601(b)(4) of 
VHCA amended section 1927(b)(4)(B) of the Act to provide that any such 
termination not be effective until the rebate period beginning at least 
60 days after the date the manufacturer provided notice to the 
Secretary. Section 601(b)(4) of VHCA also added section 
1927(b)(4)(B)(iv) of the Act, which provided that, in the case of a 
termination of a manufacturer, the Secretary will provide notice of the 
termination to the State not less than 30 days before the effective 
date of the termination.

D. Changes made by the Omnibus Budget Reconciliation Act of 1993

    Section 13602 of OBRA '93 modified the Medicaid drug rebate program 
by amending sections 1902(a)(54), 1903(i)(10), and 1927 of the Act.
    This section of the preamble contains a discussion of the 
amendments to the sections of the Act and how they differ from the 
original language under OBRA '90. Where applicable, effective dates are 
noted in the discussion.
    Sections 13602(d)(1) and (2) of OBRA '93 specify two different 
effective dates of the OBRA '93 amendments. Section 13602(d)(1) 
provides that, except for changes made to sections 1902(a)(54) and 
1927(d) of the Act, the OBRA '93 amendments are effective as if 
included in the enactment of OBRA '90. Under section 13602(d)(2) of 
OBRA '93, amendments to sections 1902(a)(54) and 1927(d) of the Act are 
effective with rebate periods (calendar quarters) beginning on or after 
October 1, 1993, without regard to whether or not regulations to carry 
out these amendments have been published by that date.
1. Payment for Covered Outpatient Drugs
    Section 13602(b) of OBRA '93 amended section 1903(i)(10) of the Act 
to provide that FFP for covered outpatient drugs will be denied (l) 
unless there is a rebate agreement in effect under section 1927 for 
covered outpatient drugs or unless the drug is rated 1-A by the Food 
and Drug Administration, and (2) with respect to any amount expended 
for innovator multiple source drugs dispensed on or after July 1, 1991, 
if, under applicable State law, a less expensive multiple source drug 
could have been dispensed, but only to the extent that such amount 
exceeds the upper payment limit for such multiple source drug.
    OBRA '93 amended section 1903(i)(10) of the Act to remove from this 
section the requirement for States to provide for drug use review as a 
condition to receive FFP. (A drug use review is still required under 
section 1927(g).) Former section 1927(e) of the Act, with respect to 
multiple source drugs, has also been added to section 1903(i)(10) and 
modified. This section now requires only that any amount above the 
upper payment limit be disallowed for an innovator multiple source drug 
if, under applicable State law, a less expensive multiple source drug 
could have been dispensed. As is the case with our current policy, this 
provision only applies to drugs subject to the Federal upper limits 
payment.
2. Formulary Provisions and Permissible Restrictions
    Section 13602(c) of OBRA '93 amended section 1902(a)(54) of the Act 
to delete the reference that prohibits a State from maintaining a 
restrictive formulary. Section 1927(d)(1)(B)(iv) provides that a State 
may exclude a covered outpatient drug if the State has excluded 
coverage from its formulary in accordance with section 1927(d)(4). 
Section 13602(a)(1) of OBRA '93 added section 1927(d)(4) which provides 
that States may establish a formulary if the formulary meets the 
requirements specified in that section, as discussed below. States may 
continue to exclude or restrict drugs or classes of drugs specified in 
section 1927(d)(2). Previously, any State formulary or similar 
restriction must have permitted coverage, for all medically accepted 
indications, of a participating manufacturer's drugs except for those 
drugs or classes of drugs specified in the list of permissible 
restrictions in section 1927(d)(2).
    a. Formulary Requirements. Section 13602(a)(1) of OBRA '93 added 
section 1927(d)(4) which provides that States may establish a formulary 
if it meets certain requirements, effective October 1, 1993. The 
formulary must:
    (i) Be developed by an appropriate Governor-appointed committee 
consisting of physicians, pharmacists, and other appropriate 
individuals, or, at State option, the State drug use review board;
    (ii) Except as specified in item (iii), include covered outpatient 
drugs, other than those drugs excluded from coverage or restricted 
under section 1927(d)(2), of manufacturers which have entered into and 
comply with the Medicaid drug rebate agreement; 

[[Page 48445]]

    (iii) Exclude only those drugs (with respect to the treatment of a 
specific disease or condition for an identified population) where the 
drug's labeling or its medically acceptable indication (based on 
appropriate compendia) does not have a significant, clinically 
meaningful therapeutic advantage, in terms of safety, effectiveness, or 
clinical outcome, over other drugs included in the formulary;
    (iv) Have available to the public, a written explanation of the 
reasons for excluding drugs under item (iii); and
    (v) Permit coverage of drugs that are excluded under item (iii) 
from the State's drug formulary (other than those drugs excluded from 
coverage in accordance with section 1927(d)(2)) and subject them to 
prior authorization consistent with the requirements in section 
1927(d)(5).
    This proposed rule does not address any further requirements that a 
formulary must meet. If we determine later that additional requirements 
should be imposed on States with regard to formularies, we will address 
them in a separate notice of proposed rulemaking.
    b. List of Drugs Subject to Restriction. Section 1927(d)(1)(B) of 
the Act permits States to exclude or restrict drugs contained in the 
list of permissible restrictions in section 1927(d)(2) of the Act. 
Prior to OBRA '93, section 1927(d)(2) contained a paragraph (I) which 
meant that States could exclude or restrict drugs described in section 
107(c)(3) of the Drug Amendments of 1962 (``DESI'' drugs) and those 
identical, similar, or related drugs (IRS drugs). OBRA '93 amended 
section 1927(d)(2) to eliminate paragraph (I). However, the removal of 
coverage restrictions from section 1927(d)(1)(B) does not mean that 
coverage is necessarily required in light of existing funding 
restrictions under section 1903(i)(5) and restrictions in the 
definition of a covered outpatient drug.
    Thus, effective with rebate periods beginning on or after October 
1, 1993, States cannot exclude or restrict these DESI/IRS drugs. This 
includes DESI/IRS drugs approved prior to 1962 that have not yet been 
approved under or subject to the DESI review process. If these drugs 
otherwise meet the criteria of a covered outpatient drug and are not 
subject to funding restrictions under section 1903 (i)(5) of the Act, 
States must provide coverage of these drugs and manufacturers must pay 
rebates on these drugs if they are dispensed and paid for by the State.
3. Terms of the Rebate Agreement
    a. Periodic Rebates. Section 13602(a)(2)(A) of OBRA '93 amended 
sections 1927(b)(1)(A) and (b)(2)(A) of the Act and made technical 
changes to the original language under OBRA '90 as follows:
     The period of time used to calculate rebates was 
previously referenced as ``calendar quarter.'' OBRA '93 changed this 
term of reference to ``rebate period.'' However, this change does not 
alter the quarterly rebate period as previously established.
     OBRA '93 clarified the language in section 1927(b)(1)(A). 
This clarification supports the policy in the national rebate agreement 
that manufacturers will be responsible for rebates calculated for drugs 
dispensed after December 31, 1990 for which payment was made under the 
State Medicaid plan during a rebate period. Since the beginning of the 
Medicaid rebate program, Medicaid utilization data and rebates have 
been based on the date the State paid for the drug and not the date it 
was dispensed.
    b. State Provision of Information. Section 13602(a)(2)(A)(ii) of 
OBRA '93 amended section 1927(b)(2)(A) of the Act to specify that 
States must report information to each manufacturer on the total number 
of units of each dosage form and strength and package size of each 
covered outpatient drug dispensed and paid for by the State. This 
change clarifies the language in section 1927(b)(2)(A), and supports 
the standard reporting format established by the Secretary and approved 
by the Office of Management and Budget that States must report drug 
utilization data to manufacturers using an 11-digit National Drug Code 
(NDC) number for each drug. Previously, section 1927(b)(2)(A) of the 
Act did not specify that States must report information on the package 
size, which represents the last two digits of the 11-digit NDC code.
4. Amount of Rebate
    a. Revisions to Definition of Best Price. Section 13602(a)(1) of 
OBRA '93 amended section 1927(c)(1)(C) of the Act to ratify our 
interpretation that the definition of ``best price'' includes those 
prices available to providers and health maintenance organizations 
(HMOs). This interpretation of the definition of best price has been in 
effect since OBRA '90. Manufacturers must include in their best price 
calculation, for a single source or innovator multiple source drug, the 
lowest price available from the manufacturers during the rebate period 
to any wholesaler, retailer, provider, health maintenance organization, 
nonprofit entity, or governmental entity within the United States 
except for those entities specifically excluded by statute.
    Section 13602(a)(1) of OBRA '93 also amended section 1927 of the 
Act to clarify the term ``free good'' to specify which free goods must 
be included in the best price calculation. Section 1927(c)(1)(C)(ii)(I) 
of the Act specifies that best price must include free goods that are 
contingent on any purchase requirement. Thus, only those free goods 
that are not contingent on any purchase requirements may be excluded 
from best price.
5. Additional Rebate for Single Source and Innovator Multiple Source 
Drugs
    Section 13602(a)(1) of OBRA '93 amended section 1927(c)(2) of the 
Act regarding how additional rebates for single source and innovator 
multiple source drugs are calculated if the increase in the average 
manufacturer price (AMP) of the drug exceeds the increase in the 
Consumer Price Index-Urban (CPI-U). OBRA '93 deleted the requirement 
that effective January 1, 1994, additional rebates would be calculated 
using a weighted average manufacturer price (WAMP). Amended section 
1927(c)(2) provides that additional rebates for single source and 
innovator multiple source drugs will continue to be calculated on a 
drug-by-drug basis, that is, the method in effect since January 1, 
1991.
    The additional rebate calculation utilizes the drug's ``base date 
AMP'' (the AMP of the drug when it was first marketed) and the ``base 
CPI-U'' (the CPI-U in effect when the drug was first marketed). Section 
1927(c)(2) of the Act further clarifies ``base date AMP'' and ``base 
CPI-U'' for the calculation of the additional rebates as follows:
    a. For Drugs Approved on or Before October 1, 1990. Base Date AMP--
For drugs approved by the FDA on or before October 1, 1990, the base 
date AMP means the AMP for the calendar quarter beginning July 1, 1990. 
This base date AMP remains the same as the definition in the national 
rebate agreement. Consequently, the base date AMP remains the AMP 
reported for the July - September 1990 calendar quarter. OBRA '93 
clarified our interpretations of section 1927(c)(2)(A)(ii) of the Act 
previously contained in language in the rebate agreement and in 
operating instructions provided to manufacturers, and, thus, there is 
no change in methodology. Therefore, the base date AMP is the AMP for 
the calendar quarter beginning July 1, 1990, without regard to whether 
or not the drug has been sold or transferred to an entity, 

[[Page 48446]]
including a division or subsidiary of the manufacturer, after the first 
day of such calendar quarter.
    Base CPI-U--The base CPI-U used for calculating the additional 
rebate amounts for drugs approved by the FDA before October 1, 1990 is 
also unchanged, that is, the base CPI-U in effect for September 1990.
    b. For Drugs Approved After October 1, 1990. Base Date AMP--OBRA 
'93 changed the criteria for determining base date AMP for drugs 
approved by the FDA after October 1, 1990. However, as discussed in 
section VI.C. of this preamble, for rebate periods beginning on or 
after January 1, 1991 through September 30, 1993, the original policy 
in effect under OBRA '90 and explained in paragraph 5.a. of this 
section will continue to be used. That is, the base date AMP will 
continue to be the AMP for the first day of the first full month in 
which the drug was first marketed.
    In accordance with the amended language of section 1927(c)(2)(B) of 
the Act, effective for rebate periods beginning on or after October 1, 
1993 (as discussed in section VI.C. of this preamble), the AMP in 
effect for the first full rebate period after the day on which the drug 
was first marketed is the base date AMP and will be used to calculate 
the additional rebate.
    Thus, for drugs approved by the FDA after October 1, 1990, but 
before October 1, 1993, there is the potential for the same drug to 
have different base date AMPs, that is, one AMP for the January 1, 1991 
through September 30, 1993 period and one AMP for the period beginning 
October 1, 1993.
    OBRA '93 amended section 1927(c)(2)(A)(ii) of the Act to clarify 
that the base date AMP in effect for both of these periods is to be 
determined without regard to whether or not the drugs have been sold or 
transferred to an entity, including a division or subsidiary of the 
manufacturer, after the first day of such rebate period. Thus, a 
manufacturer's base date AMP (whether for drugs approved by FDA prior 
to or after October 1, 1990) is drug-specific and should follow the 
drug regardless of which manufacturer has current legal title.
    Base CIP-U--OBRA '93 also amended the criteria for determining the 
base CIP-U for drugs approved by the FDA after October 1, 1990. In 
accordance with the amended language of section 1927(c)(2)(A)(ii), 
effective for rebate periods beginning on or after October 1, 1993, the 
CIP-U for the month prior to the month of the first full rebate period 
on which the drug was first marketed is used to calculate the 
additional rebate as the base CIP-U.
    In accordance with section 1927(c)(2)(A)(ii)(II) of the Act, the 
base CIP-U is the CPI in effect for the month prior to the month of the 
first full rebate period after the day on which the drug was first 
marketed. This change will be effective for rebate periods beginning on 
or after October 1, 1993.
    For rebate periods beginning January 1, 1991 through September 30, 
1993, the original policy in effect under OBRA '90 will be used. That 
is, the base CIP-U continues to be the CIP-U for the month before the 
month in which the drug was first marketed.
6. Requirements of the Prior Authorization Program
    Except with respect to new drugs, OBRA '93 did not modify existing 
requirements on a State's ability to establish and maintain a program 
to subject drugs to prior authorization. The statute clarified in 
section 1927(d)(4) of the Act that a prior authorization program 
established by a State under section 1927(d)(5) is not a formulary 
subject to the requirements of section 1927(d)(4) (A) through (E).
7. Treatment of New Drugs
    OBRA '93 eliminated all special coverage requirements for new drugs 
by deleting the former section 1927(d)(6) and deleting a reference to 
new drugs in sections 1902(a)(54), 1927(d)(1)(A) and 1927(d)(3) of the 
Act. Former section 1927(d)(6) provided that States could not exclude 
from coverage, subject to prior authorization, or otherwise restrict 
any new biological or drug approved by the FDA for 6 months after FDA 
approval.
    Effective for rebate periods on or after October 1, 1993, States 
may exclude or restrict from coverage or prior authorize any new drugs 
approved by the FDA. New drugs approved by the FDA prior to October 1, 
1993 will only receive the unrestricted coverage specified in former 
section 1927(d)(6) of the Act through September 30, 1993. Beginning 
October 1, 1993 the unrestricted coverage no longer applies to these 
new drugs.
8. Treatment of Pharmacy Reimbursement
    a. Treatment of Pharmacy Reimbursement Limits. Section 13602(a)(1) 
of OBRA '93 redesignated section 1927(f) of the Act as section 1927(e), 
``Treatment of Pharmacy Reimbursement Limits''. This section continues 
to specify that for the moratorium period of January 1, 1991 through 
December 31, 1994, a State cannot reduce its reimbursement limits or 
dispensing fees for certain covered outpatient drugs below the limits 
in effect as of January 1, 1991. For this provision to apply, States 
must have been in compliance with Federal regulations at 42 CFR 447.331 
through 447.334.
    OBRA '93 amended section 1927(e)(2) of the Act to clarify that if a 
State is not in compliance with the regulations at 42 CFR 447.331 
through 447.334, the moratorium provisions do not apply to the State 
until it is in compliance with these regulations.
    b. Effect on State Maximum Allowable Cost Limitations. Section 
13602(a)(1) of OBRA '93 also added section 1927(e)(3) to clarify that 
the moratorium provisions do not affect State Maximum Allowable Cost 
(MAC) limitations in effect prior to or after the moratorium period. 
That is, as allowed under OBRA '90, States may continue to operate 
their MAC programs in effect prior to January 1, 1991, in accordance 
with the terms of that program, for example, adjusting limits and 
adding drugs within the requirements of the MAC.
9. Average Manufacturer Price
    Section 13602(a)(2)(B)(i)(II) of OBRA '93 amended section 
1927(k)(1) of the Act to clarify that the AMP for a rebate period is 
the average price paid to the manufacturer for the drug in the United 
States by wholesalers for drugs distributed to the retail pharmacy 
class of trade after deducting customary prompt pay discounts. The 
policy that AMP will be calculated after deducting customary prompt pay 
discounts is reflected in the national rebate agreement.
10. Limiting Definition of Covered Outpatient Drug
    Section 13602(a)(2)(B)(ii) of OBRA '93 amended section 1927(k)(3) 
to clarify the limiting definition of what is not included in the 
definition of a covered outpatient drug. In addition to the criteria 
originally defined in section 1927(k)(3), a covered outpatient drug 
does not include the following two items:
     Any drug or product for which a NDC number is not required 
by the FDA. This category includes whole blood and blood components 
separated by physical or mechanical means.
     Any drug, biological, or insulin provided as part of, or 
as incident to and in the same setting as, services in an intermediate 
care facility for the mentally retarded (ICF/MR) (and for which payment 
is made as part of the service and not as direct reimbursement for the 
drug.)

[[Page 48447]]

11. Medically Accepted Indication
    Section 13602(a)(2)(B)(iii) of OBRA '93 amended section 1927(k)(6) 
to further define the term ``medically accepted indication.'' OBRA '93 
deleted the reference to the use of peer-reviewed medical literature 
and specified that the medical indication must be on the label or be 
supported by one or more citations included or approved for inclusion 
in any of the compendia described in section 1927(g)(1)(B)(i).
    OBRA '93 amended section 1927(k)(6) to specify that the term 
``medically accepted indication'' means any use for a covered 
outpatient drug which is approved under the Federal Food, Drug and 
Cosmetic Act or the use which is supported by one or more citations or 
approved for inclusion in any of the specified compendia. Those 
compendia have not changed and are the American Hospital Formulary 
Service-Drug Information, the American Medical Association Drug 
Evaluations, and the United States Pharmacopeia-Drug Information.

E. Organization of Remainder of Preamble

    The following sections of the preamble explain the actual 
provisions of the regulations being issued at this time without a 
description of the history of the statute. In the remainder of the 
preamble, unless otherwise indicated, references to the statute should 
be read as the provisions as amended by both the VHCA and OBRA '93. The 
preamble is structured into six main sections which discuss all related 
drug covered rebate issues and policies: rebate agreements, drugs 
covered under the rebate agreement, limitations on drug coverage, 
reporting requirements, computation of drug rebates, and payment 
limitations for covered drugs. The balance of the preamble deals with 
other required regulatory sections, such as responses to comments and 
an impact analysis. The accompanying regulation text follows section 
XV. of the preamble.

II. Rebate Agreements

    In general, section 1927(a)(1) of the Act provides that, in order 
for payment to be available under section 1903(a) of the Act for 
covered outpatient drugs of a manufacturer, the manufacturer must (1) 
have entered into and have in effect a national rebate agreement with 
the Secretary on behalf of the States; and (2) also enter into a 
pharmaceutical pricing agreement with PHS and, if necessary, with DVA 
(as discussed in Section I.B. of this preamble) for payment to be made 
under Medicaid for a manufacturer's covered outpatient drugs. The 
requirements for the rebate agreements are specified in section 1927(b) 
of the Act.
    Section 1927(a)(1) also provides that the Secretary may authorize 
States to enter directly into separate agreements with manufacturers. 
For purposes of this rule, we are referring to separate agreements as 
either ``existing,'' that is, agreements that were entered into on or 
before the date of enactment of OBRA '90 (November 5, 1990); or 
``new,'' that is, agreements that were entered into after the date of 
enactment of OBRA '90.
    The Secretary's authority to approve separate State agreements is 
consistent with the statute and HCFA's understanding of Congressional 
intent to decrease program costs and maximize Medicaid savings. Section 
1927(a)(1) of the Act gives the Secretary broad authority to authorize 
separate State agreements. There are no provisions in section 1927 that 
circumscribe the Secretary's authority to establish criteria for 
approving separate State agreements.
    Thus, in accordance with the authority under section 1927(a)(1) of 
the Act, we would not approve a new agreement unless the manufacturer 
has entered into the national rebate agreement and the new agreement 
provides rebates at least as large as those required by the national 
agreement. (42 CFR 447.510) We believe these requirements are necessary 
to effectuate section 1927 of the Act and to uphold Congressional 
intent.
    We would require that a manufacturer enter into the national rebate 
agreement as a condition of entering into a new State agreement, in 
order to ensure that Medicaid recipients in all 50 States and the 
District of Columbia have access to that manufacturer's drugs. In 
passing various provisions of section 1927, the Congress made it clear 
that Medicaid recipients be assured access to all medically necessary 
covered outpatient drugs. (H.R. Rept. No. 881, 101st Cong., 2d Sess. 
96-98 (1990)). Without requiring that manufacturers enter into the 
national agreement, recipients could be denied access if a manufacturer 
only entered into separate agreements with several large States with a 
lucrative market for that manufacturer's drugs. Thus, access could be 
denied in other States.
    We would require that a new State agreement provide rebates at 
least as large as those required by the national agreement because 
there would be little or no benefit to the Secretary in terms of 
savings to approve a new State agreement that provides less savings. 
Approving a new agreement that provides less savings would be contrary 
to the general understanding of Congressional intent to decrease 
program costs and maximize Medicaid savings.
    The conditions that all existing agreements and new agreements 
between a State Medicaid agency and a manufacturer must meet in order 
to comply with the requirements in section 1927 of the Act are 
described below. The statute defines the entities considered 
manufacturers to which section 1927 applies. Section 1927(k)(5) of the 
Act defines the term ``manufacturer'' to mean any entity that is 
engaged in--
     The production, preparation, propagation, compounding, 
conversion, or processing of prescription drug products, either 
directly or indirectly by extraction from substances of natural origin, 
or independently by means of chemical synthesis, or by a combination of 
extraction and chemical synthesis; or
     The packaging, repackaging, labeling, relabeling, or 
distribution of prescription drug products.
    Under the statutory definition, the term ``manufacturer'' does not 
include a wholesale distributor of drugs or a retail pharmacy licensed 
under State law. For the reasons set forth below, we would clarify and 
interpret this statutory definition to require that the entity must 
possess legal title to the National Drug Code (NDC) number for a 
covered outpatient drug, insulin, or biological product. The NDC is a 
national, readily available numbering system maintained by the Food and 
Drug Administration (FDA) that identifies each drug by manufacturer, 
product, and package size. We believe this clarification is necessary 
to permit a practical means of identifying the manufacturer of the drug 
to determine which manufacturer is responsible for paying the rebate 
due under the statute to the State. This approach prevents duplicative 
manufacturer responsibilities for the drug.
    In addition, we would further clarify and interpret the term to 
specify that if a corporation meets the statutory definition of 
manufacturer and possesses legal title to the NDC number, we would 
consider the term to include--
     Any corporation that owns at least 80 percent of the total 
combined voting power of all classes of stock or 80 percent of the 
total value of shares in all classes of stock in such entity (that is, 
a parent corporation);
     Any other corporation in which a parent corporation of the 
entity owns at least 80 percent of the total combined voting power of 
all classes of stock or 80 percent of the total value of shares 

[[Page 48448]]
of all classes of stock in the other corporation (that is, a brother-
sister corporation); and
     Any other corporation in which the entity owns at least 80 
percent of the total combined voting power of all classes of stock or 
80 percent of the total value of shares of all classes of stock in the 
other corporation (that is, a subsidiary corporation).
    We would establish this definition of ``manufacturer'' because we 
believe that the statutory definition requires clarification to 
implement the provisions of OBRA '90 consistent with Congressional 
intent. As noted previously, section 1927(k)(5) of the Act defines a 
manufacturer, in part, as ``any entity'' engaged in the production, 
packaging or distribution of prescription drug products. We believe 
that when defining a manufacturer, the term ``entity'' should be 
interpreted to include any parent, brother-sister, or subsidiary 
corporation. Such an interpretation, in our opinion, comports with the 
Congress' desire to maximize recipient access to medically necessary 
drugs, while at the same time providing a more favorable drug 
purchasing arrangement for State Medicaid programs. (H. R. Conf. Rept. 
No. 964, 101st Cong., 2d Sess. 822, 832 (1990); H. R. Rept. No. 881, 
101st Cong., 2d Sess. 996 (1990).)
    The Congress, in passing the drug rebate provisions, made it clear 
that States that elect to cover prescription drugs must, except for 
certain restriction/exclusions allowed under the statute, for the most 
part, cover the drugs of a manufacturer that enters into and complies 
with a drug rebate agreement. In return for such coverage, a 
manufacturer would be responsible for providing a rebate to the State 
that would give the Medicaid program the benefit of those discounts 
that other large public and private purchasers receive. (Id.) We 
believe that it would be directly contrary to such intent for us to 
define manufacturer in a fashion that would permit a manufacturer (by 
forming a subsidiary corporation) to exclude some of its drugs from the 
drug rebate program.

A. Existing Agreements

    Section 1927(a)(4) of the Act sets forth the conditions that an 
existing agreement must meet to be in compliance with the provisions of 
section 1927. Under section 1927(a)(4), existing agreements that were 
in effect between a manufacturer and a State Medicaid agency on 
November 5, 1990, will be considered to be in compliance with section 
1927 of the Act until the end of the initial period specified in the 
agreement if (1) the State agrees to report any rebates paid under the 
agreement to HCFA; and (2) the agreement provides for a minimum 
aggregate 10-percent rebate of the State's total expenditures under the 
State plan for all of that manufacturer's drugs paid for by Medicaid in 
the rebate period. During the initial agreement period, manufacturers 
may calculate rebates in accordance with that existing agreement as 
long as these two requirements are met. (Because no manufacturer had 
existing agreements in all 50 States and the District of Columbia, and 
in light of the requirements of sections 1927(a) and 1903(i)(10) of the 
Act, we required all drug manufacturers with approvable existing 
agreements with State Medicaid agencies as of November 5, 1990, to 
enter into and comply with the national agreement to cover those States 
where manufacturers did not have existing agreements.)
    As stated above, section 1927(a)(4) of the Act requires that 
existing individual State agreements provide for a minimum aggregate 
rebate of 10 percent of the State's total expenditures under the State 
plan for coverage of the manufacturer's drugs. However, given other 
provisions of the statute and the legislative history of OBRA '90, we 
do not believe that the Congress intended that the minimum aggregate 
rebate be calculated using State expenditures. Other provisions in 
section 1927 of the Act calculate rebates using manufacturer prices, 
and there is no evidence in the legislative history that the Congress 
intended existing rebates to be calculated using a different formula. 
In fact, the Conference Report specifies that manufacturer sales, not 
State expenditures, be used to calculate the minimum aggregate rebate. 
(H. R. Conf. Rept. No. 964, 101st Cong., 2d Sess. 822 (AMP), 832 
(manufacturer sales) (1990).)
    The House Conference Report, in discussing the House bill, 
specifically states that existing rebate agreements must be considered 
in compliance with the statute if the State can establish that ``the 
agreement can reasonably be expected to provide rebates at least as 
large as the rebates under this bill [which uses manufacturer 
prices].'' (H. R. Conf. Rept. 964, 101st Cong., 2d Sess. 822 (1990); 
Id. at 822 (Senate Amendment).) Similarly, the Conference agreement 
establishes a similar standard and specifies an aggregate rebate test 
using manufacturer pricing data. The Conference agreement provides that 
existing agreements should be considered in compliance with the statute 
if ``the amount of the rebate under the [existing] contract totals at 
least 10 percent of the manufacturer's sales to Medicaid in the 
State.'' (Id. at 832.) Therefore, to read the statute in its proper 
context, and to give effect to our understanding of Congressional 
intent, we have decided to use manufacturer prices to calculate the 
minimum aggregate rebate.
    Furthermore, as noted previously, using State total expenditures 
conflicts with other rebate provisions that use manufacturer prices 
(referred to as average manufacturer prices (AMPs) and best prices) to 
calculate rebates. (Section V.B.2.a. of this preamble contains the 
definition of AMP.) A State's total expenditures include, among other 
items, wholesaler and retailer markup and dispensing fees. These 
additional charges are not included in the rebate calculations that 
base rebates on the AMP. Thus, using other than AMP as a percentage of 
a rebate test would result in an inequitable treatment of manufacturers 
participating in the rebate program. In light of the legislative 
history, we believe that the Congress intended that a similar formula 
based on manufacturer pricing data be used to calculate minimum 
aggregate rebates under section 1927(a)(4) of the Act.
    Therefore, we have concluded that the 10-percent rebate test 
applies to the manufacturer's AMP (which represents the manufacturer's 
sale of the drug) and not other State components of drug expenditures. 
Accordingly, we would specify in our regulations at 
Sec. 447.510(b)(1)(i) that, to calculate a State's total quarterly 
expenditures for a manufacturer's drugs for purposes of determining 
whether the minimum aggregate 10-percent rebate requirement for 
existing rebate agreements is met, the State must receive a minimum 
rebate of 10 percent of the AMP for the manufacturer's drugs. Actual 
rebates on specific drugs may be less than 10 percent as long as the 
aggregate rebate from that manufacturer for all of its covered 
outpatient drugs in that separate agreement meets the minimum 10-
percent rebate.
    An existing agreement must have provided for the minimum aggregate 
rebate as of November 5, 1990. If this minimum rebate condition was 
met, we believe it would be consistent with section 1927(a)(4) of the 
Act to permit States to modify an existing agreement to provide for a 
greater rebate. Therefore, under these regulations, States would be 
permitted to modify existing agreements if the State and the 
manufacturer are in agreement with all modifications and the terms of 
the agreement allow such modifications. Existing agreements would also 
be amended to add other drugs of the 

[[Page 48449]]
manufacturer if the agreement continues to meet a minimum aggregate 
rebate of 10 percent of AMP. However, we do not believe it would be 
consistent with the statute or our understanding of Congressional 
intent to permit modifications to increase the length of the initial 
term since section 1927(a)(4) of the Act specifically references the 
initial agreement period.
    In cases where an existing agreement did not have a stated 
percentage of rebate, we have required the State to submit to the HCFA 
regional office (RO) a written assurance from the manufacturer that the 
minimum 10-percent rebate, as calculated above, was met as of November 
5, 1990. We would require in Sec. 447.510(b)(2) that the rebates under 
an existing agreement also continue to meet the 10-percent threshold in 
order for payment to be made available under section 1903(a) of the Act 
for the manufacturer's covered outpatient drugs throughout the initial 
period specified in the agreement. We would monitor the savings 
figures, and, if this threshold is not met, we would consider the 
existing agreement as no longer in compliance with section 1927(a) of 
the Act. In this case, HCFA would notify the State that the 
manufacturer's drugs are subject to the rebate terms of the national 
drug rebate agreement.
    The requirements for renewal of existing rebate agreements between 
States and manufacturers at the end of the initial period specified in 
the agreement are generally specified in section 1927(a)(4) of the Act. 
Under this section, a State/manufacturer agreement is renewable after 
the initial period specified in the agreement if the State establishes 
to HCFA's satisfaction that the agreement provides for rebates that are 
at least as large as the rebates required under the national rebate 
agreement, and the State agrees to report to HCFA any rebates received 
under the agreement. We would not approve the renewal of an existing 
agreement unless the manufacturer has entered into the national rebate 
agreement. As is the case for existing agreements in the initial 
period, the State is responsible for submitting to the HCFA RO, along 
with the agreement, a written assurance from the manufacturer that the 
agreement submitted for renewal meets the minimum rebate requirements 
described above.
    If the actual rebates fail to be at least as large as those rebates 
required under the national agreement for the renewal period, the 
renewed agreement would not be considered to be in compliance with 
section 1927(a) of the Act. In this case, HCFA would notify the State 
that the manufacturer's drugs are subject to the rebate terms of the 
national agreement.

B. New Agreements

    New rebate agreements are those individual rebate agreements 
between a manufacturer and a State that are entered into on or after 
November 6, 1990, and specifically authorized by HCFA. Section 
1927(a)(1) of the Act provides that the manufacturer may enter into a 
rebate agreement with the Secretary on behalf of a State, or the 
Secretary may authorize a State to enter directly into a rebate 
agreement with a manufacturer, thus providing an alternative to the 
national rebate agreement.
    In accordance with section 1927 of the Act, HCFA would authorize 
State Medicaid agencies to enter directly into new agreements with drug 
manufacturers. However, we would apply the requirements in section 
1927(a)(4) to these new State manufacturer agreements, that is, the 
agreements must provide rebates at least as large as those required 
under the national rebate agreement, and the State must agree to report 
any rebates under the agreement to HCFA. Therefore, we would require in 
Sec. 447.510(c)(4) that the State include with its agreement 
authorization request to HCFA a written assurance from the manufacturer 
that the agreement provides rebates that equal or exceed the rebate 
amounts specified in the national agreement.
    We believe this additional verification of the rebate amounts 
specified in the new agreement would be necessary since these contracts 
can differ in form and content in each State. A written assurance from 
the manufacturer would be evidence that both parties certify that the 
rebate amounts under the new agreement meet or exceed the rebate 
amounts in the national agreement.
    We would not authorize individual State agreements that provide for 
rebates less than those required under the national agreement. In our 
opinion, such agreements are contrary to our understanding of 
Congressional intent to maximize program savings while expanding access 
to covered outpatient drugs. Thus, since there is little or no 
additional benefit for either the States or HCFA to authorize these 
types of individual agreements, which would increase Medicaid drug 
costs without offsetting national rebate savings, we would not approve 
such agreements.

C. Length of Agreements

    We would specify in Sec. 447.512(a) that the initial period of an 
existing State/manufacturer agreement and a new State/manufacturer 
agreement is the period specified in the agreement, and that the 
national rebate agreement is effective for an initial period of at 
least 1 year. While we would not require a 1-year timeframe for the 
initial period in a new State/manufacturer agreement, we recommend its 
use to avoid administrative delays from HCFA reviewing new agreements 
with shorter timeframes. More frequent reviews add to unnecessary 
administrative costs and burdens for all parties involved.
    Under this section we also would specify that the national 
agreement will be automatically renewed for successive periods of at 
least 1 year unless (1) HCFA terminates the agreement under the 
conditions specified in section 1927(b)(4)(B)(i) of the Act; or (2) the 
manufacturer terminates the agreement for any reason as permitted under 
section 1927(b)(4)(B)(ii) of the Act.

D. Termination of Agreements

1. Termination by HCFA
    In accordance with section 1927(b)(4)(B)(i) of the Act, a rebate 
agreement may be terminated by the Secretary if the manufacturer 
violates the requirements of the agreement or for ``other good cause 
shown.'' HCFA has been delegated the Secretary's authority under 
section 1927(b)(4)(B) to provide for termination of a rebate agreement. 
We would interpret ``other good cause shown'' to be any violations of 
the provisions of the national rebate agreement, section 1927 or the 
related regulations, or the persistent failure to provide timely 
information on pricing and other required information or to pay timely 
rebates. HCFA would send a written notice of the decision to terminate 
the agreement to the manufacturer. HCFA would also notify State 
agencies of the termination. The termination would not be effective 
earlier than 60 days after the date a notice of the termination is sent 
to the manufacturer (Sec. 447.514(b)). If a manufacturer is 
dissatisfied with a termination decision made by HCFA, the manufacturer 
may request a hearing (as specified in section II.D.5. of this 
preamble). However, a request for a hearing would not delay the 
effective date of the termination.
2. Termination by the Manufacturer
    In accordance with section 1927(b)(4)(B)(ii) of the Act, the 
manufacturer may terminate its rebate agreement for any reason. Section 
601(b)(4) of VHCA amended section 1927(b)(4)(B) of the Act to provide 
that any such termination not be effective until the rebate period 
beginning at least 

[[Page 48450]]
60 days after the date the manufacturer provides notice to the 
Secretary. A termination notice from a manufacturer is considered a 
request to end its participation in the national rebate agreement with 
the understanding that there is a delay before reinstatement (as 
discussed in section II.D.4. of this preamble).
    We would provide in Sec. 447.514(c)(1) that a manufacturer that 
wishes to terminate an agreement must provide to HCFA a written notice 
of intent to terminate at least 60 days before the beginning of the 
rebate period in which the termination will occur. We would specify 
that the effective date of a requested termination will be the first 
day of the first rebate period beginning at least 60 days after the 
manufacturer gives written notice requesting termination, or a later 
date if specified by the manufacturer. We would specify in 
Sec. 447.514(c)(3) that the date of notice will be considered to be the 
postmark date of the U.S. Postal Service or common mail carrier.
    If the manufacturer fails to terminate the agreement at least 60 
days before the renewal date, the automatic renewal provisions of 
section 1927(b)(4)(A) would be effective and the agreement would not 
terminate until the rebate period following the renewal. For example, 
if a manufacturer intended to terminate the rebate agreement effective 
January 1, 1994, HCFA must have received the written notice on or 
before November 1, 1993. Otherwise, if HCFA received the notice on 
November 15, 1993, the termination date would be April 1, 1994 (the 
first day of the first rebate period beginning at least 60 days after 
receipt of the notice).
    Any termination would not affect rebates due under the agreement 
before the effective date of the termination.
3. Nonrenewal of Rebate Agreement
    To effectuate sections 1927(b)(4)(A) and (b)(4)(B)(ii) of the Act, 
we would require in Sec. 447.514(c)(2)(i) that a manufacturer give 
written notice of its decision not to renew the rebate agreement 
(nonrenewal notice) at least 60 days before the end of the current 
agreement period. (We would consider the date a manufacturer gives 
written notice of its decision not to renew to be the date of the 
postmark of the U.S. Postal Service or common mail carrier 
(Sec. 447.514(c)(3)).) If HCFA receives a manufacturer's nonrenewal 
notice at least 60 days before the end of the agreement period, the 
nonrenewal would be effective on the ending date of the agreement 
period. This 60-day period would give HCFA the time needed to notify 
States that the manufacturer's drugs are no longer eligible for FFP 
under Medicaid.
    If the manufacturer fails to meet this 60-day advance notice 
requirement, the agreement would be automatically renewed for another 
1-year term. In this case, HCFA would deem the nonrenewal notice a 
termination notice because the manufacturer missed the nonrenewal 
deadline. Therefore, in accordance with the regulations at 
Sec. 447.514(c)(2)(ii)(B), HCFA would terminate the rebate agreement 
effective the second calendar quarter of the renewed agreement period.
4. Reinstatements
    Section 1927(b)(4)(C) of the Act provides that, if a rebate 
agreement is terminated, another agreement with the manufacturer (or a 
successor manufacturer) may not be entered into until a period of 1 
calendar quarter has elapsed from the date of the termination, unless 
the Secretary finds good cause for an earlier reinstatement of the 
agreement. We would incorporate this provision in Sec. 447.514(d) of 
our regulations. For example, if HCFA received a written notice on 
October 1, 1993, to terminate an agreement, the rebate agreement would 
be terminated on January 1, 1994, and a manufacturer could not enter 
into another agreement until April 1, 1994, unless HCFA finds good 
cause to do otherwise. An example of good cause might be if a 
manufacturer's drug is medically necessary to a significant number of 
Medicaid recipients and there is no therapeutic substitute available.
5. Opportunity for Appeal
    Section 1927(b)(4)(B) of the Act provides that the Secretary must 
provide a manufacturer with a hearing concerning a termination of a 
rebate agreement if the manufacturer requests one. In accordance with 
this section of the Act, we would provide in Sec. 447.514(b)(4) that, 
if a manufacturer is dissatisfied with a termination of a rebate 
agreement by HCFA, the manufacturer may appeal the termination under 
the administrative procedures specified in the contract provision in 
the rebate agreement. We believe the appeal procedures specified in the 
national rebate agreement afford manufacturers the due process rights 
to which they are entitled under section 1927 of the Act, since the 
process provides a written notification process, the right to appeal 
the termination and, if applicable, a hearing before a HCFA official or 
other party.
    Section 1927(b)(4)(B)(i) of the Act also requires that the hearing 
not delay the effective date of the termination. Accordingly, we would 
provide in Sec. 447.514(b)(4) that, while manufacturers have the right 
to an administrative hearing, such a hearing would not delay the 
effective date of the termination.
6. Notice to States
    Section 601(b)(4) of VHCA added section 1927(b)(4)(B)(iv) of the 
Act, which provides that in the case of a termination of a 
manufacturer, the Secretary will provide notice of the termination to 
the States not less than 30 days before the effective date of the 
termination. In accordance with this section of the Act, we would 
provide in Sec. 447.514(f) that HCFA will notify States of any 
termination from the drug rebate program at least 30 days prior to the 
effective date of the termination.

III. Drugs Covered Under the Rebate Agreement

A. Rebated and Non-Rebated Drugs

    Sections 1927(k)(2) and (k)(4) of the Act specify the covered 
outpatient drugs that are subject to rebate agreements. Covered 
outpatient drugs are defined as (1) those drugs that may be covered as 
prescribed drugs under Medicaid under section 1905(a)(12) of the Act, 
are dispensed only upon prescription (except over-the-counter drugs), 
and that meet certain requirements specified in sections 
1927(k)(2)(A)(i) through (iii) of the Act; (2) a biological product 
other than a vaccine that may be dispensed only upon prescription, is 
licensed under section 351 of the Public Health Service Act, and is 
produced at an establishment licensed under section 351 to produce such 
products; (3) insulin certified under section 506 of the Federal Food, 
Drug, and Cosmetic Act; and (4) ``over-the-counter'' drugs that are 
prescribed by a physician or other person authorized to prescribe under 
State law, if the State provides for coverage of these drugs as 
prescribed drugs under its approved State plan. We would add this 
definition to Sec. 447.516(a) of our regulations.
    We would require in Sec. 447.516(b) that a manufacturer submit as 
part of its rebate agreement a listing of all of its drugs that fall 
within the definition of covered outpatient drugs in sections 
1927(k)(2) through (k)(4) of the Act. We also would require use of 
National Drug Code (NDC) numbers to identify the drugs.
    We would interpret ``covered outpatient drug,'' as defined in 
section 1927(k)(2) of the Act, to include all covered outpatient drugs 
for which that manufacturer holds legal title to the NDC number. The 
statutory definition 

[[Page 48451]]
encompasses all FDA-approved prescription drugs and biologicals except 
for vaccines or drugs that fall within the limiting definition in 
section 1927(k)(3) of the Act (Secs. 447.504 and 447.516(b)(2)). 
Manufacturers that have entered into the national rebate agreement have 
agreed to submit a listing of all covered outpatient drugs, not a 
partial listing. Therefore, in accordance with the statute and the 
provisions of the national rebate agreement, manufacturers that enter 
into a rebate agreement could not exclude any covered outpatient drug 
specified in section 1927(k) of the Act from its listing of covered 
outpatient drugs.
    Even though States may choose to exclude or restrict certain drugs 
under section 1927(d) of the Act (as discussed in section IV.B of this 
preamble), the drugs may be covered in other States or covered by that 
State at a later date. Therefore, a manufacturer would be required to 
list by NDC number all of its covered outpatient drugs, regardless of 
whether its drugs are dispensed or covered by Medicaid programs in all 
States. In addition, HCFA would not allow a manufacturer to withhold 
its covered outpatient drugs from being subject to the rebate 
provisions, regardless of whether the drugs are sold by the 
manufacturer's subsidiaries or parent company, as discussed in section 
I.A. of this preamble.
    In Sec. 447.522(a), we would provide for an exclusion from the 
definition of covered outpatient drugs consistent with section 
1927(k)(3) of the Act. Section 1927(k)(3) of the Act, as amended by 
section 13602(a)(2)(B)(ii) of OBRA '93, provides certain exclusions 
from the definition of covered outpatient drugs. This section specifies 
that covered outpatient drugs do not include ``any drug, biological 
product, or insulin provided as part of, or as incident to and in the 
same setting as, any of the following (and for which payment may be 
made under [Medicaid] as part of payment for the following and not as 
direct reimbursement for the drug): Inpatient hospital services; 
hospice services; dental services (except that drugs for which the 
State plan authorizes direct reimbursement to the dispensing dentist 
are covered outpatient drugs); physicians' services; outpatient 
hospital services; nursing facility services and services provided by 
an intermediate care facility for the mentally retarded; other 
laboratory and x-ray services; and renal dialysis'' (Sec. 447.522(a)).
    The term ``covered outpatient drug'' also would not include any 
such drug, biological product, or insulin for which an NDC number is 
not required by the FDA that is used for an indication that is not 
``medically accepted'' (Sec. 447.522(b)). A medically accepted 
indication is defined under section 1927(k)(6) of the Act, as amended 
by section 13602(a)(2)(B)(iii) of OBRA '93, as any use for a covered 
outpatient drug that is approved under the Federal Food, Drug and 
Cosmetic Act, or the use of which is supported by one or more citations 
included or approved for inclusion in any of the following compendia: 
The American Hospital Formulary Service-Drug Information, the American 
Medical Association Drug Evaluations, and the United States 
Pharmacopeia-Drug Information. We would incorporate this definition in 
Sec. 447.504 of our regulations.
    There are additional drugs and biologicals that do not fall within 
the definition of covered outpatient drugs set forth in section 1927(k) 
of the Act. These drugs are not subject to rebates, although Medicaid 
coverage may be provided under section 1905(a)(12) of the Act at State 
option, and FFP is available. Generally, these additional drugs and 
biologicals that do not fall within the section 1927(k) definition are 
discussed below and would be specified in Sec. 447.522(c) through (g) 
of the regulations. We do not consider this a definitive list due to 
the vast nature of drugs and biologicals regulated by the FDA and the 
unique situations that exist for particular products. Drugs that fall 
outside of the scope of section 1927 of the Act would not be considered 
covered outpatient drugs and, therefore, would not be subject to 
rebate.
     Any drug, biological product, or insulin for which an NDC 
number is not required by the FDA would not meet the definition of a 
covered outpatient drug in section 1927(k) and, therefore, would not be 
subject to a rebate as a condition of FFP. This would include whole 
blood (collected from a single human donor) and blood components (which 
are the result of physical or mechanical separation either as part of 
the collection process or subsequent to the collection of whole blood).
     Medical items and supplies, such as syringes (except 
insulin-filled syringes), urine and blood glucose testing strips and 
devices, lancets, and inhalers (except pre-filled inhalers) do not meet 
the definition of covered outpatient drugs in sections 1927(k)(2) 
through (k)(4) of the Act and, therefore, would not be subject to a 
rebate as a condition of FFP.
     Certain nutritional products that are regulated as drugs 
would be covered under the rebate program. Parenteral products that are 
administered intravenously are approved as drugs by the FDA under 
section 505 of the Federal Food, Drug, and Cosmetic Act. These 
parenteral products that are approved as drugs, are administered 
intravenously, and meet the definition of a covered outpatient drug in 
accordance with section 1927(k) of the Act would be subject to a rebate 
as a condition of FFP. Parenteral products that are not administered 
intravenously are regulated as ``foods'' by the FDA and would not meet 
the definition of a covered outpatient drug.
     Enteral nutrition products that are not approved by FDA as 
a drug under sections 505, 506, or 507 of the Federal Food, Drug, and 
Cosmetic Act would not be considered covered outpatient drugs under 
section 1927(k)(2)(4) of the Act, and would not be subject to rebate.
    HCFA has permitted States the option to cover enteral nutrition 
products that are not approved as a drug by the FDA, under Medicaid 
benefit categories other than prescription drugs. These categories 
include outpatient hospital services, home health services, clinic 
services, and rural health clinic services. The nutrient products may 
be covered in these settings as a medical supply. These supplies would 
not be considered covered outpatient drugs and, therefore, would not be 
subject to rebate.
     States have the option to cover under their Medicaid 
program investigational new drugs (IND) (for example, Treatment IND 
drugs, Parallel Track, and Group C cancer drugs). (State Medicaid 
programs often use the term ``experimental'' when referring to these 
types of drugs.) Since section 1927 of the Act made no changes to a 
State's previous ability to cover these drugs, FFP continues to be 
available for these drugs. However, because they do not meet the 
definition of covered outpatient drugs in sections 1927(k)(2) through 
(4) of the Act, they would not be covered under the drug rebate program 
or subject to a rebate.

B. Definitions of Drug Categories

    As defined in section 1927(k)(7)(A)(iv) of the Act, ``single source 
drug'' means a covered outpatient drug that is produced or distributed 
under an original new drug application (NDA) approved by the FDA, 
including a drug product marketed by any cross-licensed producers or 
distributors operating under the NDA. (Section III.C.3. of this 
preamble contains the definition of original new drug application.) 
Section 1927(k)(7)(A)(i) of the Act defines ``multiple source drug'' as 
a covered outpatient drug for which there are two or more drug products 
that are--

[[Page 48452]]

     Rated as therapeutically equivalent by the FDA under its 
most recent publication ofApproved Drug Products with Therapeutic 
Equivalence Evaluations;
     Are pharmaceutically equivalent and bioequivalent as 
determined by the FDA; and
     Are sold or marketed in the State during a calendar 
quarter.
    Drugs are pharmaceutically equivalent if the products contain 
identical amounts of the same active drug ingredient in the same dosage 
form and meet compendial or other applicable standards of strength, 
quality, purity, and identity.
    Drugs are bioequivalent if they do not present a known or potential 
bioequivalence problem, or if they do present such a problem, they are 
shown to meet an appropriate standard of bioequivalence. (This 
condition does not apply if FDA changes by regulation the requirement 
that in order for drug products to be rated as therapeutically 
equivalent, they must be pharmaceutically equivalent and 
bioequivalent.)
    Sections 1927(k)(7)(A)(ii) and (iii) of the Act define ``innovator 
multiple source drug'' as a multiple source drug that was originally 
marketed under an original NDA approved by the FDA and ``noninnovator 
multiple source drug'' as a multiple source drug that is not an 
innovator multiple source drug. To clarify the statutory definition, we 
would further define multiple source drugs to distinguish the 
differences between an innovator multiple source drug and a 
noninnovator multiple source drug.
    In accordance with our understanding of Congressional intent, we 
would define an ``innovator multiple source drug'' as a multiple source 
drug from 1938 to present that was originally marketed under an 
original NDA approved by the FDA. We would define a ``noninnovator 
multiple source drug'' as a multiple source drug that was marketed 
under an abbreviated NDA or any marketed, unapproved pre-1938 drug 
product for which the FDA has not made a final determination about its 
legal status. This would include (1) all products approved under an 
abbreviated NDA (authorized under the Drug Price Competition and Patent 
Term Restoration Act of 1984, Public Law 98-417), paper NDA under the 
FDA's former ``Paper NDA'' policy (54 FR 28873), or an application 
under section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act; 
and (2) any marketed, unapproved pre-1938 drug product that has not 
been evaluated under the new drug provisions of the Federal Food, Drug 
and Cosmetic Act. (Sec. 447.504)

C. Treatment of New Drugs

1. Elimination of New Drug Coverage Under OBRA '93
    OBRA '93 eliminated all special requirements for new drugs by 
deleting the former section 1927(d)(6) of the Act. That section 
provided that a State may not exclude, subject to prior authorization, 
or otherwise restrict from coverage under the rebate program any new 
drug or biological approved by the FDA after the date of enactment of 
OBRA '90 (November 5, 1990) for a period of 6 months after the date of 
FDA approval. OBRA '93 also deleted the references to new drugs in 
section 1927(d)(1)(A) and (d)(3) of the Act.
    Section 13602(d)(2) of OBRA '93 provided that amendments to section 
1927(d) of the Act are effective with rebate periods beginning on or 
after October 1, 1993. That is, effective October 1, 1993, States may 
exclude or restrict from coverage or prior authorize any new drugs 
approved by the FDA. In accordance with section 13602(d)(2), new drugs 
approved by the FDA prior to October 1, 1993 may only receive the 
unrestricted coverage specified in former section 1927(d)(6) of the Act 
through the rebate period ending September 30, 1993. Beginning October 
1, 1993 the unrestricted coverage no longer applies to these new drugs.
2. New Drug Coverage Provision in Effect for January 1, 1991-September 
30, 1993
    (Note: The discussions of sections 1927(d) (1), (3), and (7) 
throughout this section III.C.2. of the preamble pertain to any 
amendments made by OBRA '93.)

    Prior to OBRA '93, section 1927(d)(6) of the Act provided that a 
State may not exclude, subject to prior authorization, or otherwise 
restrict from coverage under the rebate program any new drug or 
biological approved by the FDA after the date of enactment of OBRA '90 
(November 5, 1990) for a period of 6 months after the date of FDA 
approval. Except as authorized in section 1927(d)(1) and (2) of the Act 
for the period of January 1, 1991-September 30, 1993, States must have 
covered these drugs with no restrictions for 6 months from the date of 
FDA approval, regardless of when the manufacturer began to market the 
drugs. We would incorporate these provisions in Sec. 447.520(a) of our 
regulations. For purposes of these provisions, we did not consider a 
delay in the marketing of a new drug following FDA approval a cause for 
extending the 6-month period.
    The mandatory coverage provisions of section 1927(d)(6) of the Act 
did not encompass those drugs that a State may exclude under sections 
1927(d)(1) and (d)(2) of the Act. Sections 1927(d)(1) and (d)(2) 
provide that a State may exclude or otherwise restrict coverage of a 
covered outpatient drug if the drug is used to treat, for example, 
anorexia, weight gain, hair loss, or cough or cold symptoms. Section 
1927(d)(2), when read in conjunction with sections 1927(d)(1) and 
1927(k)(2) of the Act, circumscribes those covered outpatient drugs 
that must be covered by States under their State plan. In other words, 
the mandatory coverage provisions of section 1927(d)(6) did not affect 
those drugs that a State may exclude or otherwise restrict under 
sections 1927(d)(1) or (d)(2).
    In addition, we would provide under Sec. 447.520(c) of the 
regulations that coverage of new drugs between January 1, 1991 and 
September 30, 1993 for the first 6 months after approval by the FDA 
would not be available for manufacturers that did not have agreements 
in existence with HCFA for this 6-month time period, since section 
1927(a) of the Act provides FFP only for covered outpatient drugs of 
manufacturers with rebate agreements. However, if the new drug is rated 
as 1-A, section 1927(a)(3) of the Act authorizes payment, at State 
option, for certain 1-A drugs not covered under a rebate agreement. 
(Section III.D.1 of this preamble contains a discussion of 1-A drugs.)
    Before the enactment of OBRA '93, sections 1927(d)(1) and (d)(6) of 
the Act provided that a State may not subject a new drug to prior 
authorization during the 6-month period after FDA approval. If the 
State chose to cover a new drug or class of drugs that was listed in 
section 1927(d)(2) of the Act, it could not prior authorize a new drug 
within that category during the 6-month period. After the 6-month 
period, a drug that was considered a new drug could be subject to the 
prior authorization provisions of section 1927(d)(1) at State option. 
We would incorporate these provisions in Sec. 447.520(b) of our 
regulations.
    Before the enactment of OBRA '93, section 1927(d)(3) of the Act 
prohibited new drugs from being added to the list of drugs subject to 
restriction in section 1927(d)(2) during the 6-month period specified 
in section 1927(d)(6). After the 6-month period, new drugs could be 
added to the list, as discussed in section IV.B.2. of this preamble.
    Before the enactment of OBRA '93, section 1927(d)(7) of the Act 
permitted a State to impose limitations on all 

[[Page 48453]]
drugs in a therapeutic class, on the minimum or maximum quantities per 
prescription, or on the number of refills, provided such limitations 
are necessary to discourage waste. We believe that to effectuate 
Congressional intent, sections 1927(d)(6) and 1927(d)(7) of the Act 
must have been read in concert to discourage waste in the use of new 
drugs during the 6-month period after FDA approval. Section 1927(d)(7), 
in our opinion, permitted States to impose limitations on all drugs, 
including new drugs, in a therapeutic class, on the minimum or maximum 
quantities per prescription, or on the number of refills, provided such 
limitations were necessary to discourage waste.
    We believe such an interpretation would be consistent with the 
statutory provisions in both section 1927(d)(6) and section 1927(d)(7). 
We believe the Congress mandated that States could not exclude from 
coverage, subject to prior authorization, or otherwise restrict a new 
drug for 6 months from FDA approval to ensure that medically necessary 
new drugs were made available to the general population. The 
limitations for waste in section 1927(d)(7) of the Act did nothing to 
discourage the proper prescribing, dispensing, and use of a new drug. 
They simply ensure that, for Medicaid recipients, the minimum supply of 
the drug is sufficient to be medically effective and economical and 
that the maximum supply of the drug discourages waste in the event the 
drug cannot be used (for example, because of allergic reactions, side 
effects, drug interaction, or other reasons of medical necessity). The 
foregoing would give effect to the provisions in both section 
1927(d)(6) and section 1927(d)(7) and, thus, would uphold the intent of 
the Congress as set forth in the statute. (See section IV.C. of the 
preamble for a discussion of a State's attorney authority to impose 
limitations as amended by OBRA '93.)
3. Definition of Original New Drug Application (NDA)
    Sections 1927(k)(7)(A)(ii) and (iv) of the Act reference the term 
``original NDA'' in the definitions of ``innovator multiple source 
drug'' and ``single source drug.'' Under the national rebate agreement, 
a drug marketed under an original NDA, in addition to other criteria, 
may be classified as either a single source or an innovator multiple 
source drug. Neither the statute nor the rebate agreement, however, 
define the term ``original NDA.'' This term is also not defined in the 
Federal Food, Drug, and Cosmetic Act.
    Because the statute does not provide specific guidance on this 
term, we would interpret it to comport with our understanding of the 
intent of the Congress. We would define in regulations at Sec. 447.504 
the term ``original NDA'' as an FDA-approved drug or biological 
application that received one or more forms of patent protection, 
patent extension under title II of Public Law 98-417, the Drug Price 
Competition and Patent Term Restoration Act, or marketing exclusivity 
rights granted by the FDA. This definition would include an NDA, an 
amended NDA, an antibiotic drug application (ADA), an amended ADA, a 
product license application (PLA), and an amended PLA.
    Based on the statute, which requires larger rebates for single 
source and innovator multiple source drugs, we believe the term 
``original NDA'' was included in sections 1927(k)(7)(A)(ii) and (iv) of 
the Act for the purposes of extracting larger rebates from those 
products that received some form of patent or marketing protection for 
a specific period of time. This form of protection could have been 
achieved through either some type of patent on the drug or some type of 
marketing exclusivity rights granted by the FDA.
    Patent protection is generally granted for 17 years. Exclusivity 
rights generally run for a period of 3 to 7 years and are granted by 
the FDA for such innovations as new medical indications, new dosage 
strengths, new dosage forms, new regimens, or new routes of 
administration. Exclusivity rights can extend beyond the life of the 
patent and protect the manufacturer from competition in one or more 
specific market areas. Thus, the innovators of drug products with 
market protection often benefitted from a lack of competition and 
increased profits for a specific period of time. Therefore, innovators 
with market protection are required to pay larger rebates than 
noninnovators that produce generic drugs with no market protection. We 
believe the term ``original NDA,'' as proposed above, produces this 
effect.
    The rebate classification system has raised questions among 
manufacturers regarding how to classify certain products. We believe 
some drugs that appear to meet the rebate agreement's definition of 
innovator multiple source drug are actually noninnovator multiple 
source drugs. The FDA may consider a previously approved drug product 
to be a new drug and require an NDA before marketing. However, in 
accordance with our understanding of these provisions, this drug may 
actually be a noninnovator. For example, under 21 CFR 310.509, the FDA 
does not generally recognize any parenteral drug product packaged in a 
plastic immediate container as safe and effective. Therefore, this type 
of drug product is considered a new drug within the meaning of section 
201(p) of the Federal Food, Drug, and Cosmetic Act and requires an 
approved NDA as a condition for marketing. In this case, if no patent 
protection or marketing exclusivity rights were granted by the FDA for 
the covered outpatient drug of that manufacturer, we would consider it 
to be a noninnovator multiple source drug.

D. Covered Drugs of Manufacturers Without Rebate Agreements

1. Coverage of 1-A Rated Drugs
    Prior to 1992, the FDA maintained a rating system under which drugs 
were rated based on various factors. Under that system, the FDA rating 
``1-A'' signified the chemical type (1) and the therapeutic potential 
(A). The FDA, in its 1991 publication Offices of Drug Evaluation 
Statistical Report, defined the rating 1-A as follows:
     The chemical type ``1'' identifies the drug as a new 
molecular entity, that is, a drug for which the active moiety has not 
been previously marketed in the United States for use in a drug 
product, either as a single ingredient or as part of a combination 
product, or as part of a mixture of stereoisomers. The term ``new 
molecular entity'' is equivalent to ``new chemical entity''.
     The therapeutic potential type ``A'' is defined as a drug 
with important therapeutic gain. The drug may provide effective therapy 
or diagnosis for a disease not adequately treated or diagnosed by any 
marketed drug, or provide improved treatment of a disease through 
improved effectiveness or safety (including decreased abuse potential).
    A 1-A drug may also be labeled ``1-A/AA''. The 1-A/AA designation 
means it is a 1-A drug that is generally being developed for AIDS and 
AIDS-related opportunistic infections and that the FDA has placed the 
drug on a fast track and will monitor it through the drug review 
process.
    Section 1927(a)(3)(A) of the Act authorizes FFP for single source 
or innovator multiple source drugs rated by the FDA as 1-A that are 
furnished by manufacturers without rebate agreements if certain 
conditions are met. Under this section, Medicaid payments may be made 
if: (1) The State has determined that the availability of the drug is 
essential to the health of recipients under the approved State plan; 
and (2) the physician has obtained 

[[Page 48454]]
approval for use of the drug before it is dispensed in accordance with 
a prior authorization program, or the Secretary has approved the 
State's determination regarding drug necessity to obviate the need for 
prior authorization (Sec. 447.518(b)). Necessity would be judged based 
on alternative therapies available and the probable outcome if a 
specific drug is not dispensed.
    Even though section 1927(a)(3) of the Act authorizes HCFA to 
provide FFP for 1-A rated drugs under certain circumstances, States 
retain the option under sections 1902(a) and 1905 of the Act to choose 
which 1-A drugs they will cover under their approved State Medicaid 
plans.
    The FDA recently changed its therapeutic classification system in 
which drugs were rated as either A, B, or C. As indicated in the FDA's 
Staff Manual Guide, Center for Drug Evaluation and Research, this 
three-tiered system has been replaced by a mutually exclusive two-
tiered system in which the potential therapeutic classification of a 
drug product is either a Type P (Priority review, therapeutic gain) or 
a Type S (Standard review, substantially equivalent drug product). Type 
P is assigned to drugs that appear to represent a therapeutic gain over 
already marketed or approved drugs (formerly rated A or B). Type S is 
assigned to drug products that appear to have therapeutic qualities 
similar to drugs already approved or marketed (formerly rated C).
    The Type P and S therapeutic classification system is effective for 
all NDAs approved on or after January 1, 1992. The classifications for 
NDAs approved prior to January 1, 1992, will remain unchanged, that is, 
these drugs will retain their A, B, or C therapeutic classification and 
1-A drugs would continue to be covered by States as specified in this 
regulation. For purposes of section 1927(a)(3)(A) of the Act, we are 
inviting public comments on possible methods to identify 1-P-rated 
drugs that we could include as 1-A-drugs under this provision using the 
FDA's former classification system.
2. Coverage of Drugs During the First Rebate Period of 1991
    Section 1927(a)(3)(B) of the Act provides for Medicaid payment for 
drugs not covered under rebate agreements if the Secretary determined 
that in the first rebate period of 1991 there were extenuating 
circumstances. On March 8, 1991, HCFA notified all State Medicaid 
Directors of its determination that extenuating circumstances did exist 
and that, for the first rebate period of 1991, outpatient prescribed 
drugs of manufacturers without rebate agreements were covered under 
Medicaid if they were included in the approved State Medicaid plan. 
States were not formally notified until March 15, 1991, of 
manufacturers participating in the rebate program. There was no 
practical way States could retroactively discontinue drug coverage on 
January 1, 1991, for drugs of nonparticipating manufacturers. However, 
as of April 1, 1991, FFP is available only for those covered outpatient 
drugs of manufacturers with rebate agreements.
    Section 1927(a)(1) of the Act required that manufacturers enter 
into a rebate agreement by March 1, 1991, for payment to be available 
for their drugs under Medicaid for the January-March 1991 rebate 
period. As discussed earlier, HCFA also extended through April 30, 
1991, the deadline for manufacturers to enter into rebate agreements 
that are retroactive to January 1, 1991.

IV. Limitations on Coverage of Drugs

    Section 1927(d) of the Act, as amended by OBRA '93, permits States 
to place certain limitations on drugs that are covered under a rebate 
agreement. States may limit the coverage of drugs by: (1) Implementing 
a prior authorization program that complies with the requirements in 
section 1927(d) (5); (2) restricting or excluding from coverage drugs 
listed in section 1927(d) (2); (3) restricting the quantities of 
outpatient drugs per prescription and the number of refills under 
section 1927(d) (6); and (4) excluding coverage of the drug from its 
formulary in accordance with section 1927(d)(4). These limitations, 
that are proposed in the regulations at Secs. 447.524 and 447.526, are 
explained below.

A. Prior Authorization

    Section 1902(a)(54) of the Act provides that in the case of a State 
plan that provides medical assistance for covered outpatient drugs (as 
defined in section 1927(k) of the Act), the State must comply with the 
applicable requirements of section 1927 of the Act. Section 
1927(d)(1)(A) provides that a State may subject any covered outpatient 
drug to prior authorization; that is, require approval of the drug 
before its dispensing for any medically accepted indication. The prior 
authorization system must meet two conditions specified under section 
1927(d)(5) of the Act.
    For drugs dispensed on or after July 1, 1991 section 1927(d)(5) of 
the Act permits a State to maintain a prior authorization program if 
the State responds by telephone or other telecommunication device to 
requests within 24 hours of a request for prior authorization. A State 
must, except for those drugs listed in section 1927(d)(2) of the Act, 
further provide for the dispensing of at least a 72-hour supply of the 
drug in emergency situations.
    The provisions in section 1927 of the Act make no other changes to 
the State's ability to maintain or establish prior authorization 
programs. Thus, as specified in section 1927(d)(1) of the Act, States 
may subject to prior authorization any covered outpatient drug.
    In passing these provisions, the Congress made it clear that 
Medicaid recipients should be assured access to all medically necessary 
covered outpatient drugs. (H. R. Rep. No. 881, 101st Cong., 2d Sess. 
96-98 (1990).) Even though OBRA '93 added section 1927(d)(4) of the Act 
to allow States to establish formularies which meet specific 
requirements, section 1927(d)(4)(D) provides that the State plan must 
permit coverage of a drug excluded from the formulary (other than any 
drug excluded or restricted under section 1927(d)(2)) pursuant to a 
prior authorization program. In accordance with our understanding of 
Congressional intent, we believe that it is necessary to prevent States 
from using a prior authorization program as a proxy for a closed 
formulary beyond what the statute allows under the formulary provisions 
of section 1927(d)(4). In addition, we believe it is necessary to 
ensure that States respond to prior authorization requests within the 
timeframes specified in the statute. We believe these requirements are 
necessary to effectuate section 1927 of the Act and to uphold 
Congressional intent.
    Prior authorizing drugs as a proxy for a closed formulary, beyond 
what the statute allows under the formulary provisions of section 
1927(d)(4) without regard for medical necessity could result in 
recipients being treated with alternate therapies that may not be in 
their best interest. This could result in increased program costs if 
other medical services, such as inpatient hospital services, are 
necessary because a drug therapy is made less accessible under the 
State Medicaid program. Thus, a recipient's access to medically needed 
drugs could be unduly hampered if medical necessity is not used in a 
prior authorization program.
    Therefore, we are proposing requirements to ensure that States 
utilize individuals with the appropriate level of medical expertise 
when determining which drugs are prior authorized and when deciding if 
the drug can be dispensed. Accordingly, we 

[[Page 48455]]
believe it most appropriate that the level of expertise be reflected by 
the ability to prescribe/dispense drugs. We believe individuals with 
this knowledge would more likely be aware of negative consequences that 
could result if a specific drug is prior authorized or not approved for 
dispensing. Thus, the State Medicaid program and recipients would 
benefit from such a prior authorization system that considers medical 
necessity as its primary concern.
    We note that this same level of expertise need not be present in 
those individuals responding to the prior authorization requests, as 
these persons would be acting in accordance with guidelines developed 
by those persons who place the drugs on prior authorization. However, 
as there may be requests for prior authorized drugs that do not fit 
into present guidelines, access to those persons responsible for 
putting drugs into a prior authorization program is needed.
    Therefore, in accordance with section 1902(a)(54) of the Act, we 
would specify in these regulations at Sec. 447.526(d) and (e) that:
     State staff who place drugs in a prior authorization 
system must be licensed to prescribe or dispense drugs in the State, 
for example, physicians or pharmacists, since these persons would have 
the medical knowledge necessary to determine criteria for prior 
authorization.
     State staff who respond to prior authorization requests 
are not limited to persons licensed to prescribe or dispense drugs as 
long as all decisions involving drugs subject to prior authorization 
are made--
    + In consultation with these licensed professionals; or
    + Under guidelines promulgated by such individuals as long as 
States provide access to licensed professionals in difficult or unusual 
cases.
     The State must establish a process to ensure recipients 
access to medically necessary covered outpatient drugs. We would not 
permit a State to use a prior authorization program as a means to deny 
covered outpatient drugs when medical necessity is shown.
     The State must provide annual written assurances to HCFA 
that the State's prior authorization program does not prevent 
recipients from gaining access to medically needed drugs.
    Generally, we would allow States flexibility in implementing the 
statutory provisions relating to a 24-hour turnaround time for prior 
authorization requests and at least a 72-hour supply for emergency 
situations. For example, States may continue to prescribe the format 
for sending the request (for example, mail, telephone, or telefax). 
States may also continue to staff this function only during normal 
business hours, provided the requirement concerning a response to prior 
authorization requests within 24 hours of a request can be met.
    However, to ensure access to medically necessary drugs, we would 
require States to structure their system so that, in emergency 
situations, a State's response is given to the dispenser or physician 
requesting the authorization before the emergency supply is exhausted. 
In these emergency situations, we would require the State to provide a 
mechanism so that a dispenser or physician can make a prior 
authorization request 24 hours before the supply is exhausted and a 
response returned by the State within that 24-hour period. We would 
require the State to allow a dispenser to provide a sufficient 
emergency supply (of at least 72 hours) until the prior authorization 
response can be returned to the dispenser. For example, the supply of a 
drug dispensed on Friday evening should not be exhausted before the 
prior authorization is requested on Monday morning and a response 
returned to the requester by the State on Tuesday morning (within 24 
hours of a request).
    We would allow States to develop a reasonable definition of 
emergency situations, as long as the definition does not prevent 
recipients from acquiring medically necessary covered outpatient drugs 
within the parameters set forth below. We would require in 
Sec. 447.526(c)(2)(i) that States specify in their State plans the 
process that will be used to determine what constitutes an emergency 
situation. Emergency situations may involve immediate and severe 
adverse consequences or continuation of an immediate and severe adverse 
consequence if a covered outpatient drug is not dispensed when a 
prescription is submitted. We would not consider an emergency situation 
to exist if (1) the lack of a drug supply does not pose an immediate 
threat to the recipient, or (2) a drug must be prior authorized before 
it can be dispensed if there is no immediate threat to the recipient.

B. Exclusion or Restriction of Drugs

1. Drugs Subject to Restriction
    Section 1905(a)(12) of the Act and regulations at 42 CFR 440.120 
define prescribed drugs that may be covered by a State under its 
Medicaid program. Existing regulations under Sec. 441.25 contain 
prohibitions on FFP for certain prescribed drugs. Except for covered 
outpatient drugs defined in section 1927 of the Act, these rules are 
not affected by the requirements for rebate agreements as a condition 
of FFP. This proposed rule would implement, in part, the provisions of 
section 1927(d)(2) of the Act, which specify the specific drugs or 
classes of drugs that States may exclude or restrict from coverage.
    As noted previously in this preamble, section 1927(d)(1)(B) of the 
Act as amended by OBRA '93 specifies conditions under which a State may 
exclude or restrict coverage of an outpatient drug under a drug rebate 
agreement. A State may exclude or restrict a drug if--
     The prescribed use of the drug is not for a medically 
accepted indication;
     The drug is contained in the list of drugs subject to 
restriction under section 1927(d)(2) of the Act;
     The drug is subject to restrictions in a separate or 
existing agreement between a manufacturer and a State agency that has 
been authorized by HCFA under sections 1927(a)(1) of the Act or in 
effect in accordance with section 1927(a)(4) of the Act 
(Sec. 447.524(b)); or
     The State has excluded coverage of the drug from its 
formulary established in accordance with the requirements for 
formularies specified in section 1927(d)(4).
    Section 1927(d)(2) limits a State's option to exclude or restrict 
drugs from coverage under the rebate program to the following drugs, 
classes of drugs, or their medical uses:
     Agents when used for anorexia, weight loss or weight gain.
     Agents when used to promote fertility.
     Agents when used for cosmetic purposes or hair growth.
     Agents when used for the symptomatic relief of cough or 
colds.
     Agents when used to promote smoking cessation.
     Prescription vitamins and mineral products, except 
prenatal vitamins and fluoride preparation.
     Nonprescription drugs.
     Covered outpatient drugs that the manufacturer seeks to 
require as a condition of sale that associated tests or monitoring 
services be purchased exclusively from the manufacturer or its 
designee.
     Barbiturates.
     Benzodiazepines.
    We would allow States flexibility in specifying the drugs and 
medical uses that fall within these descriptions. We do not intend to 
further identify or define these drugs at this time. We would allow 
States to exclude or restrict drugs that fall within these 
descriptions. However, when a drug that is primarily 

[[Page 48456]]
formulated to treat a medically accepted indication not included on the 
list set forth in section 1927(d)(2) of the Act is also prescribed for 
a medical use included in section 1927(d)(2), that use of the drug for 
the medically accepted indication outside of section 1927(d)(2) would 
not be excludable. For example, a drug that is primarily formulated to 
treat asthma or some condition other than coughs and colds should not 
be excluded for the treatment of asthma. However, a State could prior 
authorize the drug and exclude or restrict it if the drug is prescribed 
for a cough or cold in an individual case.
    We would require in Sec. 447.524(g) that a State amend its State 
Medicaid plan to include a list of those drugs or classes of drugs or 
medical uses under section 1927(d)(2) of the Act that the State is 
excluding or restricting from coverage. We would also require a State 
to describe in its plan limitations or conditions of coverage for these 
drugs. However, we would not require the State to list those drugs for 
which it requires prior authorization. We would require States to amend 
their State plans in this manner to ensure that both HCFA and the 
public are adequately informed of those drugs covered by various State 
plans.
2. Updating the List of Drugs Subject to Restriction
    a. Adding Drugs to the List. In accordance with section 1927(d)(3) 
of the Act as amended by OBRA '93, the Secretary must periodically 
update, by regulation, the list of drugs, classes of drugs, or their 
medical uses subject to restriction under the rebate program if there 
is evidence of clinical abuse or inappropriate use. Section 1927(d)(3) 
provides that the Secretary must update the list on the basis of data 
collected by the State Medicaid agencies' surveillance and utilization 
review (SUR) programs. We would incorporate this provision in our 
regulations at Sec. 447.524(d). As necessary, we will announce a 
proposed updated list in the Federal Register and allow public comment 
before the list is issued in final.
    We request public comments with suggestions on how we should 
administer a process to determine when a drug, class of drug, or its 
medical use should be added to the list in section 1927(d)(2) of the 
Act when the item is subject to clinical abuse or inappropriate use. At 
a minimum, any suggestions made for the process must take into 
consideration that we must use SUR data to substantiate any proposal to 
add an item to the list. In accordance with section 1927(d)(3) of the 
Act, a SUR report submitted as supporting documentation would need to 
provide HCFA with the data necessary to make an objective analysis 
regarding clinical abuse or inappropriate use of an item.
    While we currently have reporting requirements for SUR data, we 
would need to modify them to accommodate the additional information 
needed to update the list of drugs subject to restriction. These 
reporting requirements would be addressed in a separate document.
    b. Deleting Drugs From the List. Section 1927(d)(3) of the Act 
provides that the Secretary must ``update'' the list of drugs subject 
to exclusion or restriction. In this proposed rule, we would interpret 
this provision to mean that drugs subject to clinical abuse or 
inappropriate use may be added to the list. However, we do not believe 
that section 1927(d)(3) allows the Secretary to delete drugs from the 
list. That list, set forth in section 1927(d)(2) of the Act, represents 
drugs that, as noted in the Senate Report, are ``commonly subject to 
exclusion or restriction by State Medicaid programs.'' (136 Cong. Rec., 
S15658, daily ed. October 18, 1990) The tenor of that report, as with 
the statute, is that drugs may be added to the list, but that the 
categories already on the list will remain subject to State 
restriction.
    An example to reinforce this point can be made with paragraph (H) 
under section 1927(d)(2) of the Act. Paragraph (H) refers to ``covered 
outpatient drugs that the manufacturer seeks to require as a condition 
of sale that associated tests or monitoring services be purchased 
exclusively from the manufacturer or its designee.'' If we were to 
conclude that we have the authority to remove any drug from the list if 
it were not subject to clinical abuse or inappropriate use (as noted in 
section 1927(d)(3) of the Act), and data were available demonstrating 
that a product was not subject to clinical abuse or inappropriate use, 
we would have to remove the drug from the list (regardless of any 
exclusive arrangement) and require all State Medicaid programs to cover 
the drug. This result would clearly conflict with the statute and with 
the legislative history. Accordingly, the drugs on the list would be 
statutorily mandated and could only be deleted from the list by 
amendments to the statute.
3. DESI and IRS Drugs
    a. The DESI Program. Before enactment of the Federal Food, Drug, 
and Cosmetic Act of 1938, drugs could be marketed in the United States 
as long as a drug's label did not present false information regarding 
the drug's strength and purity. The Federal Food, Drug, and Cosmetic 
Act first established the requirement that a manufacturer has to prove 
the safety of a drug before the manufacturer could market it in the 
United States. In accordance with that statute, drugs marketed before 
the passage of the Federal Food, Drug, and Cosmetic Act were 
``grandfathered'' so that manufacturers, if they do not change the 
representations on the drugs' labels, were allowed to continue to 
market them unless evidence was developed to indicate that they were 
not safe (referred to as pre-38 drugs). However, once a manufacturer 
changed the representation on a pre-38 drug's label, that drug was 
considered by the FDA to be a ``new drug'' and the manufacturer was 
required to prove that the drug was safe for its intended use.
    In 1962, the Federal Food, Drug, and Cosmetic Act was amended to 
require that drugs sold in the United States be regulated more closely. 
Under the provisions of the Drugs Amendments of 1962 (Public Law 87-
781), all new drugs must be shown by adequate studies to be both safe 
and effective before they can be marketed. This legislation also 
applied retroactively to all drugs approved as safe from 1938 to 1962 
(referred to as pre-62 drugs). These pre-62 drugs were permitted to 
remain on the market while evidence of their effectiveness was 
reviewed. The program established under which the FDA would review the 
effectiveness of drugs approved between 1938 and 1962 was named the 
Drug Efficacy Study Implementation (DESI) program.
    If the DESI review indicates a lack of substantial evidence of a 
drug's effectiveness for all of its labeled indications, the FDA will 
publish a Notice of Opportunity for a Hearing (NOOH) in the Federal 
Register concerning its proposal to withdraw approval of the drug for 
marketing. At that time, a manufacturer of that drug or identical, 
related, or similar (IRS) drugs has the opportunity to request a 
hearing and provide FDA with documentation of the effectiveness of the 
drug product before a final determination is made. Drugs for which a 
NOOH has been published are referred to as less than effective (LTE) 
DESI drugs. The IRS drug counterpart of a LTE DESI drug is also 
considered less than effective. (We note that the terms ``DESI drug'' 
and ``LTE DESI drug'' are not synonymous.)
    If all the labeled indications of the product are found to lack 
substantial evidence of effectiveness, a withdrawal notice is published 
in the Federal Register withdrawing approval of the NDA for the 
product. At that time, shipping this product and any IRS drug product 
in interstate commerce after the 

[[Page 48457]]
effective date of the withdrawal notice is unlawful.
    If only some of the labeled indications of the product are found to 
lack substantial evidence of effectiveness, the manufacturer must 
delete those LTE indications from the drug's label. If a manufacturer 
does not comply with this requirement, the manufacturer's NDA can be 
withdrawn by the FDA. All manufacturers of IRS drug products must also 
revise their labeling and submit an application to the FDA to obtain 
approval for their product to be allowed to continue marketing their 
drug.
    In accordance with section 1903(i)(5) of the Act, FFP is not 
available for LTE DESI/IRS drugs for which a NOOH is issued for all 
labeled indications. Under the drug rebate program, a drug is not 
considered a covered outpatient drug if a NOOH is issued for some or 
all labeled indications.
    At present, drugs subject to the DESI review process are in various 
stages of review. The mandatory and optional State coverage 
requirements and FFP restrictions on these drugs are discussed in 
section IV.B.3.b. of this preamble. The term ``DESI/IRS drugs'' is used 
when discussing coverage of a DESI drug and its IRS counterparts.
    b. Coverage of DESI/IRS Drugs Under the Medicaid Program. This 
section describes the general coverage, FFP requirements, and rebate 
requirements for DESI/IRS drugs. Detailed instructions on how to 
identify DESI drugs and the roles that HCFA, States, manufacturers, and 
the FDA play in this process have been sent to the manufacturers and 
States.
     Non-DESI/IRS Drugs or DESI/IRS Drugs Determined Safe and 
Effective. Non-DESI/IRS drugs (pre-38 drugs and post-62 drugs) and pre-
62 DESI/IRS drugs that have undergone the DESI review process and have 
been determined by the FDA to be safe and effective for their labeled 
uses under sections 505 and 507 of the Federal Food, Drug, and Cosmetic 
Act meet the definition of a covered outpatient drug. Therefore, these 
drugs of a participating manufacturer must be covered under the drug 
rebate program and are, therefore, subject to a rebate and FFP.
     DESI/IRS Drugs under Review (No NOOH Issued). DESI/IRS 
(pre-62 drugs) of participating manufacturers which meet the definition 
of a covered outpatient drug that are undergoing the DESI review 
process but for which a NOOH has not been issued must be covered under 
the rebate program. These drugs include:
    + Drugs described in section 107(c)(3) of the Drug Amendments of 
1962 and for which the Secretary has determined there is a compelling 
justification for its medical need, or is identical, similar, or 
related to such a drug; and
    + Drugs for which the Secretary has not issued a NOOH under section 
505(e) of the Federal Food, Drug, and Cosmetic Act to withdraw approval 
of an application for such drug under such section because the 
Secretary has determined that the drug is less than effective for some 
or all conditions of use prescribed, recommended, or suggested in its 
labeling.
    In other words, a State must cover DESI/IRS drugs of a 
participating manufacturer for which a NOOH has not been issued for 
some or all of the drug's labeled indications. FFP is available and the 
drugs are subject to a rebate. DESI/IRS drugs under this category do 
not include drugs that have been found to be safe and effective under 
the DESI review program.
     Less Than Effective (LTE) DESI/IRS Drugs for Some 
Indications. Section 1903(i)(5) of the Act does not prohibit FFP if a 
DESI drug is effective for at least one indication. A drug would meet 
this criterion if a NOOH has been issued for some, but not all, 
indications. These DESI/IRS drugs may be covered at State option and 
FFP is available.
    For purposes of the rebate program, the definition of a covered 
outpatient drug in section 1927(k)(2)(A)(iii) of the Act specifically 
excludes those DESI/IRS drugs for which a NOOH has been issued because 
the FDA has determined that the drugs are less than effective for some 
or all of their prescribed recommended uses. However, when these drugs 
have an FDA-approved, labeled indication for which a NOOH has not been 
issued, the drug is considered a covered outpatient drug for that 
indication (and other medically accepted indications). Therefore, these 
drugs of participating manufacturers must be included in the drug 
rebate program for their approved indications (and other medically 
accepted indications) and are subject to a rebate and FFP.
     Less Than Effective (LTE) DESI/IRS Drugs for All 
Indications. Under section 1903(i)(5) of the Act, FFP is prohibited for 
DESI drugs for which a NOOH has been issued for all conditions of use 
prescribed, recommended, or suggested in its labeling. Therefore, if a 
State chooses to cover these LTE DESI/IRS drugs, FFP is not available. 
This prohibition was not changed by OBRA '90 and applies regardless of 
whether the manufacturer is appealing the NOOH for some or all of the 
drug's indications.
     Less Than Effective DESI/IRS Drugs Withdrawn from the 
Market. The FDA has determined this group of DESI/IRS drugs to be less 
than effective and published a NOOH and subsequent withdrawal notice in 
the Federal Register. Based on these findings, the manufacturer is 
required to discontinue the distribution of these drug products. 
However, because the FDA does not institute recalls of these drug 
products to the retail level, these products may still be available in 
pharmacies. In any event, under section 1903(i)(5), FFP is not 
available for these DESI/IRS drugs.
    c. Reporting DESI/IRS Drugs. The rebate agreement requires that the 
manufacturer's list of covered outpatient drugs include the NDC numbers 
for all drugs currently marketed by the manufacturer. Manufacturers are 
also required to list the NDC number for a drug that it no longer 
markets because the manufacturer will be responsible for providing a 
rebate on the drug until the entire supply of the drug under an NDC has 
expired, the drug has been taken off the market, or for other reasons, 
the potential no longer exists that the covered outpatient drug may be 
dispensed under the manufacturer's NDC number. To comply with these 
requirements, manufacturers must include on their lists of covered 
outpatient drugs all DESI/IRS drugs.
    Even though some drugs are not subject to the rebate program, 
manufacturers must report to HCFA the required information for all LTE 
DESI/IRS drugs. A change from one DESI category to another DESI 
category, as described in section IV.B.3.b. of this preamble, could 
change a drug's coverage under Medicaid. For example, LTE DESI/IRS 
drugs could be potentially covered at some point under the rebate 
program if the FDA reverses its decision on a NOOH. HCFA must have the 
baseline pricing data (for single source and innovator multiple source 
drugs) from October 1, 1990, and for all drugs, the DESI drug 
indicator, as well as other data, in the event they are covered at a 
later date.
    A manufacturer is responsible for knowing the status of DESI/IRS 
drugs by reviewing DESI notices published in the Federal Register by 
the FDA. (See 52 FR 1663 and 1668, January l5, 1987.) Manufacturers 
must identify in their list of covered outpatient drugs which they 
submit to HCFA those DESI/IRS drugs that they produce that are the 
subject of a NOOH.
    In accordance with section 1927(b)(3)(C)(ii) of the Act, any 
manufacturer with an agreement under section 1927 that knowingly 
provides false information is subject to a civil 

[[Page 48458]]
money penalty in an amount not to exceed $100,000 for each item of 
false information. This provision also applies to any manufacturer that 
knowingly reports false information to HCFA regarding the status of a 
DESI/IRS drug for coverage purposes. In addition to civil money 
penalties, the manufacturer may also be subject to termination because 
it is not in compliance with section 1927 of the Act, the national 
rebate agreement, and regulations under Sec. 447.534 that specify 
manufacturer reporting requirements.
    C. Amount, Duration, and Scope of Services. Prior to the enactment 
of OBRA '90, States could establish amount, duration, and scope 
restrictions on Medicaid services, including prescription drugs. These 
restrictions could be based on such criteria as medical necessity and 
utilization control, or could be based on other factors so long as the 
amount of the services provided was sufficient to ``reasonably achieve 
its purpose'' (See section 1902(a)(10) of the Act and Sec. 440.230 
(Sufficiency of amount, duration, and scope)). States could impose 
prior authorization restrictions and also limit the number of 
prescription drugs that they covered through a formulary.
    Section 1927 of the Act curtails a State's authority to exclude 
drugs from coverage and limited its authority to impose prior 
authorization requirements under section 1927(d)(5). However, the 
statute did not alter the State's authority to establish amount, 
duration, and scope restrictions, and, in fact, specifically recognized 
States' authority to impose additional restrictions on the quantities 
per prescription and the number of refills. Specifically, section 
1927(d)(6) of the Act allows a State to impose restrictions on minimum 
and maximum quantities of outpatient drugs per prescription and on the 
number of refills within a therapeutic class to discourage waste. 
Section 1927(d)(6) also allows a State to impose these limitations and 
address instances of fraud or abuse by individuals in any manner 
authorized under the Act.
    The legislative history of OBRA '90 indicates that this statutory 
provision was designed to enhance, not limit or replace, a State's 
authority to impose reasonable amount, duration, and scope 
restrictions. The House Report, adopted by the Conference Committee, 
states that ``States are not prevented from restricting the amount, 
duration, and scope of coverage of covered outpatient drugs consistent 
with the need to safeguard against unnecessary utilization.'' (H. R. 
Conf. Rept. No. 964, 101st Cong., 2nd Sess., 825, 832 (1990)) This 
statement supports the conclusion that the Congress did not intend to 
circumscribe a State's authority to impose amount, duration, and scope 
restrictions. Therefore, in regulations at Sec. 447.524(e), we would 
specify that a State may continue to impose limitations on the minimum 
and maximum quantities of drugs per outpatient prescription and the 
number of prescriptions or dispensing fees allowed per month as it did 
before the enactment of OBRA '90.
    A State, in accordance with section 1927(d)(6) of the Act, may 
impose coverage restrictions on package sizes of a drug when required 
to prevent waste. We do not believe that, given the general goals of 
the drug rebate provisions, Congress intended for States to pay for 
more expensive package sizes when less costly alternatives exist. Thus, 
we would permit States to impose coverage restrictions based on the 
relative economy, or the high cost, of a specific package size. For 
example, a State may exclude from coverage the unit dose packaging of a 
particular drug based on its cost; however, such restrictions may be 
imposed, given the formulary requirements of section 1927(d), only if 
the manufacturer packages the drug in other sizes which the State 
covers.

V. Reporting Requirements

    Under section 1927(b)(2) of the Act as amended by OBRA '93, States 
are responsible for providing to the manufacturer Medicaid utilization 
data for a rebate period regarding the quantity of drugs that they have 
dispensed after December 31, 1990 for which payment was made under 
their State plan during a rebate period. Section 1927(b)(3) of the Act 
requires a manufacturer to supply to HCFA, for each rebate period, 
information concerning AMP and, as required, best price for its covered 
outpatient drugs. Rebates are calculated for each rebate period on the 
basis of this information, as explained in section VI. of this 
preamble.

A. State Reporting Requirements

    Under section 1927(b)(2)(A) of the Act, the State Medicaid agency 
must provide to manufacturers with drug rebate agreements State drug 
utilization data regarding the total number of ``units'' of each dosage 
form, strength, and package size of the manufacturer's drug that were 
dispensed after December 31, 1990 and paid for under the State plan 
during a rebate period. In the regulations at Sec. 447.530(a)(2), we 
would define ``unit'' as the lowest commonly identifiable amount of a 
drug for example, tablet or capsule for solid dosage form, milliliter 
for liquid forms, and gram for ointments or creams, as supplied to HCFA 
in accordance with instructions in the rebate agreement. The use of 
units with regard to State reporting requirements and rebate 
calculations is discussed throughout sections V. and VI. of the 
preamble.
    To comply with the provisions of section 1927(b)(2)(A), we would 
specify in our regulations at Sec. 447.530(b) that States provide 
Medicaid drug utilization data based on claims paid by the State 
Medicaid agency during a rebate period.
1. Pharmacy Coding, Oversight, and Audit
    To comply with the provisions of section 1927(b)(2)(A) of the Act, 
and to facilitate uniform reporting, we would require in 
Sec. 447.530(a)(1) that States report their utilization data by the 11-
digit NDC number. We note that FDA's regulations at 21 CFR 207.35 refer 
to the NDC number as a 10-character code. This code can show leading 
zeros in any segment of the NDC number. However, for standardization 
purposes in the drug rebate program, we are using a consistent 11-digit 
code that reflects leading zeros and the maximum number of digits that 
can appear in each segment of the NDC code.
    We are recommending that, in order to implement these provisions in 
the most efficient and cost-effective manner, State Medicaid agencies 
identify for pharmacies certain information, as discussed below, that 
will enable them to determine those drugs that are covered under a 
State plan. The State should make available to pharmacies information 
concerning the labeler codes of manufacturers with rebate agreements; 
drugs under section 1927(d) of the Act that are excluded or restricted 
from coverage and the limitations or conditions of coverage; and drugs 
that are subject to prior authorization.
    For purposes of this regulation, the term ``pharmacy'' applies to 
any entity authorized by the State to dispense covered outpatient drugs 
in that State. Thus, these requirements will be binding on all 
dispensers of covered outpatient drugs to Medicaid recipients.
    The State agency may establish its own policies to ensure accurate 
pharmacy coding. However, we would require the agency to establish and 
implement an oversight and auditing process to ensure proper pharmacy 
coding and reporting practices. We would also require States to 
establish and implement procedures for investigating allegations of 
erroneous utilization data at the pharmacy level by participating 
manufacturers or other 

[[Page 48459]]
interested parties (Sec. 447.530(e) (2) and (3)). We would require 
State agencies to establish procedures to comply with section 
1927(b)(2)(B) of the Act, which gives manufacturers the authority to 
audit State data. The agency would also be responsible for taking the 
actions necessary to ensure accurate coding (Sec. 447.530(e)(4)).
    We believe these requirements regarding accurate pharmacy coding 
are necessary to effectuate OBRA '90 drug rebate provisions. Accurate 
pharmacy coding is a fundamental and critical component of the Medicaid 
drug rebate program under section 1927 of the Act. Without these 
requirements, pharmacies may use incorrect NDC numbers when billing the 
Medicaid State agencies, which could result in numerous problems.
    Use of incorrect NDC numbers could have a detrimental effect that 
would carry through the entire drug rebate process. First, pharmacies 
could bill States for a brand name drug although a generic drug was 
dispensed, resulting in overpayments to pharmacies, increased drug 
costs, and erroneous utilization data. If pharmacies substitute the NDC 
numbers of one manufacturer for another, even if the drugs cost the 
same amount, the Medicaid utilization data would be flawed. Secondly, 
flawed data would cause the States to invoice manufacturers for 
erroneous rebates, resulting in over and under billing for rebates. 
Thirdly, erroneous data may increase the likelihood that manufacturers 
would dispute the data and withhold rebate payments to States. Thus, 
inaccurate pharmacy coding would increase a State's dispute resolution 
workload, delay rebate payments, and cause interest to accrue on unpaid 
amounts. The dispute resolution process is an expensive, lengthy, and 
resource-intensive process for all parties involved.
    In addition to disputing the data, manufacturers may, in accordance 
with section 1927(b)(2)(B) of the Act, audit the drug utilization data 
provided (or required to be provided) by the State. A manufacturer 
could also request a State to audit a pharmacy, which is also expensive 
and resource intensive. Because of the magnitude of the problems and 
costs inaccurate pharmacy coding can cause, we believe the requirements 
discussed above are necessary to properly and efficiently effectuate 
the drug rebate program requirements in OBRA '90.
    Therefore, we would require in Sec. 447.530(e)(1) that the State 
must inform pharmacies that they are required to use accurate NDC 
numbers for the drugs dispensed in submitting their Medicaid claims and 
that payment can be denied for a drug that has been inaccurately coded 
by a pharmacy. States may consider inaccurate coding to be good cause 
for terminating provider agreements subject to applicable Federal and 
State laws. Also, under anti-fraud provisions, pharmacy claims with 
incorrect NDC numbers may subject these pharmacies to criminal or civil 
money penalties, as well as exclusion from the Medicare and Medicaid 
programs.
    States must implement the requirements of Sec. 447.530(e) within 60 
days after publication of the final rule. We believe this timeframe is 
adequate for establishing procedures to ensure accurate pharmacy coding 
since we informed States of these requirements in mid-1991. We are 
aware that many States have since established procedures to ensure 
accurate pharmacy coding. States that do not ensure accurate pharmacy 
coding may be considered to be out of compliance with section 1927 of 
the Act and, therefore, subject to compliance proceedings. In addition 
to effectuating OBRA '90 drug rebate provisions, we believe these 
pharmacy coding requirements are essential to comply with section 
1902(a)(30) of the Act. Section 1902(a)(30) generally provides that 
methods and procedures relating to the utilization and payment of 
services under the State plan safeguard against unnecessary utilization 
and to ensure that payments are consistent with efficiency, economy and 
quality of care.
    In accordance with section 1927(b)(2)(B) of the Act, a manufacturer 
may audit the drug utilization data provided (or required to be 
provided) by the State. If the information indicates that utilization 
was greater or less than the amount previously specified, adjustments 
to the rebates must be made on the next quarterly report submitted by 
the State. All corrections must be applied to the quarter for which 
utilization data are adjusted. If the adjustments result in a 
manufacturer owing an additional rebate amount, the manufacturer must 
include that amount, plus interest, in the rebate payment for next 
rebate period.
    Since the statute permits manufacturers to audit drug utilization 
data but does not authorize manufacturers to directly audit pharmacies, 
we would require States to have procedures to investigate 
manufacturers' allegations of erroneous utilization data produced at 
the pharmacy level. If the State agrees to such a request, it may apply 
a process that uses a sampling methodology to audit pharmacies in a 
targeted area where erroneous data are believed to be occurring, or by 
other means that will address the alleged problem. Given the large 
volume of Medicaid drug claims, we believe a targeted sampling of 
pharmacies and their claims is a reliable method to discover inaccurate 
coding and billing practices, especially when targeted for specific 
drugs. Doing otherwise could prove costly for States without providing 
a significant amount of additional information. If erroneous data are 
discovered, a State could expand the audit to determine the severity of 
inaccurate billing practices.
    An audit may be performed at any time throughout the dispute 
resolution process. However, both parties must agree to the audit and 
develop mutually agreeable audit procedures. (Section V.F. of this 
preamble contains a discussion of dispute resolution.)
2. Format and Contents of Report
    Section 1927(b)(2)(A) of the Act requires that the Secretary 
establish a standard reporting format that States must use to report 
drug utilization data to manufacturers and to HCFA. Using this standard 
reporting format, States must identify drugs by manufacturer to ensure 
that the proper rebates are paid. As indicated earlier, we selected the 
NDC number that identifies each drug by manufacturer, product, and 
package size as part of the standard reporting format to be used 
throughout the rebate program.
    We have issued, through the rebate agreement and a notice published 
in the Federal Register on May 1, 1991 (56 FR 20006), the standard 
reporting format for States to use in reporting for the rebate period 
to HCFA and manufacturers. We have also issued subsequent letters to 
State Medicaid Directors containing instructions to provide additional 
guidance in using the reporting format. This standard reporting format 
includes the following information:
     State identification;
     Rebate period and year for which data apply;
     NDC number to identify labeler code, product code, and 
package size code;
     Total number of units paid for during the rebate period 
for each NDC;
     FDA registration name to provide a cross-check for the 
product code;
     Total amount of rebate that a State claims for each NDC;
     Number of prescriptions reimbursed by NDC;
     Rebate amount per unit and total reimbursement amount to 
verify manufacturer's payment; and

[[Page 48460]]

     A correction record flag to alert HCFA of a change or 
correction from a previous report.
    These data elements will be updated through separate instructions 
as needed to further program objectives in this area. We would 
incorporate in the regulations at Sec. 447.530(a) through (d) the basic 
reporting requirements and timeframes. HCFA instructions will provide 
guidelines for States to use when reporting utilization data.
3. Timeframe for State Reporting of Utilization Data
    In accordance with section 1927(b)(2)(A) of the Act, we would 
require in Sec. 447.530(c) that each State Medicaid agency report drug 
utilization data to HCFA and the manufacturer no later than 60 days 
after the end of each rebate period. The data for the first rebate 
period (January-March 1991) were originally due to HCFA and the 
manufacturer on May 30, 1991. However, since the Secretary had not 
developed a standard reporting format, we extended the May 30, 1991, 
deadline to July 30, 1991, for States to submit data to HCFA and the 
manufacturer. This delay resulted, in part, from a lack of either 
baseline and/or first rebate period data from many of the 
manufacturers, including the majority that joined the rebate program 
during the extension period to April 30, 1991. We believe the extension 
alleviated the need for States to send to HCFA and manufacturers 
multiple updates of corrected data, prevented disputes on partial data, 
and allowed for smoother implementation of the drug rebate program.
    States should mail the utilization data to manufacturers in a form 
that will provide evidence of the date the data were received by the 
manufacturers. Manufacturers must pay rebates for each rebate period or 
provide a written notice of disputed utilization data by the 30th day 
after receipt of State utilization data. Evidence of the date received 
is important so that States can accurately determine when rebate 
payments are due, when interest begins accruing on any unpaid balances, 
and when the interest period begins for purposes of the dispute 
resolution process. (Section V.F.4. of this preamble contains a 
discussion of the interest provision.)
4. Effect of Timeliness of State Utilization Data on Payment of Rebates
    Section 1927(b)(2)(A) of the Act provides that a State Medicaid 
agency shall report rebate period information on the drugs dispensed 
and paid for to each manufacturer not later than 60 days after the end 
of each rebate period and in a form consistent with a standard 
reporting format established by the Secretary. As noted previously in 
section V.A. of this preamble, we would specify in regulations that 
States provide Medicaid drug utilization data based on claims paid by 
the State during a rebate period. However, we believe circumstances 
could arise that prevent States from being able to generate Medicaid 
utilization information in the standard reporting format to meet this 
60-day deadline. While the statute requires States to meet this 60-day 
requirement, we do not believe the statute relieves manufacturers from 
the obligation of paying rebates if States cannot meet the requirement. 
States do not have an incentive to submit late rebate claims to 
manufacturers since they are losing revenue by doing so. While 
processing late rebate claims may be an inconvenient administrative 
task for manufacturers, manufacturers have the advantage, in this case, 
by having access to these rebate funds which should have been paid to 
the State had the State submitted the data within the specified 
timeframe.
    Thus, we realize that we must establish a maximum timeframe during 
which the manufacturer is bound to pay rebates on all drugs sold to 
Medicaid recipients. We would, therefore, establish a maximum time 
limit of 1 year from the end of a rebate period for States to bill a 
manufacturer for a rebate. However, if a State submits claims later 
than the required 60-day period, the State can only bill the 
manufacturer for the rebate amount that would have been due during the 
rebate period in which the State paid the drug claim. Consequently, we 
would specify in regulations at Sec. 447.530(c) that the manufacturer 
is not required to pay a rebate on its drugs when a State does not 
submit its rebate period utilization data to the manufacturer within 1 
year after the rebate period ended.
    We believe this 1-year timeframe meets the needs of both States and 
manufacturers and is equitable because it parallels the maximum 1-year 
timeframe for providers' and States' responsibilities. Other Medicaid 
provisions allow a maximum timeframe of 1 year for pharmacies to submit 
claims and up to 1 year for States to pay claims (42 CFR 447.45(d)). A 
State would not lose rebates on those drugs for which it cannot compile 
the data within 60 days, and a manufacturer would not be held liable 
for rebates for an extensive period of time due to a State's failure to 
report utilization data within 60 days. As a general matter, HCFA will 
not find a State to be out of compliance if its utilization data are 
submitted to the manufacturer within this 1-year timeframe.
    We consider any time period longer than 1 year after the rebate 
period ended to be extensive since this period could ultimately 
translate into a manufacturer being responsible for rebates for more 
than 3 years after the drug is dispensed. In accordance with 
Sec. 447.45, pharmacies have up to 1 year to bill the State agency for 
drugs dispensed to Medicaid recipients, and States could take as long 
as 1 year to pay a drug claim. Thus, these two processing timeframes 
and the 1-year cutoff total 3 years. This 3-year time period also 
comports with general business principles. The Internal Revenue Service 
generally requires that records be maintained for 3 years unless they 
are involved in some type of action requiring their use. Manufacturers 
may not be able to substantiate rebate claims for more than 3 years 
after a drug is dispensed since they are not required to maintain 
records for more than 3 years. Adding more disputes to the resolution 
process for data where no records may exist is not, in our opinion, a 
cost effective or efficient manner of operating the drug rebate 
program. Thus, we believe this 1-year threshold for States to submit 
utilization data to manufacturers is reasonable and consistent with the 
drug rebate provisions of section 1927 of the Act and necessary to 
effectuate the OBRA '90 drug rebate provisions.
    States that lose rebates required under section 1927 of the Act for 
failure to submit rebate period utilization data to manufacturers 
within 1 year after the rebate period ended may be considered out of 
compliance with section 1927. Therefore, HCFA could initiate a 
compliance action against a State if it fails to collect rebates to 
reduce the amount expended under their State plan for medical 
assistance (Sec. 447.530(c)).
5. Data Edits on State Utilization Data
    As discussed in section V.A.2. of this preamble, States are 
required, under section 1927(b)(2)(A) of the Act, to submit drug 
utilization data to manufacturers in a format established by HCFA. 
Since the accuracy of the invoiced rebates is dependent upon the 
reliability of the State utilization data, we would require States to 
establish a system of edits to its Medicaid utilization information. 
These edits must be performed before the State submits it utilization 
data to the manufacturer. The data reports generated from these edits 
will not be disclosed to the manufacturer but will be used to verify 
the accuracy of the information disclosed. We believe this requirement 
is necessary to effectuate 

[[Page 48461]]
the OBRA '90 drug rebate provisions and to prevent unnecessary disputes 
between States and manufacturers that delay the timely payment of 
rebates.
    The types of edits described in this section are intended to verify 
the accuracy of the Medicaid utilization information by examining 
whether:
     The unit types claimed are appropriate for NDC number 
claimed;
     The units claimed match the amount paid by the State; and
     The amount paid by the State is an amount allowable for 
the NDC (for example, a brand name payment amount was not made for a 
generic drug or the opposite).
    We believe that, by verifying the accuracy of such items described 
in this section before submitting the information to the manufacturer, 
the State will identify inconsistencies, correct them, and reduce the 
number of subsequent disputes. The State must submit the utilization 
data to the manufacturer within the timeframes contained in 
Sec. 447.530(c), as described in sections V.A.3. and V.A.4. of this 
preamble, and only after the State has performed the types of edits 
described in Sec. 447.530(f) and believes the data are accurate.
    The requirement in Sec. 447.530(f) for State edits on Medicaid 
utilization information would be effective 60 days following 
publication of the final rule. That is, State data submitted to 
manufacturers for that rebate period must have been verified through 
the use of system edits.
6. Use of Rounding Indicator
    We also would establish the requirement in Sec. 447.530(g) that 
States must identify by NDC number those drugs for which the number of 
units has been rounded by showing a rounding indicator for the number 
of units dispensed. States must include this information in their 
rebate period Medicaid utilization information submitted to the 
manufacturers. We have determined that this requirement is necessary 
since some pharmacies lack the ability to report decimal quantities in 
the Medicaid utilization information and, thus, in accordance with 
accepted industry standards, round up decimal quantities to the nearest 
whole unit. This practice can result in manufacturers being sent 
inflated utilization data or lead to disputes over the number of units 
billed.
    We believe this requirement is necessary to effectuate the OBRA '90 
drug rebate provisions and to prevent unnecessary disputes between 
States and manufacturers which delay the timely payment of rebates. We 
would, therefore, require States to indicate in the appropriate data 
field whether or not the number of units reported in the Medicaid 
utilization information has been rounded. This indicator will alert the 
manufacturer that a rounding adjustment factor has been applied to 
appropriately deflate the State's utilization data.
    The requirement in Sec. 447.530(g) for States to use the rounding 
indicator would be effective 60 days following publication of the final 
rule. That is, State data submitted to manufacturers for that rebate 
period must include the rounding indicator field and the number of 
units billed. We will provide separate instructions to the States and 
manufacturers regarding the use of the rounding indicator.
7. Rebate Tolerance Limits for Invoicing
    Many States have informed us that the costs of preparing an invoice 
for drug rebates can often exceed the amount of a minimal rebate. For 
instance, some States have spent $50 preparing an invoice for a $5 
rebate. We believe that if administrative costs are more than the 
rebates, the State should not expend its resources to collect a rebate 
that reduces State savings. Thus, to effectuate the OBRA '90 drug 
rebate provisions in the most efficient manner, we would establish a 
rebate tolerance limit for States to use in determining whether it 
should bill a manufacturer for a rebate when the administrative expense 
exceeds the rebate savings.
    Generally, if the rebate amount due per labeler code is less than 
the administrative costs associated with preparing the invoice and 
collecting the rebate, the State should not invoice the labeler for 
that rebate amount. We have determined that a maximum tolerance of $50 
per rebate period would be acceptable if State-supplied information 
establishes this as the reasonable cost of preparing a labeler's 
utilization data. In situations where the tolerance is applied, the 
State need not invoice the manufacturer, although it is free to 
establish its own tolerance below $50 and continue to submit 
utilization data above that tolerance. (We note that, in either event, 
the unit rebate amount must have been supplied by HCFA for all of that 
manufacturer's drugs in that rebate period and the State applied that 
unit rebate amount to its utilization data. If the manufacturer fails 
to supply pricing information for a drug, the unit rebate amount would 
be zero or missing from the HCFA pricing file. In this case, the 
tolerance would not apply.) Further, the State would not be at risk of 
loss of FFP on that portion of the uncollected rebates within the 
tolerance limits.
    The State should maintain supporting documentation that identifies 
the instances when the tolerance levels were applied. We believe our 
policy promotes efficiency by allowing States the authority to pursue 
only those rebate amounts that exceed the States' administrative costs 
associated with those rebate amounts. Our policy also alleviates 
States' concern that they may be liable for the Federal share of those 
rebates that are within the tolerance limits.

B. Reporting Requirements for Manufacturers

    Section 1927(b)(3)(A) of the Act requires manufacturers to supply 
drug pricing information to HCFA. In addition to pricing data, we would 
require manufacturers to complete and submit to States Form HCFA-304, 
the Medicaid Remittance Advice Report (RAR), within 30 days of 
receiving State Medicaid utilization information. The RAR has been 
approved by OMB prior to publication of this proposed regulation (OMB 
approval No. 0983-0676). The basis and timeframes for meeting this 
requirement, as well as what information is required on the RAR, are 
discussed below.
1. Timeframes for Reporting
    Under the terms of the statute and the national rebate agreement, 
manufacturers must supply HCFA with a list of all covered outpatient 
drugs, the applicable baseline AMP, and, for single source and 
innovator multiple source drugs, best price within 30 calendar days of 
entering into the national rebate agreement. Manufacturers must update 
the list for each rebate period under the agreement to include AMP and, 
as appropriate, best price of drugs (both terms are discussed more 
fully below) and must report the update to HCFA no later than 30 days 
after the last day of each rebate period. We would incorporate these 
requirements in the regulations under Sec. 447.534 (a) and (b).
    In accordance with the dispute resolution process described in 
section V.F. of this preamble, and as set forth in regulations under 
Sec. 447.536(b), we would require manufacturers to complete and submit 
to States the RAR within 30 days of receiving a State's Medicaid 
utilization information. We believe this requirement is necessary to 
effectuate the drug rebate provisions in OBRA '90, and to aid in the 
timely resolution of disputes and the timely payment of rebates.
2. Content of Reporting
    a. Manufacturer Reporting Requirements to HCFA. Section 

[[Page 48462]]
    1927(b)(3)(A)(i) of the Act requires that the manufacturer's list of 
covered outpatient drugs submitted under the rebate agreement must be 
updated by the manufacturer on a rebate period basis to include the AMP 
and, for single source drugs and innovator multiple source drugs, the 
manufacturer's best price.
    (1) Definition of Average Manufacturer Price (AMP). As stated 
earlier, under section 1927(k)(1) of the Act, AMP means, with respect 
to a rebate period, the average unit price paid to the manufacturer for 
the drug in the States by wholesalers for drugs distributed to the 
retail pharmacy class of trade after deducting customary prompt pay 
discounts. We would incorporate the definition of AMP in 
Sec. 447.534(c). Under this definition, sales that a manufacturer makes 
to other than the retail class of trade must be excluded. Thus, sales 
where the buyer relabels or repackages the drug with another NDC number 
and sales through wholesalers where the manufacturer pays a chargeback 
for sales to an excluded buyer, such as a hospital, would not be 
considered sales to the retail class of trade.
    We would also exclude from this definition direct sales to 
hospitals, health maintenance organizations and to distributors where 
the drug is relabeled under that distributor's NDC number because these 
entities are not considered the retail pharmacy class of trade. We 
would also exclude Federal Supply Schedule (FSS) prices from the 
calculations of AMP since the statute does not include FSS and FSS does 
not represent a retail level of trade.
    We have interpreted AMP to include cash discounts and all other 
price reductions and customary prompt pay discounts (other than rebates 
under section 1927 of the Act) that reduce the actual price paid. This 
definition comports with the statute and HCFA's understanding of 
Congressional intent as set forth in the legislative history. (H.R. 
Conf. Rept. No. 964, 101st Cong., 2nd Sess. 825 (1990).)
    The manufacturer must calculate AMP as a weighted average price for 
all of its package sizes for each covered outpatient drug sold during 
that rebate period but only report a single AMP for the weighted 
average. AMP must be calculated as net sales divided by number of units 
sold, excluding goods or any other items given away that are not 
contingent on any purchase requirements. For bundled sales, the 
allocation of the discount is made proportionately to the dollar value 
of the units of each drug sold under the bundled arrangement. In this 
context, bundled sale refers to the packaging of drugs of different 
product codes where the condition of rebate or discount is that more 
than one drug is purchased, or where the resulting discount or rebate 
is greater than that which would have been received had the drug 
products been purchased separately. Because we are defining the AMP to 
include cash discounts allowed and all other price reductions, we would 
require in Sec. 447.534(c)(5) that the manufacturer adjust the AMP for 
a rebate period if cumulative discounts or other arrangements 
subsequently adjust the prices actually realized.
    (2) Definition of Best Price. We have interpreted ``best price,'' 
as defined in section 1927(c)(1)(C) of the Act, to mean, with respect 
to single source and innovator multiple source drugs, the lowest price 
at which the manufacturer sells the covered outpatient drug to any 
purchaser (as discussed later in this section of the preamble) in the 
United States (excluding the Territories). We would further interpret 
best price at Sec. 447.534(d) to mean the lowest price in any pricing 
structure (including capitated payments) in the same rebate period for 
which the AMP is computed.
    The best price must include cash discounts, free goods that are 
contingent on any purchase requirements, volume discounts, and rebates 
other than rebates under section 1927 of the Act. Best price must be 
determined on a unit basis without regard to special packaging, 
labeling, or identifiers on the dosage form or product or package, and 
will not take into account prices that are nominal in amount (that is, 
less than 10 percent of AMP). Unlike AMP, the best price is the single 
lowest price of the drug at the product code level during the rebate 
period and is not a weighted average.
    For bundled sales, the allocation of the discounts is made 
proportionately to the dollar value of the units of each drug sold 
under the bundled arrangement. We would require the manufacturer to 
adjust the best price for a rebate period if cumulative discounts, 
rebates, or other arrangements subsequently adjust the prices actually 
realized. We believe this is consistent with our understanding of the 
statute and the Congress' desire that the Medicaid program benefit from 
the same discounts available to other bulk purchasers.
    OBRA '93 amended section 1927(c)(1)(C) of the Act by adding to the 
definition of ``best price'' providers and health maintenance 
organizations (HMOs) as entities included in the best price 
calculation. This reflects our existing policy in this area as the 
result of OBRA '90. The best price reflects any price of a manufacturer 
except those prices specifically exempted by the law. For purposes of 
best price we interpret ``provider'' to mean a physician, hospital and 
other health maintenance organizations or entities that treat 
individuals for illnesses and injuries or provide services or items in 
the provision of health care.
    OBRA '93 amended section 1927(k)(3) to specify that any drug, 
biological, or insulin excluded from the definition of covered 
outpatient drug as a result of section 1927(k)(3) must be treated as a 
covered outpatient drug for the purpose of determining the drug's best 
price. That is, any prices offered to the entities listed in section 
1927(k)(3) of the Act must be included in a manufacturer's best price 
calculation even though drugs provided as part of these settings are 
not considered covered outpatient drugs.
    Because of legislative changes, best price varies over time 
regarding the prices that are included and excluded from its 
definition. To identify these variances, we have separated them into 
the specific time periods.
    (a) Best Price Definition Effective January 1, 1991-October 27, 
1991 and July 1, 1992-September 30, 1992. For these periods, best price 
includes prices to wholesalers, retailers, providers, HMOs, nonprofit 
entities or governmental entities within the States (excluding depot 
prices and single-award contract prices of any agency of the Federal 
Government). ``Depot prices'' mean prices available to any depot of the 
Federal Government for purchase of drugs from a manufacturer through 
the depot system of procurement, irrespective of whether the drug 
products physically flow through the depot. ``Depot'' means any Federal 
warehousing facility and distribution arrangement whether: (1) 
Government owned and operated; (2) government owned and privately 
operated; or (3) privately owned and operated. The Department of 
Defense's (DOD's) Electronic Commerce Initiative (ECI), which is an 
electronic ordering system that ships drugs directly to Federal 
Government medical facilities that were previously shipped through the 
depot system, is included in this definition. ``Single-award contract 
prices'' mean prices under a contract between the Federal Government 
and a manufacturer resulting in a single supplier for a covered 
outpatient drug within a class of drugs.
    Given the definition of best price provided in section 
1927(c)(1)(C) of the Act, it is our opinion that the FSS prices must be 
included in the best price calculation for these periods, since FSS 

[[Page 48463]]
prices are neither depot nor single award prices, which are the only 
statutory exclusions relative to best price. Since prices for drugs and 
biologicals that are either paid by the DVA or in contracts 
administered by the DVA are listed in the FSS, these prices must also 
be included in the best price calculation for these periods.
    (b) Best Price Definition Effective October 28, 1991-June 30, 1992. 
For this period, best price includes prices to wholesalers, retailers, 
providers, HMOs, nonprofit entities, governmental entities within the 
States (excluding depot prices and single-award contract prices of any 
agency of the Federal Government). The Department of Veterans Affairs 
Appropriations Act (Public Law 102-139), enacted on October 28, 1991, 
provides that effective October 28, 1991, through either June 30, 1992, 
or the date of enactment of other DVA drug price legislation, whichever 
is earlier, prices for drugs and biologicals paid by the DVA, and drugs 
and biologicals sold under contracts administered by that Department 
that are listed in the FSS, shall not be considered in the Medicaid 
drug rebate calculation. Therefore, for the period October 28, 1991, 
through June 30, 1992, the definition of best price excludes FSS prices 
for drugs and biologicals paid by the DVA and drugs and biologicals 
sold under contracts administered by that Department that are listed in 
the FSS. (Note: In accordance with this legislation, manufacturers must 
reflect any sales of drugs or biologicals to the DVA or of drugs and 
biologicals sold under contracts with that Department that are listed 
in the FSS during the period of October 1, 1991, through October 27, 
1991, in their best price for the fourth quarter of 1991 and again 
beginning in the rebate period starting July 1, 1992.)
    (c) Best Price Definition Effective October 1, 1992. Beginning 
October 1, 1992, best price includes prices to wholesalers, retailers, 
providers, HMOs, nonprofit entities or governmental entities within the 
States (excluding depot prices and single award contract prices of any 
agency of the Federal Government). The Veterans Health Care Act 
broadened the exclusions from best price effective October 1, 1992. 
Section 601(a) of VHCA amends section 1927(c)(1)(C) of the Act to 
exclude from best price any prices charged on or after October 1, 1992, 
to the Indian Health Service, the DVA, a State home receiving funds 
under section 1741 of title 38 of the United States Code, the 
Department of Defense, the Public Health Services, or a covered entity 
described in section 1927(a)(5)(B) of the Act; any prices charged under 
the FSS of the General Services Administration; or any prices used 
under a State pharmaceutical assistance program. Best price excludes 
depot prices and single-award contract prices of any agency of the 
Federal Government.
    (3) Requirements for the List of Covered Outpatient Drugs. We would 
require that the manufacturer's list of covered outpatient drugs 
include the NDC numbers for all drugs currently marketed by the 
manufacturer and continue to list the NDC numbers for drugs that are no 
longer marketed until such time as it is no longer possible for a State 
Medicaid agency to properly make payment for the drug and report this 
payment to the manufacturer. We would require that a manufacturer 
continue to list an NDC number for a drug that it no longer markets 
because the manufacturer will be responsible for providing a rebate on 
the drug until the entire supply of the drug under an NDC has expired, 
the drug has been taken off the market, or, for other reasons, there no 
longer exists the potential that the drug may be dispensed under the 
manufacturer's NDC number (for example, the FDA recalls the drug or 
reverses its approval on an approved NDA). In addition, since the 
manufacturer must pay the rebate on State utilization data for up to 1 
year after the rebate period in which the data are submitted (as 
discussed in section V.A.4. of this preamble), the manufacturer must 
continue to report the data during this period. A rebate would be 
calculated on drugs that are no longer marketed using the AMP and best 
price from the last rebate period reported for those drugs 
(Sec. 447.534(b)).
    In accordance with the provisions of the rebate agreement and the 
May 1, 1991, Federal Register notice (56 FR 20006), and to implement 
the drug rebate provisions of OBRA '90, we would require the 
manufacturer to supply the following information:
     NDC number with labeler code, product code, and package 
size code;
     Period covered for rebates (rebate period and year);
     Product FDA registration name;
     Drug category of single source, innovator multiple source, 
or noninnovator multiple source;
     DESI drug indicator;
     FDA therapeutic equivalence explanation code;
     Unit type;
     Units per package size;
     Average manufacturer price (AMP);
     Base date AMP;
     Best price;
     FDA approval date;
     Date drug entered market;
     Drug termination date;
     Drug type (Rx/OTC indicator);
     Rounding adjustment factor; and
     Correction record flag.
    The above information is needed to meet the requirements set out in 
section 1927 of the Act. To calculate the rebate amounts required for 
each manufacturer under section 1927(c) of the Act, we need specific 
information to identify the manufacturers, drugs, prices, number of 
units sold, and the time period covered. The drug category is used to 
determine which rebate calculation to apply. The FDA approval date and 
the date the drug entered the market are necessary to determine 
baseline AMP for drugs approved by the FDA after October 1, 1990. The 
drug termination date is necessary to avoid making payment for a drug 
that is no longer on the market. The FDA registration name, DESI drug 
indicator, FDA therapeutic equivalence code, and the drug type indicate 
whether the drug meets the definition of a covered outpatient drug in 
sections 1927(k)(2) and (4) of the Act, and allow States to properly 
exclude drugs under section 1927(d)(2) of the Act. The rounding 
adjustment factor is supplied for drugs sold in decimal quantities and 
is used by a State when the quantity of a drug has been rounded up. The 
correction flag signals that the record contains corrected information 
from a previous submission.
    (4) Rounding Adjustment Factor. We would establish a requirement 
that manufacturers include a rounding adjustment factor for those drugs 
sold in decimal quantity sizes, for example, a 1.4 gram of ointment. We 
have determined that this requirement is necessary to effectuate the 
OBRA '90 drug rebate provisions because, as described in section V.A.6. 
of this preamble, some pharmacies lack the capability to report decimal 
quantities of drugs to the State agencies. In this situation, the 
pharmacy rounds the utilization data upward so that a 1.4-gram tube is 
reported as a 2-gram tube. Rounding up is the pharmacy industry 
standard and is a common practice in all States that round decimal 
quantities of drug utilization data. Since, in this case, the rebate 
amount is calculated on a unit basis of grams, the manufacturer may be 
invoiced for an excessive rebate amount. Thus, the use of a rounding 
adjustment factor can reduce the amount of disputes for decimal 
quantity packages. Therefore, we would require manufacturers to provide 
a rounding adjustment factor for each of their rebate period pricing 
data submitted to HCFA for those drugs sold in decimal quantities. 

[[Page 48464]]

    As described in section V.A.6. of this preamble, we would also 
require States to identify for manufacturers those utilization data by 
NDC number that have been rounded. Therefore, HCFA will submit the 
rounding adjustment factors to the States with the rebate period unit 
rebate amount information. This will enable States that round decimal 
quantity packages to apply the rounding factor to its data before 
submitting utilization data to the manufacturer. Such data will help 
ensure that rebates are an accurate reflection of the units paid during 
a rebate period.
    We will issue specific program instructions to States and 
manufacturers regarding the use of the rounding adjustment factor.
    The requirements for reporting the rounding adjustment factor for 
manufacturers and the requirements for States to identify rounded 
utilization data with the rounding indicator, as described in section 
V.A.6. of this preamble, would be effective 60 days following 
publication of the final rule. That is, the rebate period pricing data 
submitted to HCFA by manufacturers for that rebate period must include 
the rounding adjustment factor for those applicable NDCs. We believe 
this allows sufficient time for manufacturers and States to implement 
the rounding requirements.
    As stated earlier, section 1927(b)(3)(A)(i) of the Act requires 
that the manufacturer's list of covered outpatient drugs submitted 
under the rebate agreement be updated by the manufacturer on a rebate 
period basis to include the AMP and, for single source drugs and 
innovator multiple source drugs, the manufacturer's best price. We will 
issue program instructions to manufacturers to update the data 
elements, as needed, to further program objectives in this area.
    b. Manufacturer Reporting Requirements to States. We would require 
manufacturers to complete and submit to States Form HCFA-304, the 
Medicaid Remittance Advice Report (RAR). The RAR has been approved by 
OMB prior to publication of this proposed regulation (OMB approval No. 
0938-0676). The RAR is a mandatory form that provides a uniform format 
for manufacturers to report the remittance of rebate payments to 
States, adjustments to previous rebate period payments, and disputed 
rebate amounts. The RAR is available in two formats, electronic and 
paper, depending on the preference of the manufacturer. Each 
participating manufacturer would be required to complete and submit the 
RAR to States within 30 days of receiving State Medicaid drug 
utilization information. In addition to reporting regular rebate period 
rebates and disputed amounts, manufacturers would use the RAR on an 
unscheduled basis when the States need the RAR to process adjustments 
to prior periods. The regulations pertaining to the RAR are found in 
Secs. 447.534(f) and 447.536(b).
    HCFA developed the RAR in response to a need for improved data 
exchange between manufacturers and States. In order to develop the RAR 
to meet the needs of both manufacturers and States, HCFA convened 
several dispute resolution conferences beginning in February 1992. 
These conferences were attended by groups representing manufacturers, 
pharmacists, States and HCFA. HCFA received suggestions from these 
groups to help develop a uniform reconciliation report to improve data 
exchange between manufacturers and States, to enable States to verify 
rebate payments, and to provide a vehicle for manufacturers to identify 
specific disputed amounts. HCFA considered these suggestions in 
preparing the final version of the RAR.
    The RAR will function as a reconciliation report with the intent of 
reducing disputes by standardizing data exchange and improving 
communication between manufacturers and States regarding Medicaid 
utilization data, rebates, adjustments, and disputes. For these 
reasons, we have determined that the requirement for the completion and 
submission of the RAR is necessary to effectuate the OBRA '90 drug 
rebate provisions and to provide for the efficient administration and 
function of the Medicaid drug rebate program as required under section 
1927 of the Act.
    The RAR includes the following information:
     Manufacturer name;
     Labeler code;
     Manufacturer address;
     Name of manufacturer contact person;
     Telephone number of contact person;
     Facsimile (FAX) number of contact person;
     State;
     Rebate period and year for which the information applies;
     Invoice number, if State provided one;
     NDC number;
     Product name;
     Rebate amount per unit;
     Units invoiced;
     Rebate amount invoiced;
     Rebate amount paid;
     Adjusted rebate per unit, if applicable;
     Adjustment code, if applicable;
     Credit/debit indicator, if applicable;
     Adjusted invoice amount, if applicable;
     Units disputed, if applicable;
     Dispute code, if applicable;
     Withheld invoice amount, if applicable;
     Total rebate amount invoiced;
     Total rebate amount paid;
     Total adjusted invoice amount, if applicable; and
     Total withheld invoice amount, if applicable.
    These data elements will be updated, as needed, through separate 
instructions to further program objectives in this area. We would 
incorporate the basic reporting requirements and timeframes in our 
regulations at Sec. 447.534(f).
    We believe the above information is needed for the State to 
identify and verify rebates per NDC and reconcile any disputed amounts 
as a result of the requirements set forth in section 1927 of the Act 
and these regulations. We further believe the information is necessary 
for HCFA to more accurately monitor the operation of the drug rebate 
program. To verify the rebate amounts paid as calculated under section 
1927(c) of the Act, or to reconcile any disputed amounts, it is 
essential that the information contained in the RAR identify the 
manufacturers, drugs by NDCs, rebate amounts per units, units invoiced, 
rebate amounts invoiced, and rebate amounts paid, as well as any 
adjusted rebate amounts, reasons for any adjustments, units disputed, 
reasons for any disputed amounts, and any withheld invoice amounts, if 
applicable. We would also require that manufacturers separately report 
supporting documentation if a State requests it to verify the 
information contained on the RAR.
    c. Prior Period Adjustments. A prior period adjustment is a change 
in the unit rebate amount based on a manufacturer's revised AMP or best 
price data for a prior rebate period after that rebate period's pricing 
data has been submitted to HCFA. HCFA uses the manufacturer's pricing 
data to generate the unit rebate amount for each 9-digit NDC which 
States use to calculate rebate amounts due from manufacturers. Any 
changes to a manufacturer's AMP or best price result in changes to the 
unit rebate amount and rebates due from the manufacturer. Thus, prior 
period adjustments are necessary to correct rebate amounts that are 
owed by manufacturers or credits due to manufacturers.
    We would establish a time limitation of 3 years during which prior 
period adjustments will be generated based on 

[[Page 48465]]
revised AMP or best price data from manufacturers. Therefore, we would 
require manufacturers to report changes to AMP or best price for 3 
years after the rebate period to which the data pertains 
(Sec. 447.334(h)). No prior period adjustments will be generated for a 
quarter more than 12 quarters prior to the current quarter. For 
example:
    (1) No prior period adjustment pertaining to the rebate period 
ending December 31, 1991, may be generated after December 31, 1994.
    (2) All prior period adjustments pertaining the rebate period 
ending June 30, 1992, must be generated prior to July 1, 1995.
    We believe this 3-year timeframe is reasonable since it is 
consistent with the record retention requirements we would establish 
under Sec. 447.534(g)(1). That is, we would require manufacturers to 
retain records (written or electronic) for 3 years after the date the 
manufacturer reports its rebate period AMP or best price. This 3-year 
time-frame also comports with the requirements for the maintenance of 
records on State Medicaid expenditures imposed on States. (See section 
V.C. of the preamble for a discussion of the record retention 
requirements.)
    The 3-year timeframe during which manufacturers must report changes 
to AMP or best price parallels the record retention period and the 
possible corrective actions from audits during this 3-year period. 
During this timeframe, a manufacturer's records on the drug rebate 
program could be audited with findings that result in an adjustment of 
pricing information and rebate payments. Thus, any changes to AMP or 
best price should also be required during this 3-year timeframe.
    After States receive prior period adjustments from HCFA on the 
quarterly pricing file, States should calculate the difference between 
the original and revised unit rebate amounts and adjust the rebate 
amounts due from or credited to manufacturers.
    We note that changes to the unit rebate amount from prior period 
adjustments cannot be disputed by manufacturers nor handled through the 
normal dispute resolution mechanism because this information is 
reported by manufacturers to HCFA. Any discrepancies in the unit rebate 
amounts should be reported to HCFA for clarification and resolution. 
HCFA will review all pricing information changes that result in a 
revised unit rebate amount.

C. Recordkeeping Requirements

1. AMP and Best Price Calculations
    Section 1927(b)(3)(B) of the Act gives the Secretary the authority 
to survey a manufacturer's records and data to verify the pricing 
information reported under section 1927(b)(3)(A) of the Act. To 
facilitate such surveys, we would require under Sec. 447.534(g) that a 
manufacturer must retain for 3 years from the date the manufacturer 
reports that rebate period's data, all records (written or electronic) 
of the data and any other materials from which the calculations of the 
AMP and best price were derived. A manufacturer must retain records 
beyond the 3-year period if audit findings related to the AMP and best 
price have not been resolved. In addition, if the manufacturer makes 
reasonable assumptions in its calculations of AMP and best price, the 
manufacturer must also maintain a written or electronic record 
outlining these assumptions. We will consider reasonable assumptions to 
include: that the AMP can never be zero or a negative number; that the 
methodology used to determine basedate AMP, as well as AMP and best 
price, is used consistently for all rebate period calculations; and 
that accounting methods are in accordance with generally acceptable 
accounting principles and conform to the manufacturer's tax reporting 
accounting policies.
    We would require manufacturers to maintain records for 3 years 
since this time period is necessary to verify the accuracy of 
information received. Also, the 3-year time period comports with the 
requirements for the maintenance of records on State Medicaid 
expenditures imposed on States. Regulations at Sec. 433.32 require that 
States retain records for 3 years from the date of submission of a 
final expenditure report for FFP. Therefore, we believe that 
manufacturers should also maintain records for this same timeframe, in 
the event that manufacturers' records on the drug rebate program are 
audited and the audit results in an adjustment of pricing information 
and rebate payments.
2. Dispute Resolution Process and RAR
    The dispute resolution process described in section V.F. of this 
preamble and Sec. 447.536 would require that both States and 
manufacturers maintain supporting documentation at various stages of 
the dispute resolution process. For example, manufacturers and States 
must maintain supporting documentation for certain types of disputes 
indicated on the RAR, data inconsistencies, and agreements reached 
between both the manufacturer and State in settling a dispute. States 
must also maintain documentation if States choose to cease the dispute 
resolution process based on the cost effectiveness thresholds. Thus, in 
Sec. 447.534(g)(2) we would require both States and manufacturers to 
keep all supporting documentation required under the dispute resolution 
process and in conjunction with the RAR for a 3-year period from the 
date the dispute is resolved between the manufacturer and the State.
    As discussed in section V.C.1. of this preamble, States are 
required to maintain records on State Medicaid expenditures for 3 years 
from the date of submission of a final expenditure report for FFP. The 
final expenditure report for FFP must contain any rebate payment 
adjustments as a result of the final dispute settlement 
(Sec. 447.534(g)(2)).
    We would require manufacturers to maintain supporting documentation 
for this 3-year period under our general rulemaking authority since 
this requirement comports with the State maintenance of record 
requirements and is necessary to effectuate the provisions of OBRA '90 
and the dispute resolution process.

D. Confidentiality of Reported Information

    In accordance with section 1927(b)(3)(D) of the Act (as amended by 
VHCA), we would specify in Sec. 447.540(a) that manufacturer-specific 
pricing information disclosed by the manufacturer in connection with 
the rebate agreement is confidential and, notwithstanding other 
provisions of law (including the Freedom of Information Act (FOIA), 5 
U.S.C. 552), must not be disclosed by the Secretary of HHS, the 
Secretary of Veterans Affairs, the State Medicaid agency or its 
contractors in a form that reveals the manufacturer or wholesaler, or 
prices charged by the manufacturer or wholesaler, except as necessary 
for:
     The Secretary to carry out the provisions of section 1927 
of the Act;
     The Comptroller General to review the information 
provided; and
     The Director of the Congressional Budget Office to review 
the information provided.
    Based on this explicit confidentiality language, HCFA is prohibited 
from disclosing specific manufacturer data that identify the base date 
AMP, AMP, best price, unit rebate amount, or the total rebate amount 
claimed. We believe that it is reasonable to expect that disclosure of 
any of these data would lead to the identity of a manufacturer and its 
prices. We do not believe, 

[[Page 48466]]
however, that this prohibits us from releasing data in a non-
manufacturer specific or aggregate form, such as that required in 
section 1927(i) of the Act, which describes the information to be 
included in the Secretary's annual report regarding the operation of 
the drug rebate program. Under this section, the Secretary must include 
in the annual report such information as the total value of rebates 
received and the number of manufacturers providing such rebates, and 
the effect of inflation on the value of rebates required under the drug 
rebate program.
    While we are not precluded from releasing AMP and best price to the 
States (inasmuch as the confidentiality provisions of section 
1927(b)(3)(D) of the Act contemplate such release), we have determined 
that supplying the specific unit rebate amount to the States, as 
opposed to other pricing data, will give States sufficient information 
to invoice and verify rebate payments.
    States are prohibited from releasing any manufacturer-specific 
pricing data supplied by HCFA in relation to the drug rebate program. 
States are also prohibited from releasing these data to individual 
pharmacists or pharmacy groups. However, release of a State's 
utilization data, excluding manufacturer-specific pricing data, is 
permitted to the extent it is allowed under Federal or State 
confidentiality laws.
    These confidentiality provisions will remain in full force and 
effect on the States and HCFA, regardless of the nonrenewal or 
termination of the rebate agreement. The statute does not specify that 
the confidentiality provisions are limited to the period when an 
agreement is in effect.

E. Penalty for Failure to Report Information or for Reporting False 
Information

    Section 1927(b)(3)(B) of the Act provides that the Secretary may 
survey wholesalers and manufacturers that directly distribute their 
covered outpatient drugs, when necessary, to verify manufacturer prices 
reported to HCFA. The Secretary may impose a civil monetary penalty in 
an amount not to exceed $100,000 on a wholesaler, manufacturer, or 
direct seller of a covered outpatient drug if the wholesaler, 
manufacturer, or direct seller refuses a request for information about 
charges or prices by the Secretary in connection with a survey or 
knowingly provides false information. The provisions of section 1128A 
of the Act regarding civil monetary penalties (except for subsections 
(a) (with respect to amounts of penalties or additional assessments) 
and (b)) apply to the imposition of these penalties in the same manner 
as such provisions apply to a penalty or proceeding under section 
1128A(a).
    If a manufacturer fails to provide the required information on AMP 
and best price or the list of covered outpatient drugs, the amount of 
the civil money penalty is $10,000 for each day beyond the due date 
that the information is not provided. We have included the list of 
covered outpatient drugs as a required item because we believe it is a 
necessary component of the pricing information required by the statute. 
The corresponding drug identifiers provided by the list of covered 
outpatient drugs, such as NDC numbers, names, and package sizes, are 
needed to accurately verify the pricing information of the vast number 
of drugs on the market. If all of the required information is not 
reported within 90 days of the required timeframe, HCFA is authorized 
to suspend the drug rebate agreement after the end of that 90-day 
period and continue the suspension until the information is provided. 
The suspension period must not be for less than 30 days. A manufacturer 
will continue to be responsible for rebates on drugs covered during the 
period the agreement was not suspended.
    Any manufacturer with an agreement, that knowingly provides false 
information, will be subject to a civil money penalty in an amount not 
to exceed $100,000 for each item of false information. These penalties 
are in addition to other penalties prescribed by law. The provisions of 
section 1128A (other than subsections (a) and (b)) apply to a civil 
money penalty under this paragraph in the same manner as such 
provisions apply to a penalty or proceeding under section 1128A(a). We 
would incorporate these provisions under Sec. 447.542.

F. Dispute Resolution for Medicaid Utilization Information

1. Background
    As required under section 1927(b)(1) of the Act, a manufacturer 
must provide to each State a rebate for covered outpatient drugs within 
30 days after receipt of the State utilization information. For 
purposes of the Medicaid drug rebate program, and, as set forth in 
section II.(b) of the national rebate agreement, the manufacturer is 
responsible for timely payment of the rebate amounts within 30 days of 
receiving, at a minimum, information, by NDC number, on the number of 
units reported by the State. Additionally, section V.(b) of the 
national rebate agreement sets forth broad guidelines for a dispute 
resolution process for States and manufacturers to follow in cases 
where the manufacturer believes the State utilization data are 
erroneous. We would clarify these guidelines and timeframes for dispute 
resolution in these regulations.
    The resolution of disputes has been a source of concern for 
manufacturers and States alike. The type of process needed to resolve 
disputes over utilization data is unique to the drug rebate program 
under Medicaid. Because these disputes often do not involve legal 
issues but can be resolved by exchange of information and refinement of 
data collection methods through discussions between the principals, the 
process must provide a full opportunity for such resolution before any 
proceeding before a hearing officer (the method commonly used to 
resolve other types of disputes). There are no existing regulations, 
under either the Medicaid or Medicare program, that can be applied to 
this dispute process. Likewise, there are no regulations that could be 
used as a model for developing the dispute resolution requirements.
    Recognizing the need for improvements in this area, HCFA convened a 
meeting in February 1992 on dispute resolution with members of 
organizations representing manufacturers, pharmacists, and States. At 
that meeting, we discussed the concerns of the participants relating to 
dispute resolution. A workgroup was formed from the conferees to 
explore ways in which HCFA could develop a uniform set of guidelines 
for States and manufacturers to follow in the resolution of disputes.
    In May 1992, the conferees reconvened and recommendations of the 
workgroup were discussed. As a result of the meetings and suggestions 
received from participants, HCFA decided to provide more detailed 
requirements in the area of dispute resolution. In part, we have 
established a two-phase process for settling disputes. Phase I involves 
the manufacturer and State working jointly to resolve the dispute. 
Phase II involves using the State hearing process or an arbitrator or 
mediator to help resolve the dispute. We would identify specific steps 
and timeframes within each phase for the resolution of disputes and 
have incorporated them into our regulations at Sec. 447.536. We believe 
these requirements are necessary to effectuate the drug rebate 
provisions of OBRA '90, and to ensure that rebates are paid in a timely 
manner.
    Under phase I of the process, there is a 240-day timeframe after 
the State receives the manufacturer's RAR for the 

[[Page 48467]]
States and manufacturers to seek resolution of the dispute through 
exchange of information and informal negotiation. If both parties 
cannot reach a resolution within this timeframe, they must take one of 
several actions described in Step 4 of phase I or proceed to phase II 
of the dispute resolution process.
    Under phase II of the process, the State must schedule a hearing to 
settle the dispute. Proceeding to phase II to settle disputes is 
generally done after all steps in phase I have been completed. However, 
either a State or a manufacturer may proceed to phase II if either 
party has not fulfilled its obligations under any step in the first 
phase of the process. For example, the manufacturer may request that 
the State schedule a hearing at any stage of the dispute resolution 
process if the State fails to perform required phase I actions within 
the specified timeframes. Conversely, the State may schedule a hearing 
at any stage of the process if the manufacturer fails to perform 
required phase I actions within the specified timeframes, and/or 
request HCFA, through the HCFA Regional Office (RO), to terminate the 
manufacturer's national rebate agreement.
    We believe the timeframes established for each of the steps in the 
first and second phases of the dispute resolution process are 
reasonable for both States and manufacturers based on our experience to 
date with the drug rebate program, and based on feedback from States 
and manufacturers in compiling such data and working with the original 
dispute resolution process under the national rebate agreement. The 
timeframes established in these proposed regulations were extensively 
discussed with the workgroup participants for the dispute resolution 
process. We believe that delaying the payments of rebates due to a more 
time-consuming dispute resolution process would harm both States and 
manufacturers. Rebates are needed on a predictable basis to reduce 
State expenditures for drugs and to allow States to estimate future 
budgeting for drug spending based on expected rebates. Longer 
timeframes could result in the manufacturer being liable for 
substantial amounts of interest accruing on disputed data.
    Therefore, to effectuate the OBRA '90 drug rebate provisions and to 
ensure that rebates are paid in a timely manner, we would require 
manufacturers and States to comply with the process and timeframes 
outlined in this section of the preamble beginning with disputes 
associated with data for the rebate period occurring 60 days following 
publication of the final rule. We believe this timeframe is sufficient 
since both manufacturers and States have had extensive experience in 
handling a variety of disputes since 1991. Disputes in existence prior 
to this rebate period would not be subject to the dispute resolution 
requirements of the final rule, as in some cases the applicable 
timeframes will already have passed. However, we expect such disputes 
to be resolved as quickly as possible or the State hearing process, as 
specified in the initial rebate agreement, to be made available to the 
manufacturer by the State.
    While current State law may not include manufacturers as 
``providers'' under State Medicaid programs, for purposes of these 
proposed regulations, we would require States to provide a hearing 
which we anticipate will involve the same procedure as provider 
hearings. There are no specific Federal requirements that govern this 
hearing process. In these regulations, we would not establish any new 
requirements or criteria for this process, except for the overall 
timeframe for the conduct of the hearing.
2. Identifying and Resolving Data Inconsistencies Prior to Phase I of 
the Dispute Resolution Process
    In general, within prescribed timeframes after a State submits to a 
manufacturer the Medicaid utilization information, the manufacturer 
must review the data and pay a rebate on the undisputed portion. The 
disputed portion of the data must be resolved through the dispute 
resolution process. However, to prevent both phase I and phase II of 
the process from being used to handle disputes involving data 
inconsistencies, we would require both States and manufacturers to take 
certain actions, as discussed below, to resolve data inconsistencies 
before they initiate phase I of the dispute resolution process. We 
would consider data inconsistencies to be data errors unrelated to 
actual utilization, such as incorrect NDC numbers, unit types, or 
decimal positions (Sec. 447.536(a)).
    The dispute resolution process is a costly and time-consuming 
activity for all parties, delays the payment of rebates for disputed 
data, and causes interest to accrue on disputed amounts. Therefore, to 
effectuate the drug rebate provisions of OBRA '90 and to ensure the 
timely payment of rebates, we would require in Sec. 447.536(a) that 
manufacturers attempt to identify and resolve State Medicaid 
utilization data inconsistencies with the State no later than 30 days 
after receipt of the data. We believe that requiring States and 
manufacturers to resolve data inconsistencies during the 30-day period 
before a manufacturer must pay a rebate on the undisputed data will 
result in timely rebates being paid for a larger percentage of State 
utilization data and reduce the volume of data involved in disputes. 
Thus, administrative costs incurred from the dispute resolution process 
would be reduced for both States and manufacturers.
    Examples of data inconsistencies that manufacturers must screen for 
are items such as:
     Incorrect unit types;
     Reported NDC numbers failing to match manufacturer's NDC 
numbers; and
     Incorrect decimal position in units reported.
    If, in any rebate period, a manufacturer discovers discrepancies in 
a State's utilization data, the manufacturer must distinguish between 
disputes that will require further resolution and data inconsistencies 
before initiating phase I of the dispute resolution process. If data 
inconsistencies are detected, a manufacturer must contact the State, 
identify the inconsistencies, and propose possible corrective actions. 
Examples of an attempt by the manufacturer and State to resolve these 
data inconsistencies could involve:
     Verifying that unit types are appropriate for the product;
     Examining the data to verify that the total number of 
units is appropriate for the amount paid; and
     Matching State-reported NDCs to the manufacturer's NDCs.
    If an agreement is reached and the data inconsistencies are 
resolved, both the State and manufacturer must maintain written 
documentation of the resolution. The manufacturer must record the 
resolution of data inconsistencies on the RAR. If these preliminary 
attempts to resolve the data inconsistencies fail, the manufacturer and 
State must initiate phase I of the dispute resolution process as 
described below.
3. Steps in the Dispute Resolution Process
    a. Steps in Phase I of the Dispute Resolution Process. Phase I of 
the dispute resolution process is divided into four steps. These steps 
describe the actions that manufacturers and States must take and 
specify the timeframes within which the actions must be completed. The 
HCFA RO will monitor the dispute resolution process, and problems that 
occur in the process 

[[Page 48468]]
should be referred to the appropriate RO.
    Step 1: Manufacturer Submits RAR to State (To be completed within 
30 days after the manufacturer receives State utilization information)
    In the event a manufacturer discovers a discrepancy in the Medicaid 
utilization information that the manufacturer and the State are unable 
to resolve within the 30-day timeframe, as discussed in section V.F.2. 
of this preamble, the manufacturer must complete the following actions:
     Pay the rebate on undisputed data and provide written 
notice of any discrepancies by submitting the RAR to the State Medicaid 
agency. The manufacturer may, at this time, pay rebates on the disputed 
portion of the data;
     Ensure that the RAR is postmarked by the United States 
Postal Service or common mail carrier no later than 30 days after 
receipt of State data; and
     Identify on the RAR, among the other requirements of that 
form, the reason(s) why the data are disputed, by NDC number, and, if 
the entire amount of the rebate is not paid, why the disputed portion 
of the rebate is withheld.
    We would require the manufacturer to submit supporting 
documentation with the RAR for certain types of disputes, as indicated 
on the RAR. The manufacturer must submit supporting documentation for 
other types of disputes if a State requests it to verify information 
contained on the RAR. This support will allow the State to verify the 
dispute and submit relevant information in the next step to move 
towards a resolution.
    Interest begins to accrue on the withheld portion of rebates for 
disputed data on the 31st day after the manufacturer receives State 
data. Interest ceases to accrue only when payment is made for both 
rebates and accumulated interest, or an excess payment is refunded, 
consistent with the resolution of the dispute.
    Step 2: State Responds to Manufacturer Regarding Disputes 
Identified on RAR (To be completed within 90 days after the State 
receives the manufacturer's RAR).
    Within 90 days after the State receives the manufacturer's RAR, the 
State must complete two actions. First, the State must contact the 
manufacturer to discuss, by NDC number, the items disputed and the 
reasons why the manufacturer is disputing the items. Second, the State 
must present its preliminary response on the items identified on the 
RAR as being in dispute. Both the State and manufacturer must maintain 
documentation of the items disputed and the State's preliminary 
response to the manufacturer.
    Step 3: Exchange of Data and Negotiations Between Manufacturer and 
State (To be completed within 150 days after the State receives the 
manufacturer's RAR).
    Within 150 days after the State receives the manufacturer's RAR, 
the State must take definitive steps, as discussed below, to resolve 
the disputed items. If State confidentiality laws allow, we would 
require that the State provide the manufacturer with zip code or 
pharmacy-level data, a sampling of pharmacy claims, or historical 
trends data on such items as the manufacturer may have found in 
dispute. We would require the State to provide the manufacturer with 
the same type of data that the manufacturer used to dispute the rebate 
payment. That is, if the manufacturer based its dispute on pharmacy-
level data, the State must provide pharmacy-level data to enable the 
manufacturer to analyze and compare the two sources in an effort to 
resolve the discrepancies. We would define zip code-level data or 
pharmacy-level data as a report by NDC number for a particular covered 
outpatient drug dispensed by pharmacies within a particular zip code or 
dispensed by a particular pharmacy respective to Medicaid recipients.
    We believe these requirements for data exchange between States and 
manufacturers are necessary to effectuate the OBRA '90 drug rebate 
provisions and to resolve disputes in a timely manner. Without 
additional like data to substantiate or refute disputes, neither party 
may be able to resolve the discrepancies and, thus, further delay the 
payment of rebates and increase the amount of interest accruing on 
disputed rebates. Further, if the State disagrees with the manufacturer 
on the disputed items, the State must provide the manufacturer with 
this further breakdown of data or other reasons to support its 
position. Otherwise, the process may reach an impasse if the State and 
the manufacturer have no basis to resolve the underlying dispute.
    Both the State and the manufacturer must ensure that any exchange 
of data protects the confidentiality requirements of section 
1927(b)(3)(D) of the Act. Specifically, the statute prohibits 
disclosure by the State of any information that would disclose the 
identity of the manufacturer or the prices of the manufacturer's drugs.
    Furthermore, if State confidentiality laws prohibit the release of 
certain data, such as pharmacy specific data, the State may require the 
manufacturer to supply to the State the data on which it based its 
dispute. If the manufacturer supplies the State with like data in this 
situation, we will consider the manufacturer to have satisfied this 
data exchange requirement and to be in compliance with the requirements 
under this step of phase I of the dispute resolution process.
    Step 4: Post-Negotiations Decision (To be completed within 240 days 
after the State receives the manufacturer's RAR) Within 240 days after 
the State receives the manufacturer's RAR, the negotiations between the 
State and the manufacturer must be completed and one of the following 
options must be chosen and acted upon:
     The State may decide to cease the dispute resolution 
process based on its cost-effectiveness determination as described in 
section V.F.6 of this preamble. However, the State maintains the 
discretion to continue the dispute resolution process for disputed 
amounts that fall below the thresholds. Further, the State must 
maintain adequate documentation to support its determination to 
discontinue the dispute based on cost-effectiveness or maintain 
adequate documentation that clearly describes any settlement reached 
with a manufacturer.
     The State and the manufacturer may agree to a settlement 
based on the State's Medicaid utilization information.
     The State and the manufacturer may agree to a settlement 
based on valid documentation that other data were more representative 
of the actual Medicaid utilization.
     If none of the above settlements are reached, the State 
and manufacturer must proceed to phase II of the process to settle the 
dispute.
    b. Phase II of the Dispute Resolution Process. Phase II of the 
dispute resolution process is initiated when the dispute is not 
resolved in step 4 of phase I, or when either party does not comply 
with the requirements under any of the phase I steps and either the 
manufacturer or State wants to proceed to phase II. In either case, 
under phase II the State must schedule a hearing within 30 days from 
the end of the phase I process, or within 30 days from the date the 
manufacturer or the State chooses to proceed to phase II due to 
noncompliance. We would require that the hearing be conducted no later 
than one year from the 240th day after the State receives the 
manufacturer's RAR (Sec. 447.536(d)). The State and the manufacturer 
could continue to attempt to settle the dispute between themselves 
before the hearing is conducted. However, we would require that the 
hearing be scheduled and conducted, if 

[[Page 48469]]
still necessary, within the one-year timeframe.
    In lieu of a State hearing, the State and the manufacturer may 
agree to arbitration or mediation to settle the dispute. In this case, 
we would require the State to maintain documentation that clearly 
describes the agreement with the manufacturer to settle the dispute 
through arbitration or mediation rather than a State hearing 
(Sec. 447.536(e)).
    After the dispute is resolved, the disputed amount plus the rate of 
interest, as set forth in section 1903(d)(5) of the Act, must be paid 
or credited on the entire balance by the manufacturer or the State no 
later than the due date of the next rebate period payment. As noted in 
section V.F.4 of this preamble, interest would begin to accrue 38 
calendar days from the date the State mails its Medicaid utilization 
information to the manufacturer. Interest would continue to accrue 
until the date payment is made or excess payment is refunded for the 
part of the disputed Medicaid utilization information that the State 
and manufacturer agree is appropriate, as resolved through the dispute 
resolution procedures set forth in this section.
4. Interest Rate under Section 1903(d)(5) of the Act
    The interest rate under section 1903(d)(5) of the Act is the 
average of the yield of the weekly 90-day Treasury bill auction rates 
during the period for which interest will be charged. For purposes of 
section 1903(d)(5) of the Act, the investment yield is considered the 
bond equivalent rate or the true discount rate. HCFA will supply the 
manufacturers and States with the rates to assure that both parties are 
using the same interest rates in the calculation.
    Interest would be applied to disputed or unpaid amounts and late 
rebate payments but not to prior period adjustments of unit rebate 
amounts or State utilization adjustments.
    Interest would begin accruing 38 calendar days from the date the 
State mails the State utilization data, as evidenced by the postmark by 
the United States Postal Service or other common mail carrier on the 
envelope (not a postage meter stamp). We would allow 7 additional days 
(from the 31st day after utilization data are sent from a State) to 
begin the interest clock which will allow time for receipt of the 
mailing by the manufacturer. For documentation purposes, we would 
require States to maintain a record of the date of mailing and 
manufacturers must maintain the envelope bearing the postmark from the 
State.
    Interest accrues on the disputed portion of the rebate amount or on 
the total amount of the late rebate payment for all rebate periods 
beginning January 1, 1991 and only stops accruing on the date the check 
is disbursed. We would consider the date of disbursement to be the date 
the check is mailed by the manufacturer. Interest must be collected and 
may not be disregarded as part of the dispute resolution process by the 
State or manufacturer.
    Interest calculation is based on a 365-day year with simple 
interest applied to the average of the yield of the weekly 90-day 
Treasury bill auction rates during the period for which interest will 
be charged. (For purposes of this calculation, include the rate for the 
entire week if the beginning and/or ending date fall within that week.)
    The following formula and example illustrate how interest should be 
calculated:
    Obtain yield rates (bond equivalent rates) for period involved:

------------------------------------------------------------------------
                                                               Yield    
                      Auction dates                       rates(Percent)
------------------------------------------------------------------------
March 1, 1993...........................................          3.035 
March 8, 1993...........................................          3.043 
March 15, 1993..........................................          3.064 
March 22, 1993..........................................          3.003 
March 29, 1993..........................................          3.022 
------------------------------------------------------------------------

    (a) Total the yield rates of each weekly auction of 90-day Treasury 
Bill. Total = 15.167%
    (b) Divide the total from (a) by the number of rates to determine 
the average interest rate.
    15.167% divided by 5 = 3.0334% = Average Interest Rate.
    (c) Multiply average interest rate by amount of unpaid rebate.
    $1,000  x  3.0334% = $30.33 Amount of Interest Due.
    (d) Divide the amount of the interest due by 365 days to obtain the 
amount of interest due per day.
    $30.33 divided by 365 days = $.08309 = Amount of Interest Due Per 
Day.
    (e) Multiply daily amount of interest due per day by the number of 
days the unpaid rebate amount is outstanding.
    $.08309  x  29 days (March 4, 1993-April 1, 1993) = $2.41 Total 
Interest Due.
5. Manufacturer's Right To Audit Data
    The manufacturer retains the right provided under section 
1927(b)(2)(B) of the Act to audit the Medicaid utilization information 
reported (or required to be reported) by the State. While not mandated 
by the statute or this regulation, but as specified in the national 
rebate agreement, we encourage the manufacturer and the State to 
develop mutually beneficial audit procedures that promote a cooperative 
relationship that saves time and money for both parties.
    Adjustments to rebate payments will be made if information 
indicates either that Medicaid utilization were greater or less than 
the amount previously specified, or that other information is 
inaccurate (for example, a drug is not properly classified as a single 
source, innovator multiple source, or noninnovator multiple source drug 
that affects the amount of rebates).
6. Cost-Effectiveness of Dispute Resolution
    In some cases, a State may consider that engaging in continued 
attempts to resolve a dispute with a manufacturer is not cost-effective 
in that the State resources required to settle the dispute exceed the 
amount in dispute, or that the accuracy of the utilization data can be 
established only to a certain degree. Many States have expressed 
concern that guidelines are needed to determine cost-effectiveness 
tolerance limits for the dispute resolution process. Thus, to 
effectuate the OBRA '90 drug rebate provisions in the most efficient 
manner, we would establish the following cost-effectiveness tolerance 
limits for States.
    For any rebate period, a State need not proceed into further 
dispute resolution process steps beyond final negotiations (Step 4 of 
phase I) with a manufacturer if the disputed amount is (1) under 
$10,000 per manufacturer's labeler code, and (2) under $1,000 per 
product code. States must maintain supporting documentation of the 
determination that may be subject to review by the Department. Further, 
when a State decides to cease the dispute resolution process based on 
these cost-effectiveness criteria and adequately documents that the 
process is not cost-effective, as discussed above, FFP will generally 
be available for the drugs dispensed and the Federal portion of the 
rebate will generally not be required from the State.
    States maintain the discretion to proceed with the dispute 
resolution process in cases that fall below the thresholds described in 
this section. We believe this policy provides States with the 
flexibility to determine the merits of pursuing disputed rebates in 
terms of cost-effectiveness.

VI. Formulas for Computation of Amount of Drug Rebates

    Section 1927(c) of the Act specifies that each manufacturer must 
remit a basic rebate and an additional rebate to the State Medicaid 
agency for single source drugs and innovator multiple 

[[Page 48470]]
source drugs, and a rebate for covered outpatient drugs other than 
single source and innovator multiple source drugs. We would require in 
regulations at Sec. 447.546(a) and (b) that the manufacturer must make 
timely payment of the rebate, that is, within 30 days of receiving 
State Medicaid utilization information that includes, at a minimum, the 
number of units paid by NDC number during the rebate period under the 
approved State plan. We would also require in Sec. 447.546(a)(3) that 
the manufacturer continue to make rebate payments for all of its 
covered outpatient drugs for as long as an agreement is in force and 
utilization information reports are made. Also, a rebate payment would 
be required for all drugs until the entire supply of the drug under an 
NDC number has expired; the drug has been taken off the market; or, for 
other reasons, there no longer exists the potential that the drug may 
be dispensed under the manufacturer's NDC number or paid for and a 
rebate requested by the State Medicaid agency.
    Section 1927(c) of the Act specifies the formulas to be used to 
compute the rebates as follows:

A. Rebate for Noninnovator Multiple Source Drugs

    The rebate for noninnovator multiple source drugs is--

For October 1, 1992--December 31, 1993: 10 percent of the AMP.
For January 1, 1994, and thereafter: 11 percent of the AMP.

B. Basic Rebate for Single Source Drugs and Innovator Multiple Source 
Drugs

    In general, section 1927(c)(1)(B) of the Act, as established under 
OBRA '90, provided for the following basic rebate for single source 
drugs and innovator multiple source drugs:

For January 1, 1991-December 31, 1991: The greater of 12.5 percent of 
the AMP or the AMP minus best price. (The rebate is capped at 25 
percent of AMP.)
For January 1, 1992-December 31, 1992: The greater of 12.5 percent of 
the AMP or the AMP minus best price. (The rebate is capped at 50 
percent of AMP.)
For January 1, 1993 and thereafter: The greater of 15 percent of the 
AMP or the AMP minus best price. (The rebate is not capped.)

    Section 601(c) of VHCA amended section 1927(c)(1)(B) of the Act to 
account for a budget neutrality adjustment to the basic rebate for 
single source drugs and innovator multiple source drugs. This budget 
neutrality adjustment was established to offset a reduction in rebates 
resulting from the additional exclusion of prices from the best price 
calculation required under section 601(a) of VHCA. On April 12, 1993, 
the Veterans Health Care Act of 1992--Technical Corrections (Public Law 
103-18) was enacted. Section 2(a) of Public Law 103-18 amended section 
1927(c)(1)(B)(ii)(II), as amended by section 601(c) of VHCA, to restore 
the 50 percent rebate cap for the rebate period October 1, 1992, 
through December 31, 1992. This amendment is effective as if it were 
included in the enactment of section 601(c) of VHCA. Thus, section 
1927(c)(1)(B)(ii)(II) of the Act has been amended to provide that for 
the rebate period beginning after September 30, 1992, and before 
January 1, 1993, the amount of the rebate may not exceed 50 percent of 
the AMP.
    In general, for period beginning with October 1, 1992, the 
following basic rebate for single source or innovator multiple source 
drugs are as follows:

For October 1, 1992-December 31, 1993: The greater of 15.7 percent of 
the AMP or the AMP minus best price. (The rebate is capped at 50 
percent of AMP for the rebate period October 1, 1992-December 31, 
1992.)
For January 1, 1994-December 31, 1994: The greater of 15.4 percent of 
the AMP or the AMP minus best price.
For January 1, 1995-December 31, 1995: The greater of 15.2 percent of 
the AMP or the AMP minus best price.
For January 1, 1996, and thereafter: The greater of 15.1 percent of the 
AMP or the AMP minus best price.

C. Additional Rebate for Single Source and Innovator Multiple Source 
Drugs

    Section 1927(c)(2) of the Act requires that manufacturers pay an 
additional rebate amount for single source and innovator multiple 
source drugs if, for rebate periods beginning January 1, 1991, the AMP 
exceeds the ``base date'' AMP by a greater percentage than the 
percentage increase in the CPI-U for the rebate period from the ``base 
CPI-U.'' Section 13602(a)(1) of OBRA '93 made clarifying changes to 
section 1927(c)(2), deleted requirements that would have replaced the 
calculation with one based on a weighted average manufacturer price 
(WAMP), and changed the calculation method for drugs approved by the 
FDA after October 1, 1990. Under section 13602(d)(2) of OBRA '93, these 
amendments are effective without regard to whether or not regulations 
to carry out these amendments have been promulgated by that date. HCFA 
adopted an October 1, 1993 effective date with respect to the OBRA '93 
amendments to section 1927(c). Using a retroactive effective date for 
these provisions would require HCFA, manufacturers, and States to 
recalculate additional rebates for 11 quarters. This would generate an 
enormous amount of prior period adjustments and changes to rebate 
amounts in the dispute resolution process. Such a volume of changes 
would place an undue administrative burden on States, manufacturers, 
and HCFA without a level of additional rebates to warrant the 
administrative costs involved in such a task. We believe our adoption 
of an October 1, 1993 effective date comports with HCFA's understanding 
of Congressional intent, as demonstrated in the legislative history. 
Since the amendments clarified but did not substantively change methods 
for calculating the additional rebate for drugs approved by the FDA 
before October 1, 1990, a single calculation method can be used for 
those drugs. Since OBRA '93 substantively changed the method for 
calculating the additional rebate for drugs approved by the FDA after 
October 1, 1990, different calculation methods must be used for the 
periods January 1, 1991 through September 30, 1993 and October 1, 1993 
and thereafter. We discuss all of these methods in more detail below.
1. For Drugs Approved on or Before October 1, 1990
    Section 1927(c)(2)(A) of the Act requires that manufacturers pay an 
additional rebate amount for single source and innovator multiple 
source drugs if, for rebate periods beginning January 1, 1991, the AMP 
exceeds the base date AMP by a greater percentage than the percentage 
increase in the CPI-U for the rebate period from the base CPI-U. The 
statute provides that the CPI-U used for calculating the additional 
rebate amounts be based on the CPI-U in effect for the month preceding 
the rebate period (or other period) involved. Therefore, to be 
consistent with the statute and the national rebate agreement, we have 
defined the following terms to be used in the formulas for calculating 
additional rebates:
    Base Date AMP--The base date AMP means the AMP for the calendar 
quarter beginning July 1, 1990, i.e., that originally reported for the 
July-September 1990 rebate period. Section 1927(c)(2)(A)(ii)(II) of the 
Act, as amended by OBRA '93, provides that the base date AMP is the 
base date in effect at the time of the rebate period beginning July 1, 
1990, without regard to whether or not the drug has been sold or 
transferred to an entity, including a division or subsidiary of the 

[[Page 48471]]
manufacturer, after the first day of such rebate period.
    Base CPI-U--The base CPI-U means the CPI-U in effect for September 
1990; for example, the CPI-U in effect that month was 132.7.
2. For Drugs Approved After October 1, 1990
    For drugs approved by the FDA after October 1, 1990, OBRA '93 
defines base date AMP and base CPI-U different from how they are 
defined in OBRA '90. These changes affect how additional rebates are 
calculated for single source and innovator multiple source drugs 
approved after October 1, 1990. Generally, the base date AMP is the AMP 
in effect for the first full rebate period after the day the drug was 
first marketed. The base CPI-U is the CPI-U in effect for the month 
prior to the first full rebate period after the day the drug was first 
marketed.
    HCFA adopted on October 1, 1993 effective date for these changes to 
section 1927(c). Therefore, these changes are effective with rebate 
periods beginning on or after October 1, 1993, and additional rebates 
will be calculated differently for these drugs for the period of 
January 1, 1991 through September 30 1993 and rebate periods beginning 
on or after October 1, 1993. Therefore, to be consistent with the 
statute, we have defined the following terms to be used in the formulas 
for calculating additional rebates. HCFA will issue specific 
instructions to manufacturers and States on how to calculate additional 
rebates for these different periods.
    Base Date AMP for rebate periods beginning on or after January 1, 
1991 through September 30 1993--The original policy in effect under 
OBRA '90 will continue to be used for base date AMP. That is, for this 
period, the base date AMP will continue to be that for the first day of 
the first full month in which the drug was first marketed.
    Base CPI-U for rebate periods beginning January 1, 1991 through 
September 30, 1993--The original policy in effect under OBRA '90 will 
be used for the base CPI-U. That is, the base CPI-U continues to be the 
CPI-U in effect for the month before the month in which the drug was 
first marketed.
    Base Date AMP for rebate periods beginning on or after October 1, 
1993--In accordance with section 1927(c)(2)(B), the base date AMP is 
the AMP in effect for the first full rebate period after the day on 
which the drug was first marketed.
    Base CPI-U for rebate periods beginning on or after October 1, 
1993--The base CPI-U means the CPI-U in effect for the month prior to 
the month of the first full rebate period after the day on which the 
drug was first marketed.

VII. Payment Limitations for Covered Drugs

A. Applying Federal Reimbursement Upper Limits

    OBRA '93 amended section 1927 of the Act regarding pharmacy 
reimbursement limits. Section 13602(a)(1) of OBRA '93 amended section 
1927(f) by redesignating it as section 1927(e) and modifying the 
language in several subsections. OBRA '93 revised and redesignated 
section 1927(f)(1) of OBRA '90 as sections 1927(e)(1) and (e)(2), added 
section 1927(e)(3), and redesignated section 1927(f)(2) of OBRA '93 as 
section 1927(f)(4) of the Act.
    Existing regulations at 42 CFR 447.331 through 447.334 establish 
methodologies for upper limits for payment of drugs covered under the 
Medicaid program, in accordance with section 1902(a)(30)(A) of the Act. 
Section 1927(e)(1) of the Act (redesignated from section 1927 (f)(1) 
under OBRA '90) imposed a moratorium period beginning January 1, 1991, 
and ending on December 31, 1994 with regard to pharmacy reimbursement 
limits. During this moratorium period, in accordance with section 
1927(e)(1)(a), a State cannot reduce its reimbursement limits for 
covered outpatient drugs or the dispensing fees for these drugs in 
effect as of January 1, 1991 which were established in accordance with 
42 CFR 447.331 through 447.334. In accordance with the statute, up to 
January 1, 1991, States retained the right to reduce payments to 
pharmacies.
    Section 1927(e)(2) establishes a special rule for States that were 
not in compliance with these regulations. If a State is not in 
compliance with Secs. 447.331 through 447.334, the provisions in 
section 1927(e)(1)(A) do not apply to the State until it is in 
compliance. That is, States which reduce reimbursement rates during 
January 1, 1991 through December 31, 1994 to comply with the 
regulations will not be violating the moratorium provision under 
section 1927(e)(1).
    Since the statute refers specifically to States ``in compliance,'' 
States that were not in compliance with the regulations on January 1, 
1991, are still required to come into compliance with the regulations 
and reduce reimbursement limits, as required by these regulations, 
after January 1, 1991. To be in compliance with the regulations, the 
State must demonstrate that the estimated acquisition cost (EAC) is set 
at the State Medicaid agency's ``best estimate'' of the prices that 
pharmacists in the State are generally and currently paying. (Section 
447.301 contains the definition of EAC.)
    Section 1927(e)(1)(B) of the Act provides that the Secretary may 
not modify by regulation the Federal upper limits formula used to 
determine reimbursement limits in Secs. 447.331 through 447.334 to 
reduce the reimbursement limits for covered outpatient drugs. This 
provision applies to the Federal upper limits formula that was in 
effect on November 5, 1990 (the date of enactment of OBRA '90).
    In accordance with section 1927(e)(3) of the Act (as added by OBRA 
'93), the moratorium provisions will not supersede or affect provisions 
in effect for State maximum allowable cost (MAC) limitations prior to 
January 1, 1991, or after December 31, 1994. MAC programs established 
by States prior to January 1, 1991, or after December 31, 1994 are 
allowable under the statute and are not considered a reduction in 
pharmacy reimbursement. States may continue to operate MAC programs in 
effect prior to January 1, 1991 in accordance with the terms of that 
program, e.g., States may adjust limits and add drugs within the 
requirements of the MAC programs in effect prior to January 1, 1991.

B. Multiple Source Drugs

1. Drugs Subject to Federal Upper Limits Under Section 447.332 (Upper 
Limits for Multiple Source Drugs)
    Under existing Sec. 447.332(a), an upper limit for a multiple 
source drug may be established if the following requirements are met:
     All of the formulations of the drug approved by the FDA 
have been evaluated as therapeutically equivalent in the current 
edition of the FDA publication, Approved Drug Products with Therapeutic 
Equivalence Evaluations; and
     At least three suppliers list the drug (which has been 
classified by the FDA as category ``A'') in the current editions (or 
updates) of published compendia of cost information for drugs available 
for sale nationally.
    Under these existing provisions of Sec. 447.332, a State agency's 
payment for multiple source drugs must not exceed in the aggregate the 
payment levels determined by applying for each drug a reasonable 
dispensing fee established by the agency plus an amount established by 
HCFA that is equal to 150 percent of the published price for the least 
costly therapeutic equivalent (using all 

[[Page 48472]]
available national compendia) that can be purchased by pharmacists in 
quantities of 100 tablets (or capsules) or the commonly listed size. 
Upper limits do not apply to brand name drugs if a physician certifies 
in his or her own handwriting on the prescription that a specific brand 
is medically necessary for the recipient. HCFA identifies the multiple 
source drugs that are subject to upper limits and their prices on a 
periodic basis in the State Medicaid Manual under Part 6, Payment for 
Services.
2. Drugs Subject to Federal Upper Limits Under Section 1927(e)(4) of 
the Act
    Section 1927(e)(4) of the Act (redesignated from section 1927(f)(2) 
under OBRA '93) contains a provision that establishes new conditions 
for determining which multiple source drugs are subject to upper limits 
and, thus, establishes a new group of drugs subject to upper limits. 
Section 1927(e)(4) requires HCFA to establish an upper reimbursement 
limit for each multiple source drug when there are at least three 
therapeutically and pharmaceutically equivalent (A-rated by the FDA) 
multiple source drugs. When this condition is met, an upper limit will 
be applied to the multiple source drug whether or not the FDA rating of 
the additional formulations of the drug are either A-rated or B-rated 
drugs. (Sec. 447.335.)
    Given the moratorium provisions in section 1927(e)(1)(B) of the Act 
(discussed in section VII.A. of this preamble), we view section 
1927(e)(4) of the Act as authority to establish upper payment limits 
for additional multiple source drugs, rather than a mandate to change 
the formula set forth in Sec. 447.332. Any modification to existing 
Sec. 447.332 during the moratorium period of January 1, 1991, to 
December 31, 1994, would conflict with section 1927(e)(1)(B) of the 
Act, which prohibits the Secretary from modifying by regulation the 
Federal upper limits formula in Secs. 447.331 through 447.334. By 
prohibiting a change in the reimbursement methodology under section 
1927(e)(1)(B), we believe that the Congress recognizes and approves of 
the current method of establishing upper limits under Sec. 447.332.
    In accordance with the moratorium provisions in section 
1927(e)(1)(B) of the Act, we would not change the formula used to 
determine reimbursement limits that is presently set forth in 
Secs. 447.331 through 447.334. However, we do not believe the 
moratorium provisions prevent HCFA from applying the existing upper 
payment limit formula to existing and additional drugs as required by 
section 1927(e)(4) of the Act.
    To comply with the requirements of both 42 CFR 447.332 and section 
1927(e)(4) of the Act, HCFA would establish an upper reimbursement 
limit for multiple source drugs using both sets of criteria found at 
the existing Sec. 447.332 and the new Sec. 447.335. We would specify in 
regulations at Sec. 447.335 the conditions under which covered 
outpatient drugs will be subject to the Federal upper limits under 
section 1927(e)(4) of the Act. On a periodic basis, HCFA would 
consolidate both groups of drugs, including their prices, into one 
listing of drugs that are subject to the Federal upper limits. HCFA 
will issue this listing to the States in an electronic medium and in 
the State Medicaid Manual under Part 6, Payment for Services.
3. Inclusion of A- and B-Rated Drugs
    The FDA publication, Approved Drug Products with Therapeutic 
Equivalence Evaluations, lists the application holders for the drugs 
and the accompanying A or B drug rating. This publication, however, 
does not list the current owner of the drug or distributors, that is, 
packagers or relabelers, and there is no Federal requirement that these 
repackagers or relabelers identify the source of their drug product. 
Therefore, the A and B rating is lost for all such drugs in the 
marketplace once they are repackaged or relabeled.
    Because we are unable to identify an A or B rating for what we 
believe are the majority of drugs sold at the retail level of trade, we 
are including all drugs (A and B rated) in the rebate program. 
Otherwise, since there is no method to identify A-rated drugs, we would 
have to require all manufacturers that participate in the drug rebate 
program to sell only A-rated drugs to all its customers (as there is no 
method to determine which particular drug will be dispensed to a 
Medicaid recipient). This requirement would be the only feasible way to 
ensure that Medicaid recipients receive only A-rated drugs. However, 
such a requirement is not authorized under the provisions of section 
1927 of the Act and would be contrary to FDA's current drug approval 
process which allows B-rated drugs to be marketed. Such a requirement 
would also not be consistent with our understanding of Congressional 
intent of the drug rebate program since it might reduce the number of 
manufacturers participating in the program that sell only B-rated 
products or a combination of A- and B-rated products, which could then 
decrease the availability of needed drugs to Medicaid recipients.

C. Denial of FFP When a Generic Substitution is Available

    Section 1903(i)(10) of the Act provides that payment will not be 
made to a State for an innovator multiple source drug dispensed on or 
after July 1, 1991 if, under applicable State law, a less expensive 
noninnovator multiple source drug could have been dispensed but only to 
the extent that such amount exceeds the upper payment limit for such 
multiple source drugs. Consistent with our understanding of the statute 
and Congressional intent, we would interpret this provision in our 
regulations at Sec. 447.550(b) to apply to drugs subject to the Federal 
upper limits under Sec. 447.332(a). Therefore, we would include in 
regulations at Sec. 447.335 that therapeutic equivalent drugs for upper 
limits under section 1903(i)(10) of the Act means drugs rated A or B by 
the FDA. We would apply this policy to only those drugs subject to the 
Federal upper limits to provide an established drug data base available 
to all States for determining if generic substitution is appropriate. 
The Federal upper limits program offers both pharmacists and the State 
Medicaid agencies a familiar, regularly updated guideline that can be 
easily used to compare the innovator and noninnovator drug prices.
    We considered using national compendia prices or pharmacy charges 
in applying the generic substitution requirements; however, either 
alternative would be difficult to administer. Both alternatives would 
require the comparison of prices for the innovator and noninnovator 
multiple source drugs. These prices frequently change and, therefore, 
would require frequent update by the State Medicaid agency, possibly 
resulting in different lists in each State. Such alternatives could 
also disadvantage Medicaid recipients by substituting the regular 
medication they receive due to constant fluctuations in price which 
would determine whether the innovator multiple source drug could be 
dispensed at a given point in time.
    Section 1903(i)(10) of the Act specifies that the substitution will 
be under applicable State law. FFP will be available for the dispensing 
of the innovator drug where the prescription has been hand annotated by 
the prescriber either as ``brand medically necessary'' or other such 
words to that effect as may be required under State law. Current 
regulations under Sec. 447.331(c)(3) prohibit the use of a checkoff box 
on a form but allow the use 

[[Page 48473]]
of a notation such as ``brand medically necessary.''

VIII. Compliance Action

    A State's failure to comply with the reporting or drug access 
requirements of section 1927 of the Act is cause for compliance action 
against the State. Accordingly, we would specify in Sec. 447.538 that a 
manufacturer may request HCFA to initiate compliance action against a 
State if the State fails to comply with the drug access requirements of 
section 1927 of the Act. A manufacturer may also request compliance 
action against a State if the manufacturer can show a pattern or 
history of inaccuracy in the drug utilization information provided by 
the State. It is incumbent upon the State to report accurate 
utilization data to ensure that rebates are paid in accordance with the 
statute.
    Compliance actions taken by HCFA will not relieve the manufacturer 
from its obligation of making the rebate payment to States as set forth 
in section 1927 of the Act and will not bar the manufacturer from 
taking other actions against the State that are legally available to 
the manufacturer.

IX. Drug Rebate Agreement Provisions Not Addressed in This Document

    On November 2, 1992, we published in the Federal Register (57 FR 
49397) an interim final rule with comment period that addressed the 
following provisions of section 1927 of the Act:
     Drug Use Review--Section 1927(g) of the Act provides that 
a State must have, by January 1, 1993, a drug use review program for 
covered outpatient drugs that meet certain statutory requirements.
     Electronic Claims Management--Section 1927(h) of the Act 
provides that the Secretary shall encourage each State Medicaid agency 
to establish, as its principal means of processing claims for covered 
outpatient drugs under drug rebate agreements, a point-of-sale 
electronic claims management system, for the purpose of performing on-
line, real time eligibility verifications, claims data capture, and 
adjudication of claims, and assisting pharmacists and other authorized 
persons in applying for and receiving payment.
    A document that addresses public comments and finalizes rules is 
under development.

X. Summary of Public Comments on Notice and Departmental Responses

    We received 20 timely pieces of correspondence from manufacturers, 
State agencies, a pharmaceutical manufacturer association, and other 
parties on the notice published in the Federal Register on February 21, 
1991 (56 FR 7049) that reprinted the text of the national drug rebate 
agreement. A summary of these comments and the Department's responses 
follow:

A. Enforcement of Enhanced Access Provisions

1. Restrictive Formularies
    Comment: The majority of the commenters stated that the rebate 
agreement, State instructions, and regulations implementing the drug 
rebate program should prohibit States from developing restrictive 
formularies.
    Response: We agree that prior to OBRA '93, section 1902(a)(54) of 
the Act generally prohibited restrictive formularies (that is, 
formularies that impose access limitations for covered outpatient drugs 
covered under a rebate agreement). OBRA '93 revised section 1902(a)(54) 
to require that States comply with the applicable requirements of 
section 1927 and added section 1927(d)(4) which allows States to 
establish a drug formulary, effective October 1, 1993, which meets 
specific requirements. A State formulary must include covered 
outpatient drugs other than: (1) those drugs excluded under section 
1927(d)(2); and (2) those drugs (with respect to the treatment of a 
specific disease or condition for an identified population) where the 
drug's labeling or compendia-based medically accepted indication does 
not have a significant, clinically meaningful therapeutic advantage, in 
terms of safety, effectiveness, or clinical outcome over other drugs 
included in the formulary.
    We would require States to list in their State plans those drugs in 
section 1927(d) that they are excluding or restricting from coverage 
and also describe limitations or conditions of coverage (not including 
prior authorization programs). We would not require States to list in 
their State plans those drugs they are excluding or restricting from 
coverage with respect to the treatment of a specific disease or 
condition since States must have available to the public a written 
explanation of reasons for excluding the drugs. We believe requiring 
States to amend their State plans to include these drugs would be an 
unnecessary use of State resources.
    2. Prior Authorization
    Comment: The majority of commenters were adamant that States be 
required to implement what they characterized as statutorily acceptable 
prior authorization programs. They believed that medical factors should 
be the only criteria for approving or denying drugs subject to prior 
authorization and suggested that HCFA establish standards for State 
prior authorization programs to prevent abusive restrictions. One 
commenter was concerned that States would place on prior authorization: 
(1) All but the least expensive product in a therapeutic class; (2) the 
drugs of a manufacturer that does not provide an additional rebate 
above the amount required in the national agreement; and (3) the most 
expensive drug in a therapeutic class without regard for improved 
outcomes or reduction in total treatment costs associated with the more 
expensive drug therapy.
    Response: Section 1927(d)(1)(A) of the Act provides that a State 
may subject any covered outpatient drug to prior authorization; that 
is, require approval of the drug before its dispensing for any 
medically accepted indication. In accordance with section 
1927(d)(4)(E), a State's prior authorization formula is not considered 
a formulary subject to the requirements specified in section 
1927(d)(4). The prior authorization system must meet two conditions 
specified under section 1927(d)(5) of the Act.
    These proposed regulations would implement these provisions of 
section 1927 and allow States to maintain their prior authorization 
programs as they currently exist except that--
     A State must respond to a prior authorization request 
within 24 hours of the request; and
     A State must provide for the dispensing of at least a 72-
hour supply of the drug in emergency situations.
    In response to items numbered (1) and (3) in the comment, we 
believe that States should be able to consider both clinical and 
economic criteria in their prior authorization programs as long as 
medically necessary drugs are not denied. Prior to the drug rebate 
provisions, States could consider such criteria. We believe that OBRA 
'90 did not change that provision. We recognize, however, that the 
Congress, in passing the statutory provisions of the drug rebate 
program, was concerned with ensuring recipient access to medically 
necessary drugs. We would, therefore, require assurances from States 
that their prior authorization programs do not prevent access to 
medically necessary drugs.
    In regard to item numbered (2) in this comment, States may, in 
accordance with sections 1927(a) (1) and (4) of the Act, negotiate 
separate agreements for additional rebates as long as they can 
establish that the requirements in section 1927 (as discussed in 
section II. 

[[Page 48474]]
of this preamble) have been met. We will monitor the prior 
authorization programs to ensure that States are in compliance with 
these regulations.
    We do not believe that, in light of the provisions of section 
1927(d)(1)(A) of the Act, the Congress intended to set up any further 
requirements than those explicitly stated in the statute that would 
preclude States from requiring that prior authorization be obtained for 
any medically accepted indications, or requiring that the physician 
provide medical justification for using a particular drug within a 
therapeutic class, as long as access to medically necessary drugs is 
ensured. In accordance with the statute, we believe that a State 
continues to maintain the authority to prior authorize drugs provided 
the State approves the drug if medically necessary.
    Additionally, section 4401(d)(3) of OBRA '90 requires that the 
Secretary, acting in consultation with the Comptroller General, study 
prior approval procedures utilized by State Medicaid programs conducted 
under title XIX of the Act. We will review the results of this study 
and, if necessary, consider additional changes to prior authorization 
programs at that time.
    Comment: One commenter suggested that (1) a State should use a 
review board (similar to the drug utilization board) to establish 
criteria for selecting drugs subject to prior authorization; (2) the 
manufacturer should have input before a drug is placed on prior 
authorization or petition a State to remove a drug from prior 
authorization status; (3) the prior authorization process should be 
subject to the State Administrative Procedures Act; and (4) the prior 
authorization process should apply only for new prescriptions.
    Response: We would require in Sec. 447.526 that State staff who 
place drugs in a prior authorization system must be licensed to 
prescribe or dispense drugs, for example, physicians or pharmacists. We 
would provide, however, that State staff who respond to prior 
authorization requests need not be limited to persons licensed to 
prescribe or dispense drugs as long as all responses are made in 
consultation with these licensed professionals, or are made under 
guidelines promulgated by these licensed professionals and they are 
available for consultation in difficult or unusual cases. We believe 
that a State might benefit from a formulary committee for determining 
drugs that will be subjected to prior authorization but are not 
mandating this. However, we do not believe that we should limit the 
States' flexibility in operating their prior authorization programs to 
accommodate the commenter's other concerns since the statute supports 
the States' authority to maintain their prior authorization programs as 
they currently exist.
    Comment: One commenter suggested that States should be required to 
disclose all information regarding the basis for selecting drugs and 
for denying drugs subject to prior authorization, and to generate a 
report for HCFA on all claims that were denied.
    Response: In accordance with section 1927(d)(5) of the Act and our 
understanding of the legislative intent of OBRA '90, we expect States 
to operate their prior authorization programs in a manner that does not 
preclude access to medically necessary drugs. We believe States will be 
consistent in applying criteria as to how drugs are selected for prior 
authorization. We would also require annual assurances that a State's 
prior authorization program does not prevent access to medically 
necessary drugs. States may continue to disclose their records for 
prior authorization in the same manner that they did before the change 
in statute, as the statute made no changes in this area. We believe it 
would be overly burdensome to require States to generate specific 
reports on prior authorization claims and would be of nominal benefit 
to HCFA.
    Comment: Several commenters believed that, if a State does not 
comply with the prior authorization requirements that the commenters 
believe are appropriate (as discussed above in other comments on prior 
authorization), the manufacturer should be able to withhold the rebate 
due the State.
    Response: The statute requires a manufacturer to provide a rebate 
to the State for each rebate period based on utilization data submitted 
by the State. The rebate must be paid by the manufacturer to the State 
no later than 30 days after the date of receipt of the State's 
utilization data. There is no authority for the Secretary to permit a 
manufacturer to withhold a rebate (nor for a manufacturer to 
unilaterally withhold such a rebate) where a State does not comply with 
prior authorization requirements. We have a compliance process to 
ensure that States comply with all provisions of the Medicaid program 
and, as noted in the rebate agreement, manufacturers may notify the 
appropriate HCFA RO if they believe a State is not complying with a 
provision of the drug rebate program.

B. New Drug Coverage

    Comment: Several commenters were concerned that States would not 
allow unrestricted access to new drugs. Some commenters believed that 
the new drug coverage protection afforded by section 1927(d)(6) prior 
to OBRA '93 should have provided that the 6 months of coverage for a 
new drug begin with the date when it is first marketed, and not from 
the date it is approved by the FDA. One commenter asserted that the 
Congress inadvertently reduced the time to less than 6 months because 
it may take several weeks, if not months, to bring a new drug on the 
market and suggested that HCFA support a technical amendment to the 
law. This commenter believed that prior to OBRA '93, section 1927(d)(6) 
of the Act encouraged manufacturers to bring new drugs to market 
prematurely since a manufacturer may need to educate and train 
physicians on a drug's use or administration once the drug is approved. 
Also, the commenter suggested that the FDA's approval of promotional 
materials and manufacturing specifications may not coincide with the 
drug approval date.
    Response: OBRA '93 deleted section 1927(d)(6) and special coverage 
provisions for new drugs. Prior to OBRA '93, section 1927(d)(6) of the 
Act provided that a State may not exclude from coverage, subject to 
prior authorization or otherwise restrict any new drug or biological 
approved by the FDA for a 6-month period following the date of FDA 
approval. Effective October 1, 1993, these requirements no longer 
exist. New drugs approved by the FDA prior to October 1, 1993 will only 
receive the unrestricted coverage as specified in section 1927(d)(6) of 
the Act prior to OBRA '93 through September 30, 1993.
    Based on our understanding of Congressional intent, we believe this 
6-month period was specifically intended to be effective from the date 
of FDA approval to make prescribers familiar with a new drug and allow 
it to be introduced into the market place before it might require prior 
authorization by a State. Because this date was statutorily mandated, 
HCFA lacked authority to change this requirement to the date the drug 
was marketed.
    Generally, with the exception of certain biological products, the 
approval of a new drug by the FDA under the NDA process does not 
include the approval of promotional materials. However, since the mid-
1970s, the FDA has offered voluntary review and recommendations on 
proposed launch promotional materials to all sponsors. This review is 
utilized by well over 90 percent of the companies when marketing new 
products. With regard to manufacturing specifications, there are a few 
cases where compliance with the 

[[Page 48475]]
manufacturing specifications was part of a post-NDA approval agreement 
that would be completed prior to marketing the product. However, since 
there are so few exceptions in this area and because we are bound to 
follow the statute, HCFA considered the 6-month period effective from 
the date the drug is approved by the FDA.

C. Confidentiality of Manufacturer Price Information

    Comment: Many of the commenters believed that States should not 
have access to manufacturers' price information, including unit rebate 
amounts, since HCFA has access to this information. The commenters 
stated that the risk of disclosure and use of information for other 
purposes is too great.
    Response: We have agreed not to disclose AMP and best price to 
States but maintain that the statute contemplates the disclosure of 
manufacturer pricing data to States. Section 1927(b)(3)(D) of the Act 
provides that information concerning drug prices must not be disclosed 
by ``the Secretary or a State agency (or contractor therewith).'' By 
including States within the confidentiality provisions, we believe that 
the Congress intended that States have the right to access of 
sufficient pricing information to calculate their rebates as required 
by the statute. The unit rebate amount, which provides the rebate due 
per tablet, etc., and which is the end result of the manufacturer's 
calculation, is, in our opinion, the minimum amount of information 
States need to accomplish this. At the same time, the statute protects 
the manufacturer's pricing data from disclosure. In accordance with 
section 1927(b)(3)(D) of the Act, information disclosed by 
manufacturers in connection with the rebate agreement is confidential 
and, notwithstanding other provisions of law (including the Freedom of 
Information Act, 5 U.S.C. 552) must not be disclosed by HCFA, the State 
agency, or its contractors in a form that reveals the manufacturer, 
except as necessary for the Secretary of HHS to carry out the 
provisions of section 1927 and for the Comptroller General or the 
Director of the Congressional Budget Office to review the information 
provided.

D. Unit Rebate Amounts

    Comment: Several commenters believed that HCFA is not authorized by 
the statute to calculate the unit rebate amount since the law clearly 
states that the manufacturers will compute the information. They 
indicated that the penalties that may be imposed on manufacturers and 
HCFA's audit authority are sufficient to ensure that manufacturers make 
accurate and timely calculations.
    Response: In accordance with sections 1902(a)(4), 1903, and 1927 of 
the Act, we believe that the Secretary has the authority and duty to 
implement and oversee various aspects of the drug rebate program. The 
Secretary has delegated this responsibility to HCFA. In accordance with 
this authority, HCFA is not precluded from calculating the unit rebate 
amount. We agree that manufacturers are responsible for calculating and 
paying rebates correctly. However, we believe that the administrative 
approach of HCFA supplying the States with unit rebate information to 
verify rebates is a practical and acceptable administrative oversight 
responsibility to ensure that States receive correct rebate payments 
and that the proper amount of FFP is made available to States.

E. Manufacturer's Requirements To List All Drugs

    Comment: One commenter asserted that a manufacturer should not have 
to provide to HCFA a list of all of its covered outpatient drugs since 
some of its drugs may not be covered under Medicaid, that is, those 
drugs that a State may restrict or exclude from coverage under section 
1927(d)(2) of the Act. The commenter believed that the requirement to 
list all of its drugs places an unnecessary administrative burden on 
the manufacturers and States. The commenter also believed that HCFA 
should review and evaluate each manufacturer's list of covered drugs 
after several rebate periods of experience in the drug rebate program 
and delete those drugs that are not covered under Medicaid or delete 
drugs that provide a minimal rebate.
    Response: Under the terms of the national rebate agreement, a 
manufacturer is required to provide to HCFA rebates for all its covered 
outpatient drugs dispensed under the plan. Thus, in our opinion, there 
is no authority under the statute to delete drugs from the list of 
covered outpatient drugs where those drugs provide a minimal rebate 
from the drug rebate program.

F. Enforcement of State's Obligations

    Comment: Several commenters asserted that HCFA's compliance action 
initiated against a State that fails to meet the various requirements 
under the drug rebate program, (for example, covering all drugs or new 
drugs from the date of FDA approval) is an ineffective and inadequate 
means of ensuring that States obey the requirements of sections 
1902(a)(54) and 1927 of the Act.
    The majority of commenters believed that manufacturers should be 
able to withhold rebate payments to a State until the State conforms 
its policies to the law. One commenter suggested that manufacturers 
should be allowed to withhold rebate payments in an amount equal to the 
sales lost during a rebate period, which would be estimated by the 
manufacturer, as a result of a State not properly covering drugs. 
Otherwise, the commenter was concerned that a State could ``reap a 
windfall'' since it would receive rebates and, at the same time, avoid 
paying for selected products that the State was required by statute to 
cover.
    Response: Section 1904 of the Act and regulations at 42 CFR part 
430, subpart C, provide that we may initiate a noncompliance action if 
States do not comply with all provisions of the Medicaid program. As 
noted in the rebate agreement, manufacturers may notify HCFA if they 
believe a State is not complying with a provision of the drug rebate 
program. The statute requires a manufacturer to provide a rebate to the 
State for each calendar rebate period based on utilization data 
submitted by the State. The rebate must be paid by the manufacturer to 
the State not later than 30 days after the date of receipt of the 
State's utilization data. Section 1927 of the Act does not contemplate 
that manufacturers can withhold rebates in those situations where a 
State does not comply with all of the provisions of the Medicaid 
program.

G. Adequacy of State Medicaid Utilization Data

    Comment: One commenter asserted that section II. (b) of the 
national rebate agreement requires manufacturers to pay rebates to the 
States even if a State has failed to report all of the utilization data 
required by the statute and the agreement. The commenter believed this 
requirement is an attempt to relieve States of one of their primary 
responsibilities under the statute.
    Response: Section 1927(b)(2)(A) of the Act requires that States use 
a standard reporting format established by the Secretary. In accordance 
with the statute, HCFA has defined the format for utilization data to 
include, in part, the use of NDC numbers. Given the provisions of the 
statute and our regulations at Sec. 447.530, States would be required 
to report, at a minimum, the utilization data indicating the NDC number 
for the covered outpatient drugs and the total number of units of the 
drugs paid for during a rebate period. In 

[[Page 48476]]
accordance with the statute, manufacturers must calculate and pay the 
rebate amounts within 30 days of the receipt of these two items of 
information. Furthermore, a manufacturer may audit these data that a 
State provides or is required to provide. If a manufacturer believes 
that a State has reported erroneous utilization data, the manufacturer 
is not required to pay a rebate on the portion of drugs for which the 
data are in question until the dispute is resolved.
    Comment: Several commenters believed that Medicaid utilization data 
that States are required to supply to manufacturers are inadequate. 
They suggested that States should provide data at zip code level, and 
at a more detailed level if a manufacturer needs it, such as a claims 
history file that includes recipient, pharmacy, dispensing date and 
other claim information. They asserted that if States do not currently 
have this capability, we should require them to do so. These commenters 
also suggested that State utilization data should include monthly 
totals by NDC number and a rebate period summary, and that States 
should also be required to maintain the date that the drug was 
dispensed.
    Several commenters stated that manufacturers should have the right 
to audit pharmacies and HCFA should ensure State cooperation with 
manufacturers in conducting these audits.
    Response: We believe the data that the States provide under this 
regulation would be adequate for purposes of calculating the rebate. In 
addition, the manufacturer has the right, by law, to audit these data 
and adjustments to rebate amounts will be made to the extent that the 
data indicate that utilization was greater or less than the amount 
previously indicated. We would not require States to submit additional 
data, such as zip code-level information or a claims history, with 
their rebate period information. However, in the event of a dispute, we 
would require States to provide the manufacturer with this type of data 
if State confidentiality laws allow. (Section V.F. of the preamble 
contains further discussion on this issue.) Specific claim information 
that identifies a recipient is generally prohibited from being released 
to the public under the authority of section 1902(a)(7) of the Act and 
regulations at 42 CFR 431.300 through 431.307.
    Manufacturers do not have the authority to audit pharmacies under 
section 1927 of the Act, but we expect States to audit pharmacy data in 
response to manufacturer requests when warranted.

H. Dispute Mechanism

    Comment: One commenter believed that the timeframe of 30 days after 
receipt of a State's data is inadequate for a manufacturer to challenge 
errors made by the State. The commenter believed that the 30-day 
timeframe is unfair and may encourage premature challenges by 
manufacturers seeking to preserve their rights to use the dispute 
resolution process described in section V. of the rebate agreement.
    Response: Section 1927(b)(1)(A) of the Act requires that 
manufacturers provide rebates within 30 days of receipt of State 
utilization data. In accordance with this requirement, we believe that 
the 30-day timeframe is reasonable for manufacturers to distinguish 
between legitimate disputed items and data inconsistencies and to 
attempt to resolve those disputes since data used to contest State data 
are similar to that needed to pay the rebate. If a manufacturer and 
State are unable to resolve discrepancies within the 30-day timeframe, 
the manufacturer must pay the rebate on the undisputed data and provide 
written notice of any discrepancies by submitting the RAR to the State 
agency. We would view it as a violation of these regulations and the 
rebate agreement if a manufacturer challenges the data simply as a 
method to extend the time period for reviewing data and avoid paying a 
rebate. The manufacturer also will be responsible for paying interest, 
as set forth in section 1903(d)(5) of the Act, on the disputed portion 
of the rebate if the State's data are not erroneous. (Section V.F. of 
the preamble contains a detailed discussion of the dispute resolution 
process.)
    Comment: One commenter asserted that the dispute resolution process 
leaves States at financial risk when a dispute arises since HCFA will 
require its portion of the rebate payments from the States even though 
a manufacturer will withhold payments. The commenter believed that HCFA 
should assume some financial risk as well as play a more significant 
role in the dispute resolution.
    Response: Manufacturers must pay States a rebate on the portion of 
the State utilization data that is not in dispute. We do not require 
the State to pay HCFA the Federal portion of the rate on the amount 
that is in dispute. Rather, we are requiring payment on those amounts 
that States receive in accordance with section 1927(b)(l)(B) of the 
Act. As a general rule, we believe we play a significant part as an 
overseer of the dispute resolution process between manufacturers and 
States. However, since both of these parties are directly responsible 
for the data they generate, we believe they must primarily work 
together to reconcile any differences.

I. Separate State Agreements

    Comment: Several commenters believed that: (1) Modifications to 
existing State agreements are not permitted under the statute; (2) a 
State agreement may not legally provide for a different rebate amount 
than the amount in the national agreement; and (3) approval of an 
agreement under which a State exempts products from prior approval 
restrictions in exchange for rebates greater than those provided in the 
national agreement would be an abuse of HCFA's discretion even if the 
greater rebates were legal.
    Response: We do not agree that modifications to existing agreements 
are prohibited under the statute. Section 1927(a)(4) of the Act 
specifies conditions that existing agreements must meet to be in 
compliance with the law. (Section II.A. of this preamble contains a 
discussion of the provisions of section 1927(a)(4).) Section 1927(a)(4) 
does not preclude modifications to existing agreements, such as 
allowing greater rebates.
    We disagree that there is no legal authority to approve a separate 
agreement that provides for a different rebate amount than the amount 
in the national agreement. Section 1927(a)(1) of the Act recognizes the 
Secretary's authority to authorize individual State agreements and does 
not require that the individual State agreements incorporate the rebate 
amount requirements set forth in the national agreement. Thus, rebates 
under the individual State agreements need not match the rebates 
mandated under the national agreement. However, for the Secretary to 
accept them, as discussed in section II. of this preamble, they must be 
at least as large as the amount specified in the national agreement.
    HCFA has the authority under the statute to approve individual 
State agreements and will review the agreements to ensure that the 
State is operating its prior authorization program in a manner 
consistent with the statute and regulations. However, given the 
provisions of section 1927(a) of the Act, we disagree that a State may 
not negotiate a separate rebate agreement that requires a higher rebate 
in exchange for removing drugs from the State's prior authorization 
program, provided that medically necessary drugs continue to be 
available to Medicaid recipients.
    Comment: Several States contend that the 60-day timeframe allowed 
for the resolution of disputes is inadequate. 

[[Page 48477]]
The States suggested that we expand the timeframe to approximately 120 
days as a more realistic standard.
    Response: We acknowledge that this timeframe is not adequate due to 
the complexity of resolving disputes. Therefore, we have revised the 
dispute resolution process, as discussed in section V.F. of the 
preamble, to reasonably accommodate all of the steps necessary to 
resolve a dispute. We are proposing to extend the entire timeframe to 
240 days after the State receives the manufacturer's RAR for a State 
and manufacturer to settle the dispute. After this point, both parties 
may use arbitration, mediation, or the State hearing mechanism to 
settle the dispute. As discussed in section V.F. of the preamble, we 
established this timeframe after much discussion with States, 
manufacturers, and pharmacy groups. We believe the proposed dispute 
resolution process and the expanded timeframes meet the needs of both 
States and manufacturers.

J. Right of the Secretary to Audit AMP and Best Price Data

    Comment: One commenter claimed that the statute does not give the 
Secretary an unqualified right to audit a manufacturer's data regarding 
AMP and best price calculations, as stated in the rebate agreement.
    Response: Section 1927(b)(3)(B) of the Act clearly states that the 
Secretary has the right to survey wholesalers and manufacturers to 
verify manufacturer prices reported on AMP and best price. We believe 
this provision includes the right to audit pricing data, since an audit 
is often necessary to verify such pricing data.

K. Nonrenewal and Termination of Agreements

    Comment: One commenter recommended that the national rebate 
agreement should be modified to specify that the effective date of 
manufacturer initiated termination/nonrenewal is the ``earlier'' of 60 
days after a notice or the ending date of the term of contract if 
proper notice is given. The language of the published national 
agreement indicated that it is the ``later'' of these events.
    Response: This was an error in the national agreement and will be 
corrected in the next revision of the national rebate agreement. We 
will honor nonrenewals up to 60 days before the end of the current 
period of the agreement and terminations up to 60 days before the end 
of the current rebate period (effective at the end of that rebate 
period). We have indicated the correct date in the regulations at 
Sec. 447.514(c).

L. Administrative Procedure Act

    Comment: Several commenters stated that they believed HCFA violated 
the Administrative Procedure Act (APA), 5 U.S.C. section 553, by using 
a model rebate agreement to implement the drug rebate program instead 
of developing formal regulations that allowed for public comment. They 
indicated that HCFA did not have adequate input from the States, 
manufacturers, pharmacy organizations, and the public while developing 
the policies that govern the rebate program. One commenter believed 
that failure to develop regulations or allow amendments to the national 
rebate agreement puts manufacturers in the untenable situation of 
having to sign an agreement without fully understanding the terms or 
risk losing their drug coverage under Medicaid.
    Response: Section 4401 of OBRA '90 requires manufacturers to enter 
into and comply with the terms of the national rebate agreement by 
March 1, 1991, in order for payment to be made available under section 
1903 of the Act for covered outpatient drugs. (As noted earlier, this 
date was extended to April 30, 1991, under the extenuating 
circumstances provision of section 1927(a)(3) of the Act.) Because of 
the short timeframe imposed by the Congress to implement the drug 
rebate provisions, it was impossible to issue regulations prior to the 
date that the national rebate agreement was required to be signed. In 
light of these short timeframes, and in the interest of receiving 
public comments, the contents of the rebate agreement were developed in 
direct consultation with representatives of drug manufacturers, States, 
and other interested parties. We considered this process an adequate 
means of providing actual notice and for obtaining public comments of 
affected parties within the time constraints. We believe that, given 
the circumstances, this approach was consistent with the provisions of 
the APA.
    In addition, section 4207(j) of OBRA '90 authorizes the Secretary 
to issue regulations on an interim or other basis as may be necessary 
to implement the amendments made by the provisions of OBRA '90. In 
developing this proposed rule with comment period, we have taken into 
consideration, as appropriate, the public comments we received on the 
February 21, 1991, Federal Register notice, which included the contents 
of the national rebate agreement.

M. Timeframes for Signing Rebate Agreements

    Comment: The majority of commenters indicated that manufacturers 
did not have adequate time to analyze and sign the national rebate 
agreement if they wanted their drugs covered retroactively to January 
1, 1991. If they did not sign the agreement by the given deadline, 
their drugs would not be covered until July 1, 1991, thereby resulting 
in a large span of time within which drugs would not be covered.
    Response: We realized that the timeframe that manufacturers had to 
analyze and sign the rebate agreement for their drugs to be covered 
retroactively to January 1, 1991 was very limited. The majority of 
manufacturers were able to sign the rebate agreement by the deadline. 
However, for those few that did not, we extended, under the extenuating 
circumstances clause in section 1927(a)(3)(B) of the Act, the original 
deadline of February 28, 1991, to April 30, 1991, for manufacturers to 
enter into a rebate agreement effective for drug coverage retroactive 
to January 1, 1991.

N. Amending the Language of the Rebate Agreement

    Comment: One commenter recommended that HCFA include in regulations 
the process and timeframes that will be used to make changes to the 
national rebate agreement.
    Response: We plan to periodically revise the rebate agreement 
language as needed. However, we believe that a scheduled timeframe for 
publication is not warranted since manufacturers have entered into the 
rebate agreement with coverage beginning in different rebate periods. 
We will further consider all comments from the February 21, 1991 notice 
and this proposed rule when we revise the national rebate agreement 
language.

O. Definition of Terms in the National Rebate Agreement

    Comment: We received numerous comments on the definitions included 
in section I. of the national rebate agreement. Commenters claimed that 
our definitions were not in compliance with the statute.
    Response: We considered comments on definitions when developing 
this proposed rule. Where we believed changes were necessary, we 
included them in the definitions contained in this proposed rule. After 
publication of the final rule, we intend to amend the national rebate 
agreement to reflect any new regulatory requirements and definitions.

[[Page 48478]]


P. National Drug Code

    Comment: Several commenters recommended that States be required to 
maintain their records of NDC numbers by full 11-digit NDC numbers 
after a reasonable transition time period. The commenters also 
suggested that if a State does not comply with the 11-digit NDC number 
requirement by the specified deadline, manufacturers should have no 
responsibility to pay the rebate amounts until such a system is in 
place.
    Response: OBRA '93 amended section 1927(b)(2)(A) of the Act to 
require that States report to manufacturers information on the total 
number of units of each dosage form and strength and package size of 
each covered outpatient drug, that is, States must use an 11-digit NDC 
number. This change is effective as if it was included in OBRA '90.
    Prior to the enactment of OBRA '93, we agreed that States should 
maintain their records by the full 11-digit NDC number that indicates 
the manufacturer, product, and package size of a drug. In accordance 
with sections 1902(a)(54) and 1927(b)(2) of the Act, we began requiring 
States to report drug utilization data to HCFA and manufacturers using 
the 11-digit NDC numbers for claims paid on and after March 1, 1992. 
(During a transitional period of January 1, 1991 through February 29, 
l992, we allowed States that did not have the technical capability to 
report the 11-digit NDC number to use the 9-digit number (that is, the 
NDC number without the package size.)
    We disagree, however, with the statement that a manufacturer should 
be able to withhold rebates. As stated earlier, the statute requires 
manufacturers to pay a rebate within 30 days of receiving State 
utilization data and does not authorize manufacturers to withhold a 
rebate when the State has submitted utilization data to the 
manufacturer. We will consider any State that does not maintain an 11-
digit NDC number to be out of compliance.

Q. Definition of Nominal Price

    Comment: One commenter contended that the definition of ``nominal 
price'' should not be predicated on a fixed percentage of 10 percent 
since this definition is not authorized by law and ignores the unique 
marketing and pricing practices of each drug manufacturer. This 
commenter believed that the company that claims a nominal price for a 
drug should have the burden of demonstrating to HCFA that the facts and 
circumstances concerning the drug render the price as nominal. The 
commenter stated that the standards and procedures to demonstrate a 
nominal price should be specified in the regulations. Another commenter 
agreed with the nominal price definition in the rebate agreement of 
``any price less than 10 percent of the AMP.''
    Response: We originally gave consideration to a definition that a 
nominal price be less than 1 percent of AMP. However, after discussions 
with manufacturers, States, and other parties, we believe the current 
definition of ``less than 10 percent of AMP'' to be sufficient to 
encompass the nominal prices offered by manufacturers. Prices greater 
than this appear to be for sales of the type meeting the definition for 
inclusion of AMP or best price.
    We believe the administrative costs and burdens are too great to 
justify a policy that would require HCFA to review each manufacturer's 
case of why a nominal price for a drug is warranted and would offer no 
greater assurance of more accurately defining nominal price.

R. Additional Rebates Based on Rebate Period CPI-U Increases

    Comment: One commenter recommended that the additional rebates (for 
increases in drug costs in excess of the increase in the CPI-U) should 
not be computed on a rebate period basis because manufacturers do not 
raise prices each rebate period and the effects of a rebate period CPI-
U calculation would be uneven. However, the commenter believed that if 
the additional rebate is computed on a rebate period basis, it should 
be reconciled at the end of the year based on the increase of CPI-U 
compared to the increase in price. The commenter also suggested that we 
should consider comparing increases in prices to the projected annual 
increase in the CPI-U.
    Response: The revision to the additional rebate calculation 
suggested by the commenter is contrary to section 1927 of the Act, 
which provides that the additional rebate is computed on the increase 
in CPI-U from a base date to the month before the beginning of the 
rebate period. OBRA '93 amended section 1927(c)(2) and removed the 
reference that an alternate period could be considered. We believe the 
intent of the law is to ensure that, for Medicaid purposes, drug price 
increases are equal to or less than the increase in the CPI-U on a 
rebate period basis.
    Both of the commenter's proposals would allow drug prices to 
increase in excess of the rebate period CPI-U until the CPI-U ``caught 
up'', for example, a price increase of 10 percent in December 1990 
would not cause an additional rebate for all of 1991 if the CPI-U 
increased 10 percent by December 1991.
    Comment: One commenter suggested that the base CPI-U should be 
modified to use the June 1990 figure, the month before the rebate 
period used to determine the base AMP. The commenter believed this 
would make the time periods between the measurement of CPI-U and AMP 
the same.
    Response: Section 1927(c)(2) of the Act provides that for drugs 
approved before October 1, 1990, we use the CPI-U from October 1, 1990. 
The CPI-U in effect on October 1, 1990, is the September 1990 CPI-U. 
For drugs approved after October 1, 1990, section VI. A. 2. of the 
preamble explains the criteria for determining the base CPI-U for the 
periods January 1, 1991--September 30, 1993, and October 1, 1993 and 
thereafter.

XI. Responses to Public Comments

    Because of the large number of items of correspondence we normally 
receive on a rule, we are not able to acknowledge or respond to written 
public comments individually. However, we will consider all comments 
that we receive by the date specified in the ``Comment Date'' section 
of this preamble and respond to them in the preamble to any final rule 
that we issue.

XII. Paperwork Burden

    Sections 447.508, 447.510, 447.514, 447.516(b), 447.524 (f) and 
(g), 447.526(c)(2)(i), 447.530, 447.534, 447.536, and 447.540(a)(2) of 
these proposed regulations contain requirements that are subject to 
review by the Office of Management and Budget under the Paperwork 
Reduction Act of 1980 (44 U.S.C. Chapter 35). These requirements have 
been approved by OMB under approval numbers 0938-0578 (for 
manufacturers) and 0938-0582 (for States).
    Based on our experience with establishing new reporting systems, we 
estimate that the reporting requirements contained in these sections 
would be 39,289 burden hours per rebate period for manufacturers and 
1,531 burden hours per rebate period for State Medicaid agencies.

XIII. Impact Analysis

A. Overall Impact

    We generally prepare a regulatory flexibility analysis that is 
consistent with the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 
through 612), unless the Secretary certifies that a regulation will not 
have a significant impact on a 

[[Page 48479]]
substantial number of small entities. For purposes of the RFA, States 
and individuals are not small entities, but we consider some 
participating manufacturers as small entities.
    In addition, section 1102(b) of the Act requires the Secretary to 
prepare a regulatory impact analysis for any proposed rule that may 
have a significant impact on the operations of a substantial number of 
small rural hospitals. Such an analysis must conform to the provisions 
of section 604 of the RFA. For purposes of section 1102(b) of the Act, 
we define a small rural hospital as a hospital that is located outside 
of a Metropolitan Statistical Area and has fewer than 50 beds. We are 
not preparing a rural hospital impact statement because we have 
determined, and the Secretary certifies, that this proposed rule would 
not have a significant economic impact on the operations of a 
substantial number of small rural hospitals.
    Although we view the anticipated results of these interim final 
regulations as beneficial to the Medicaid program as well as to 
Medicaid recipients and State governments, we recognize that some of 
the provisions could be controversial and may be responded to 
unfavorably by some affected entities. We also recognize that not all 
of the potential effects of these provisions can be definitely 
anticipated, especially in view of their interaction with other 
Federal, State and local activities regarding outpatient prescription 
drug costs. In particular, considering the effects of our simultaneous 
efforts to improve the delivery of Medicaid-covered outpatient 
prescription drugs, it is impossible to quantify meaningfully a 
projection of the future effect of all of these provisions on State and 
manufacturers' operating costs or on the frequency of substantial 
noncompliance and termination proceedings.
    However, in a General Accounting Office report entitled ``Changes 
in Drug Prices Paid by Health Maintenance Organizations (HMOs) and 
Hospitals Since Enactment of Rebate Provisions'' (January, 1993, GAO/
HRD-93-43), there was very little evidence of a significant effect on 
small rural hospitals. This report compares the year before and year 
after rebates went into effect. It concludes that there were only 
negligible effects on drug costs to hospitals (in fact, a slight 
decrease for inpatient drugs), but that HMOs' costs went up about 8 
percent.
    It is clear that a large number of small entities, such as 
manufacturers and pharmacies, will be affected by the implementation of 
these statutory provisions, and a substantial number of these entities 
may be required to make changes in their operations. For these reasons, 
we have prepared the following voluntary analysis. This analysis, in 
combination with the rest of the preamble, is consistent with the 
standards for analysis set forth by the RFA.

B. Anticipated Effects

1. Effects on the Medicaid Program
    Primarily, the Medicaid drug rebate law was intended to reduce the 
amount State Medicaid programs pay for outpatient drugs by requiring 
manufacturers to offer States discounted prices for covered outpatient 
drugs. Below are estimates of Medicaid drug rebates. These estimates 
are based on data from actual rebates reported or paid for fiscal year 
1992. These estimates also include the impact of section 601 of VHCA, 
which eliminated prices paid by the DVA and other entities from 
calculation of best price under the Medicaid drug rebate program. 
Projected Federal and State rebates have each been reduced by $10 
million per year to account for the impact of the VHCA provisions.

------------------------------------------------------------------------
                                       FY 94    FY 95    FY 96    FY 97 
------------------------------------------------------------------------
Federal.............................     $870     $985    $1135    $1330
State...............................      620      700      810      950
------------------------------------------------------------------------

    For fiscal year 1992, we estimated 12.76 percent rebate as a 
percentage of drug costs to the Medicaid program. Fiscal year 1993 data 
indicated an increase of the drug rebate of approximately 16 percent. 
Although we expect the percentage rebate to increase slightly over the 
estimable period reflected above, we are unable to do so with any 
degree of accuracy.
    The estimates in the table represent savings generated from rebate 
payments from pharmaceutical manufacturers. They were the result of the 
following process:
     We developed a formula to estimate the manufacturer 
rebates as a percentage of Medicaid ingredient costs from a sample of 
drug claims drawn from the Medicaid Statistical Information System, 
otherwise known as MedStat.
     Average manufacturer prices were approximated by applying 
a discount to published average wholesale prices; the ``best price'' 
was developed from the DVA Federal supply schedule.
     The rebate formulas were modeled using a sample database 
from the data described above. The savings that resulted were expressed 
as a percentage of calculated Medicaid ingredient costs for the sample 
drugs.
     These saving percentages were applied to budget 
projections of Medicaid ingredient costs to obtain projected future 
savings. For this step the ingredient cost proportion of Medicaid drug 
spending and the distribution of brand name drugs versus generic drugs 
was derived from an analysis of data from the Pharmaceutical Data 
Service survey databases and MedStat data.
     The potential savings were reduced to account for rebate 
agreements that would have been negotiated between States and 
manufacturers in the absence of section 4401 of OBRA '90.
    Further, section 13602 of OBRA '93 exhibited modifications to the 
Medicaid Drug Rebate law as previously indicated. We have made the 
following estimates of savings as a result of these changes.

------------------------------------------------------------------------
                                       FY 94  FY 95  FY 96  FY 97  FY 98
------------------------------------------------------------------------
Federal..............................    $25    $55    $65    $70    $75
State................................     20     40     45     50     55
------------------------------------------------------------------------

2. Effects on Pharmaceutical Manufacturers
    Initially, it was anticipated that the outcome of these provisions 
would provide the Medicaid outpatient prescription drug program, 
representing 12 to 20 percent of all retail prescriptions in their 
respective States, with access to the best price for single source and 
innovator multiple source drugs. However, it was predicted in many 
circles that the pharmaceutical manufacturers would be unable to absorb 
these losses from 12 to 20 percent of retail sales and would respond by 
shifting the cost to other 

[[Page 48480]]
non-Medicaid sectors of the prescription drug business. Various 
articles in newspapers and health journals have indicated that the 
pharmaceutical industry has elevated some prescription prices in non-
Medicaid sectors. The overall impact of manufacturers raising drug 
prices for the non-Medicaid population cannot be accurately predicted.
    Current data shows that approximately 515 manufacturers have signed 
agreements to participate in the Medicaid drug rebate program. 
Manufacturers appear to support the system and have minimal 
dissatisfaction. Recent studies done by the Office of Inspector General 
(OIG) show well over 90 percent of the drugs (and all major drugs) are 
covered compared to those covered prior to the program.
3. Effects on Non-Medicaid Sector
    Reports indicate that some drug manufacturers are shifting higher 
drug costs to the DVA and the private sector. At one point, the DVA 
estimated that it would incur an additional $150 million in drug costs 
in 1991 and believed that these increased drug costs would be the 
result of manufacturers attempting to level out their pricing structure 
to avoid paying Medicaid significantly discounted best prices. In part, 
as a result of these estimates, the DVA Appropriations Act was enacted, 
which temporarily excluded until June 30, 1992, prices paid for drugs 
by the DVA from the best price. In addition, VHCA was enacted on 
November 4, 1992, which amended section 1927 in several areas and 
excluded prices paid by numerous entities from the best price component 
of the Medicaid drug rebate calculation. However, sufficient data do 
not exist to make a comprehensive evaluation of the overall impact on 
the non-Medicaid sectors.
    If manufacturers attempt to maintain revenues as predicted by some 
sources, there could be several entities of the non-Medicaid sector 
affected other than government. If all discounts and contracts were 
rescinded and one price instituted for all, the economic impact on the 
hospital industry, for example, would be substantially negative since 
the industry receives large discounts for drug purchases, but for some 
other purchasers, it would be substantially positive.

C. Alternatives Considered

    Section 1927 of the Act imposes strict legal and monetary savings 
requirements that the drug rebate program must meet. The only 
alternative to implementing the drug rebate program is to repeal 
section 4401 of OBRA '90 and section 13602 of OBRA '93. However, a 
repeal would impose additional costs on the Medicaid program since the 
drug rebate program is expected to generate substantial savings. Also, 
Federal and State administrative costs would be incurred to reverse the 
policy and operational procedures that were established to implement 
the drug rebate program.
    A cost/benefit analysis of repealing the legislation was not 
conducted since the primary effect of this program simply includes what 
economists term an economic ``transfer''--reducing simultaneously and 
equally costs to the government and revenues of manufacturers through a 
change in purchasing procedures. The Congress passed this law to 
generate program savings from rebates to obtain price reduction that 
other sectors of the economy have received for years, and to provide 
the Medicaid population with equal access to the same prescription 
drugs that benefit the non-Medicaid population.

D. Interaction With Other Activities

    The drug rebate program, in combination with the reimbursement 
moratorium, prospective and retrospective drug use review, electronic 
claims processing system, and demonstration projects, should ensure 
that the Medicaid prescription drug program will operate in the most 
economical manner possible. These provisions should result in decreased 
costs for both States and pharmacies once all aspects of section 1927 
of the Act are fully implemented.

E. Conclusion

    State and Federal Medicaid expenditures have grown at an 
extraordinary rate in recent years. Medicaid expenditures on 
prescription drugs, in particular, during the last half of the 1980s, 
grew at a rate greater than spending for many other Medicaid services. 
Therefore, we believe that the implementation of the above mentioned 
provisions in combination with measures that obtain an additional 
rebate based on the rate of growth of drug expenditures would help to 
reduce costs of the Medicaid program. We solicit public comments on the 
extent that any of the above mentioned entities are significantly 
economically affected by these provisions.
    In accordance with the provisions of Executive Order 12866, this 
rule was reviewed by the Office of Management and Budget.

List of Subjects

42 CFR Part 441

    Family planning, Grant programs--ealth, Infants and children, 
Medicaid, Penalties, Prescription drugs, Reporting and recordkeeping 
requirements, Safety.

42 CFR Part 447

    Accounting, Administrative practice and procedure, Grant programs--
health, Health facilities, Health professions, Medicaid, Reporting and 
recordkeeping requirements, Rural areas.

    42 CFR chapter IV, subchapter C would be amended as follows:
    A. Part 441 is amended as follows:

PART 441--SERVICES: REQUIREMENTS AND LIMITS APPLICABLE TO SPECIFIC 
SERVICES

    1. The authority citation for part 441 continues to read as 
follows:

    Authority: Sec. 1102 of the Social Security Act (42 U.S.C. 
1302).

    2. In Sec. 441.10, the introductory text is republished, and a new 
paragraph (j) is added to read as follows:


Sec. 441.10  Basis.

    This subpart is based on the following sections of the Act which 
state requirements and limits on the services specified or provide 
Secretarial authority to prescribe regulations relating to services:
* * * * *
    (j) Sections 1903(a) and (i)(10) concerning FFP for State 
expenditures for drugs.
    3. Section 441.25 is amended by adding a new paragraph (c) to read 
as follows:


Sec. 441.25  Prohibition on FFP for certain prescribed drugs.

* * * * *
    (c) FFP is not available in State expenditures for covered 
outpatient drugs unless the requirements and conditions specified in 
subpart E of part 447 of this subchapter are met.
    B. Part 447 is amended as follows:

PART 447--PAYMENTS FOR SERVICES

    1. The authority citation for part 447 continues to read as 
follows:

    Authority: Section 1102 of the Social Security Act (42 U.S.C. 
1302).

    2. Section 447.300 is revised to read as follows:


Sec. 447.300  Basis and purpose.

    In this subpart--
    (a) Sections 447.302 through 447.335 and 447.361 implement section 

[[Page 48481]]
    1902(a)(30) of the Act, which requires that payments be consistent with 
efficiency, economy, and quality of care; and section 1927(e)(4) of the 
Act, which specifies requirements for establishing upper limits on 
reimbursement for multiple source drugs dispensed under drug rebate 
agreements.
    (b) Section 447.342 implements section 1902(a)(43) of the Act, 
which permits the State plan to provide for payment to a physician for 
laboratory services which the physician did not personally perform or 
supervise.
    (c) Section 447.371 implements section 1902(a)(13)(F) of the Act, 
which requires that the State plan provide for payment for rural health 
clinic services in accordance with regulations prescribed by the 
Secretary.
    3. Section 447.332 is revised to read as follows:


Sec. 447.332  Upper limits for multiple source drugs.

    (a) Establishment and issuance of listings.
    (1) HCFA will establish listings that identify and set upper limits 
for multiple source drugs that meet the following requirements:
    (i) All of the formulations of the drug approved by the Food and 
Drug Administration (FDA) have been evaluated as therapeutically 
equivalent in the most current edition of its publication Approved Drug 
Products with Therapeutic Equivalence Evaluations (including 
supplements or in successor publications).
    (ii) At least three suppliers list the drug (which has been 
classified by the FDA as category ``A'' in its publication, Approved 
Drug Products with Therapeutic Equivalence Evaluations (including 
supplements or in successor publications)) based on all listings 
contained in current editions (or updates) of published compendia of 
cost information for drugs available for sale nationally.
    (2) HCFA will publish the lists of multiple source drugs for which 
upper limits have been established and revisions to the lists in 
Medicaid program instructions.
    (3) HCFA will identify the sources used in compiling these lists.
    (b) Specific upper limits.
    (1) The agency's payment for multiple source drugs identified and 
listed in accordance with paragraph (a) of this section must not 
exceed, in the aggregate, payment levels determined by applying for 
each drug entity a reasonable dispensing fee established by the agency 
plus an amount established by HCFA that is equal to 150 percent of the 
published price for the least costly therapeutic equivalent drug (using 
all available national compendia) that can be purchased by pharmacists 
in quantities of 100 tablets or capsules (or, if the drug is not 
commonly available in quantities of 100, the package size commonly 
listed) or, in the case of liquids, the commonly listed size.
    (2) For multiple source outpatient prescribed drugs identified in 
subpart E of this part, the formula specified in paragraph (b)(1) of 
this section is not subject to change by HCFA during the period January 
1, 1991, through December 31, 1994.
    (3) A State that is in compliance with the formula under paragraph 
(b)(1) of this section and Sec. 447.331 may not reduce its 
reimbursement limits for covered outpatient drugs or dispensing fees 
for these drugs established under this formula during the period 
January 1, 1991, through December 31, 1994.
    4. A new Sec. 447.335 is added to read as follows:


Sec. 447.335  Additional upper limits for multiple source drugs.

    (a) Establishment and issuance of listings.
    (1) In addition to establishing listings specified in Sec. 447.332, 
HCFA will establish listings that identify and set upper limits for 
multiple source drugs for which at least three of the formulations of 
the drug approved by the Food and Drug Administration (FDA) have been 
evaluated as therapeutically and pharmaceutically equivalent (category 
``A'') in the most current edition of its publication Approved Drug 
Products with Therapeutic Equivalence Evaluations (including 
supplements or in successor publications), regardless of whether all 
additional formulations are rated as such.
    (2) HCFA will publish the lists of multiple source drugs for which 
upper limits have been established and revisions to the lists in 
Medicaid program instructions.
    (3) HCFA will identify the source(s) used in compiling these lists.
    (b) Specific upper limits. The agency's payment for multiple source 
drugs identified and listed in accordance with paragraph (a) of this 
section must not exceed, in the aggregate, payment levels determined by 
applying for each drug entity a reasonable dispensing fee established 
by the agency plus an amount established by HCFA that is equal to 150 
percent of the published price for the least costly therapeutic 
equivalent drug (using all available national compendia) that can be 
purchased by pharmacists in quantities of 100 tablets or capsules (or, 
if the drug is not commonly available in quantities of 100, the package 
size commonly listed) or, in the case of liquids, the commonly listed 
size. For purposes of this paragraph, therapeutic equivalent drugs mean 
drugs rated A or B by the FDA.
    5. A new subpart I, consisting of Secs. 447.500-447.550, is added 
to read as follows:
Subpart I--Payment for Outpatient Prescription Drugs Under Drug Rebate 
Agreements
Sec.
447.500  Basis and purpose.
447.502  Applicability.
447.504  Definitions.
447.506  Requirement for rebate agreements as a condition for 
payment for outpatient prescription drugs.
447.508  State plan requirements.
447.510  Rebate agreements: General requirements.
447.512  Terms of agreements.
447.514  Termination and nonrenewal of national rebate agreements.
447.516  Outpatient drugs subject to rebates.
447.518  Outpatient drugs of manufacturers without rebate 
agreements.
447.520  New drugs subject to rebates.
447.522  Drugs not subject to rebates.
447.524  Exclusions and restrictions on drugs subject to rebates.
447.526  Prior authorization programs.
447.530  State reporting requirements.
447.534  Manufacturer reporting requirements.
447.536  Resolution of disputes relating to information reported.
447.538  Resolution of disputes relating to drug access and State 
systems.
447.540  Confidentiality of reported information.
447.542  Penalties for failure to report or reporting false 
information.
447.546  Payment of rebates.
447.548  Computation of unit rebate amount.
447.550  Denial of FFP.

Subpart I--Payment for Outpatient Prescription Drugs Under Drug 
Rebate Agreements


Sec. 447.500  Basis and purpose.

    (a) Basis. This subpart--
    (1) Interprets section 1927 of the Act which provides in part that, 
in order for payment to be made under Medicaid for covered outpatient 
drugs of a manufacturer, the manufacturer must enter into and comply 
with a rebate agreement with the Secretary of HHS on behalf of States 
(or with States directly under specific authorization of the 
Secretary);
    (2) Implements section 1902(a)(54) of the Act which includes a 
State plan requirement that provides that if a State elects to cover 
prescription drugs, the State must comply with the 

[[Page 48482]]
requirements of section 1927 of the Act; and
    (3) Implements section 1903(i)(10) of the Act which provides for 
denial of FFP in expenditures--
    (i) For covered outpatient drugs of a manufacturer dispensed in any 
State if the manufacturer does not enter into and comply with a rebate 
agreement, except as prescribed in section 1927(a)(3) of the Act; and
    (ii) For any amount expended which exceeds the upper payment limit 
for an innovator multiple source drug dispensed on or after July 1, 
1991, if under applicable State law, a less expensive multiple source 
drug could have been dispensed.
    (b) Purpose. This subpart specifies the requirements for State 
Medicaid agencies and the conditions under which FFP will be made for 
covered outpatient prescription drugs dispensed on or after January 1, 
1991, under drug rebate agreements with manufacturers. This subpart 
also specifies the conditions for approval and renewal of rebate 
agreements with drug manufacturers and manufacturer reporting 
requirements.


Sec. 447.502  Applicability.

    (a) The provisions of this subpart E apply to the 50 States 
(including any State that is furnishing medical assistance under a 
waiver granted under section 1115 of the Act) and the District of 
Columbia.
    (b) The provisions of this subpart do not apply to covered 
outpatient drugs dispensed by:
    (1) Health maintenance organizations (HMOs), including those 
organizations that contract with HCFA under section 1903(m) of the Act; 
and
    (2) Hospitals that dispense covered outpatient drugs using drug 
formulary systems and bill Medicaid no more than the hospital's 
purchasing costs for these drugs as determined under the approved State 
plan.


Sec. 447.504  Definitions.

    As used in this subpart E--
    Covered outpatient prescription drugs or covered outpatient drugs 
means those drugs as defined in sections 1927(k) (2) through (4) of the 
Act and specified in Sec. 447.516.
    Depot means any Federal warehousing facility and distribution 
arrangement, including the Department of Defense's Electronic Commerce 
Initiative (ECI), whether:
    (1) Government owned and operated;
    (2) Government owned and privately operated; or
    (3) Privately owned and operated.
    Depot prices mean prices available to any depot of the Federal 
Government for purchase of drugs from a manufacturer through the depot 
system of procurement, irrespective of whether the drug products 
physically flow through the depot.
    FDA refers to the Food and Drug Administration, Department of 
Health and Human Services.
    Innovator multiple source drug means a multiple source drug from 
1938 to present that was originally marketed under an original new drug 
application approved by the FDA.
    Manufacturer. (1) A manufacturer means any entity that--
    (i) Is engaged in the production, preparation, propagation, 
compounding, conversion, or processing of prescription drug products, 
either directly or indirectly by extraction from substances of natural 
origin, or independently by means of chemical synthesis, or by a 
combination of extraction and chemical synthesis;
    (ii) Is engaged in the packaging, repackaging, labeling, 
relabeling, or distribution of prescription drug products and is not a 
wholesale distributor of drugs or a retail pharmacy licensed under 
State law; and
    (iii) Possesses legal title to the National Drug Code (NDC) number 
for a covered drug, or biological product.
    (2) In the case of a corporation that meets the conditions of 
paragraphs (1)(i) and (1)(ii) of this definition, the entity includes--
    (i) Any corporation that owns at least 80 percent of the total 
combined voting power of all classes of stocks or 80 percent of the 
total value of shares of all classes of stock in the entity (that is, a 
parent corporation);
    (ii) Any other corporation in which the parent corporation of the 
entity owns at least 80 percent of the total combined voting power of 
all classes of stock or 80 percent of the total value of shares of all 
classes of stock in the other corporation (that is, a brother-sister 
corporation); and
    (iii) Any other corporation in which the entity owns at least 80 
percent of the total combined voting power of all classes of stock or 
80 percent of the total value of shares of all classes of stock in the 
other corporation (that is, a subsidiary corporation).
    Manufacturer-specific pricing data includes the average 
manufacturer price (AMP) (as defined in Sec. 447.534(c)(1)), base date 
AMP, best price, or unit rebate amount in connection with a rebate 
agreement.
    Marketed means that a drug was first sold by a manufacturer in the 
United States after FDA approval.
    Medically accepted indication means any use for a covered 
outpatient drug approved under the Federal Food, Drug, and Cosmetic 
Act, or any use that is supported by one or more citations included or 
approved for inclusion in any of the following compendia: the American 
Hospital Formulary Service-Drug Information; the American Medical 
Association Drug Evaluations; and the United States Pharmacopeia-Drug 
Information.
    Multiple source drug means a covered outpatient drug for which 
there are two or more drug products which--
    (1) Are rated as therapeutically equivalent by the FDA in its 
current edition of its publication Approved Drug Products with 
Therapeutic Equivalence Evaluations;
    (2) As determined by FDA, are pharmaceutically equivalent (the drug 
products contain identical amounts of the same active drug ingredient 
in the same dosage form and meet compendial or other applicable 
standards of strength, quality, purity, and identity) and are 
bioequivalent (the drugs do not present a known or potential 
bioequivalence problem, or if they do present such a problem, they are 
shown to meet an appropriate standard of bioequivalence). (This 
condition does not apply if FDA changes by regulation the requirement 
that in order for drug products to be rated as therapeutically 
equivalent, they must be pharmaceutically equivalent and 
bioequivalent);
    (3) For purposes of coverage under the drug rebate program, are 
rated as ``A'' or ``B'' ( therapeutic equivalence code) by the FDA in 
its current edition of its publication Approved Drug Products with 
Therapeutic Equivalence Evaluations; and
    (4) Are sold or marketed in the State during a rebate period.
    National rebate agreement means the rebate agreement developed by 
HCFA to implement section 1927 of the Act.
    NDC refers to the National Drug Code number maintained by the FDA.
    Nominal price refers to a price that is less than 10 percent of 
AMP.
    Noninnovator multiple source drug means a multiple source drug that 
is not an innovator multiple source drug and that was marketed under an 
abbreviated new drug application approved by FDA, or any marketed, 
unapproved pre-1938 drug product for which the FDA has not made a final 
determination about its legal status. The term includes--
    (1) All products approved under an abbreviated new drug 
application, paper new drug application under the FDA's former ``Paper 
NDA'' policy, or an application under section 505(b)(2) of the Federal 
Food, Drug, and Cosmetic Act; and 

[[Page 48483]]

    (2) Any marketed, unapproved pre-1938 drug product that has not 
been evaluated under the new drug provisions of the Federal Food, Drug 
and Cosmetic Act.
    Original New Drug Application (NDA) means an FDA-approved drug or 
biological application that received one or more forms of patent 
protection, patent extension under title II of Public Law 98-417, the 
Drug Price Competition and Patent Term Restoration Act, or marketing 
exclusivity rights granted by the FDA. This definition includes a new 
drug application (NDA), an amended NDA, an antibiotic drug application 
(ADA), an amended ADA, a product license application (PLA), and an 
amended PLA.
    Single award contract prices means prices under a contract between 
the Federal Government and a manufacturer resulting in a single 
supplier for a covered outpatient drug within a class of drugs.
    Single source drug means a covered outpatient drug which is 
produced or distributed under an original new drug application approved 
by the FDA, including a drug product marketed by any cross-licensed 
producers or distributors operating under the new drug application.
    Wholesaler means any entity (including a pharmacy or chain of 
pharmacies) to which the manufacturer sells the covered outpatient 
drugs, but that does not relabel or repackage the covered outpatient 
drug.


Sec. 447.506  Requirement for rebate agreements as a condition for 
payment for outpatient prescription drugs.

    In order for payments to be made under Medicaid for covered 
outpatient prescribed drugs described in Secs. 440.120 and 447.516 of 
this subchapter, except as provided in Sec. 447.518, the manufacturers 
of the drugs must have entered into and comply with:
    (a) A rebate agreement with the Secretary on behalf of States, or 
with States directly, that meets the requirements of this subpart.
    (b) A pharmaceutical pricing agreement with the Public Health 
Service, in accordance with section 340B of the Public Health Service 
Act, for all covered outpatient drugs purchased by a covered entity (as 
described in section 340B(a)(4) of the Public Health Service Act) on or 
after December 1, 1992.
    (c) A pharmaceutical pricing agreement with the Department of 
Veterans Affairs (DVA), in accordance with 38 U.S.C. 8126, for all 
single source drugs, innovator multiple source drugs, biologicals, and 
insulin, effective January 1, 1993.


Sec. 447.508  State plan requirements.

    A State Medicaid plan must provide that the Medicaid agency will 
comply with all of the applicable requirements of this subpart.


Sec. 447.510  Rebate agreements: General requirements.

    (a) Basic requirements.
    (1) Except as specified in paragraph (a)(2) of this section, a 
manufacturer of covered outpatient drugs that are dispensed under a 
State Medicaid program must have entered into and must comply with--
    (i) A national rebate agreement authorized by HCFA; or
    (ii) A State agreement that meets the conditions of paragraph (b) 
or (c) of this section and is authorized by HCFA.
    (2) A manufacturer that has entered into a State agreement that 
meets the requirements of paragraph (b) or (c) of this section must 
also enter into the national rebate agreement.
    (3) A manufacturer must include in its rebate agreement a list all 
of its drugs, by NDC numbers, that fall within the definition of 
covered outpatient drugs.
    (4) A manufacturer may not specify that only a partial list of its 
covered outpatient drugs are subject to rebate under this subpart.
    (b) Existing State/manufacturer agreements. 
    (1) HCFA will consider an individual drug rebate agreement between 
a manufacturer and a State Medicaid agency that is in effect on 
November 5, 1990, to be in compliance with the Federal requirements for 
drug rebates for the initial agreement period if--
    (i) The initial term of the agreement provides for a minimum 
aggregate rebate of 10 percent of the average manufacturer price, as 
defined in Sec. 447.534(c), for all of the manufacturer's drugs paid 
for by the State under Medicaid in a rebate period;
    (ii) The State agency agrees to report to HCFA any rebates paid 
under the rebate agreement; and
    (iii) The State agency submits to HCFA a written assurance from the 
manufacturer that the minimum 10-percent rebate was met under the 
agreement as of November 5, 1990.
    (2) HCFA will consider an existing individual State rebate 
agreement to be in compliance with Federal requirements for drug 
rebates throughout the initial period of the agreement only if the 
manufacturer continues to provide rebates that meet the minimum 10-
percent rebate requirement specified in paragraph (b)(1)(i) of this 
section throughout the initial period. If this requirement is not met, 
the manufacturer's drugs are subject to the terms of the national 
rebate agreement.
    (3) A State and a manufacturer may amend the initial period of a 
rebate agreement that was in effect on November 5, 1990, that meets the 
requirements of paragraph (b)(1) of this section if the State and 
manufacturer are in agreement with all modifications and the terms of 
the agreement allow such modifications. Existing agreements may be 
amended to:
    (i) Provide for a greater rebate; or
    (ii) Add drugs if the minimum 10-percent aggregate rebate 
requirement is met.
    (4) The manufacturer must have a rebate agreement that meets the 
requirements of section 1927(a) of the Act in every State and the 
District of Columbia for FFP to be available under Medicaid.
    (c) New State/manufacturer agreements. If a State Medicaid agency 
did not have an existing agreement with its drug manufacturers in 
effect on November 5, 1990, it may enter into a new agreement under the 
conditions of this paragraph.
    (1) The agreement must provide drug rebates as least as great as 
those required under the national rebate agreement.
    (2) The State agency must agree to report to HCFA any rebates paid 
under the rebate agreement.
    (3) The manufacturer must enter into the national rebate agreement.
    (4) The State agency must provide to HCFA a written assurance from 
the manufacturer that the agreement provides rebates that equal or 
exceed the amounts in the national agreement.
    (d) Authorization by HCFA. Existing and new agreements, and their 
renewals, must be specifically authorized by HCFA.


Sec. 447.512  Terms of agreements.

    (a) Initial period.
    (1) The initial period of an existing State/manufacturer agreement 
and a new State/manufacturer agreement is the period specified in the 
agreement. In the event no period is specified, the initial period is 1 
year.
    (2) The initial period of the national rebate agreement must be for 
at least 1 year.
    (b) Renewal of agreements.
    (1) An existing agreement may be renewed if--
    (i) The agreement provides drug rebates as least as great as those 
required under the national rebate agreement;
    (ii) The State agency agrees to report to HCFA any rebates paid 
under the rebate agreement; 

[[Page 48484]]

    (iii) The State agency provides to HCFA a written assurance from 
the manufacturer that the agreement provides rebates that equal or 
exceed the amounts in the national agreement; and
    (iv) The manufacturer enters into the national rebate agreement.
    (2) Each national agreement will be automatically renewed for 
successive periods of at least 1 year if the agreement continues to 
meet the conditions of the initial period of the agreement and 
requirements of these regulations, unless the manufacturer gives a 
written notice of intent not to renew the agreement or HCFA or the 
manufacturer terminates the agreement in accordance with Sec. 447.514.
    (c) Effective dates of national rebate agreements.
    (1) A national rebate agreement that was entered into and 
authorized by HCFA between February 15, 1991, and April 30, 1991, is 
effective retroactive to January 1, 1991, unless the manufacturer 
requests a later effective date.
    (2) A national rebate agreement that is entered into and authorized 
by HCFA on or after May 1, 1991, is effective the first day of the 
rebate period that begins more than 60 days after the date the 
agreement is entered into unless the manufacturer requests a later 
effective date.


Sec. 447.514  Termination and nonrenewal of national rebate agreements.

    (a) Who may terminate. National rebate agreements may be terminated 
by HCFA or by the manufacturer as specified in paragraphs (b) and (c) 
of this section.
    (b) Termination by HCFA.
    (1) HCFA may terminate an agreement if the manufacturer violates 
the requirements of the rebate agreement or for ``other good cause'' 
shown. ``Other good cause'' includes, but is not limited to, any 
violations of the provisions of the national rebate agreement, section 
1927 or the related regulations, or the persistent failure to provide 
timely information on pricing and other required information or to pay 
timely rebates.
    (2) HCFA will send a written notice of the existence of a violation 
and the decision to terminate the agreement to the manufacturer and 
notify all State Medicaid agencies of the termination.
    (3) The termination will be effective no earlier than 60 days after 
the date the notice of termination is sent to the manufacturer.
    (4) If a manufacturer is dissatisfied with a termination decision 
made by HCFA, the manufacturer may request a hearing to appeal the 
termination under the procedures established in the national rebate 
agreement. However, a request for a hearing will not delay the 
effective date of the termination.
    (c) Termination by the manufacturer. A manufacturer may terminate 
an agreement for any reason.
    (1) Reasons other than nonrenewal--(i) Written notice. To terminate 
an agreement for reasons other than nonrenewal, a manufacturer must 
provide a written notice of termination to HCFA at least 60 days before 
the beginning of the calendar quarter in which the termination will 
occur.
    (ii) Effective dates. Termination will be effective on the first 
day of the first rebate period beginning at least 60 days after the 
manufacturer gives written notice requesting termination, or a later 
date if so specified by the manufacturer.
    (2) Nonrenewals--(i) Written notice. A manufacturer that wishes not 
to renew an agreement must provide a written notice of nonrenewal of 
the agreement to HCFA at least 60 days before the end of the current 
agreement period.
    (ii) Effective dates.
    (A) Termination resulting from nonrenewal will be effective on the 
ending date of the term of the agreement if the manufacturer has given 
the 60-day advance notice.
    (B) If the manufacturer has not given the 60-day advance notice, 
the effective dates of termination specified in paragraph (c)(1)(ii) of 
this section will apply.
    (3) Date of notice. The postmark date of the U.S. Postal Service or 
common mail carrier will be considered as the date a manufacturer gives 
written notice.
    (d) Reinstatement after termination. If an agreement is terminated 
by either HCFA or the manufacturer, another agreement with the 
manufacturer (or a successor manufacturer) may not be entered into 
until a period of one calendar quarter has elapsed from the date of the 
termination, unless HCFA finds good cause for an earlier reinstatement.
    (e) Effect of termination or nonrenewal on rebates due. Any 
nonrenewal or termination of a rebate agreement will not affect rebates 
due before the effective date of nonrenewal termination.
    (f) Notification of termination. HCFA will notify States of any 
termination of a manufacturer from the drug rebate program at least 30 
days prior to the effective date of the termination.


Sec. 447.516  Outpatient drugs subject to rebates.

    (a) Except for the drugs or items listed in Sec. 447.522, the 
following covered outpatient drugs are subject to rebates under this 
subpart:
    (1) Drugs that are--
    (i) Covered outpatient drugs of participating manufacturers under 
an approved State Medicaid plan; and
    (ii) Dispensed by prescription (except certain over-the-counter 
drugs as specified in paragraph (a)(5) of this section);
    (2) Drugs that meet the requirements of the Federal Food, Drug, and 
Cosmetic Act and the Drug Amendments of 1962 specified in section 
1927(k)(2)(A) (i) through (iii) of the Act;
    (3) A biological product other than a vaccine that may only be 
dispensed by prescription, is licensed under section 351 of the Public 
Health Service Act, and is produced at an establishment licensed under 
section 351 to produce such products;
    (4) Insulin certified under section 506 of the Federal Food, Drug, 
and Cosmetic Act; and
    (5) ``Over-the-counter'' drugs that are prescribed by a physician 
or other person authorized to prescribe drugs under State law, if the 
State provides for coverage of these drugs as prescribed drugs under 
its approved State Medicaid plan.


Sec. 447.518  Outpatient drugs of manufacturers without rebate 
agreements.

    (a) Definition. For purposes of this section, 1-A rated drugs means 
drugs classified as such by the FDA, prior to January 1, 1992, as new 
molecular or chemical entities that may provide effective therapy or 
diagnosis for a disease not adequately treated or diagnosed by any 
marketed drug, or provide improved treatment of a disease through 
improved effectiveness or safety (including decreased abuse potential) 
and identified in the FDA publication Office of Drug Evaluation 
Statistical Report, issued yearly. The term includes drugs rated as 1-
A/AA.
    (b) Federal financial participation (FFP). FFP is available for 
payments for single source and innovator multiple source 1-A rated 
drugs that are furnished by manufacturers without rebate agreements 
if--
    (1) The State agency has determined that the availability of the 
drug is essential to the health of Medicaid recipients under the 
approved State plan;
    (2) The prescribing physician has obtained approval for use of the 
drug before it is dispensed in accordance with a prior authorization 
program specified in Sec. 447.526, or the Secretary has approved the 
State agency's determination regarding drug necessity under paragraph 
(b)(1) of this section. 

[[Page 48485]]



Sec. 447.520  New drugs subject to rebates.

    (a) Effective October 1, 1993, there is no special treatment for 
new drugs under the Medicaid drug rebate program.
    (b) For the period January 1, 1991 through September 30, 1993--
    (1) Subject only to the exclusions and restrictions specified in 
Sec. 447.524 (a)(2) and (a)(3), a new drug of participating 
manufacturers must be covered for a period of 6 months after the date 
of approval of the drug by the FDA, regardless of when the manufacturer 
begins to market the drug.
    (2) Except as specified in Sec. 447.524(b), a State agency may not 
exclude, subject to the prior authorization conditions specified in 
Sec. 447.526, or otherwise restrict the coverage of covered outpatient 
drugs under a drug rebate agreement any new drug or biological approved 
by the FDA for a period of 6 months after FDA approval.
    (c) FFP is not available for coverage of new drugs furnished by 
manufacturers who do not have rebate agreements that were in effect for 
the 6-month period after FDA approval of the new drug, unless covered 
during the retroactive period of January 1, 1991, through March 31, 
1991, or covered as a 1-A rated drug under Sec. 447.518(b).


Sec. 447.522  Drugs not subject to rebates.

    The following list indicates drugs or items that are not subject to 
rebates under this subpart:
    (a) Any drug, biological product, or insulin provided as part of, 
or as incident to and in the same setting as any of the following (and 
for which Medicaid payment may be made as part of payment for the 
following and not as direct reimbursement for the drug):
    (1) Inpatient hospital services;
    (2) Hospice services;
    (3) Dental services (except for drugs for which the approved State 
plan authorizes direct reimbursement to the dispensing dentist);
    (4) Physician services;
    (5) Outpatient hospital services;
    (6) Nursing facility services and services provided by an 
intermediate care facility for the mentally retarded;
    (7) Other laboratory and x-ray services; and
    (8) Renal dialysis.
    (b) Any drug, biological product, or insulin that is used for a 
medical indication that is not a medically accepted indication.
    (c) Any drug, biological product, or insulin for which a NDC number 
is not required by the FDA.
    (d) Medical supply items such as syringes (excluding insulin-filled 
syringes), urine and blood glucose testing strips and devices, lancets, 
and inhalers.
    (e) Enteral nutrition products that are not approved by FDA as a 
drug under sections 505, 506, and 507 of the Federal Food, Drug, and 
Cosmetic Act.
    (f) Parenteral nutrition products that are not approved by the FDA 
under section 505 of the Federal Food, Drug, and Cosmetic Act and given 
by the intravenous route of administration.
    (g) Investigational new drugs (for example, Treatment IND drugs, 
Group C cancer drugs, and Parallel Track drugs).


Sec. 447.524  Exclusions and restrictions on drugs subject to rebates.

    (a) A State agency may limit coverage of outpatient drugs that are 
subject to rebate by--
    (1) Implementing a prior authorization program, as specified in 
Sec. 447.526;
    (2) Restricting or excluding certain drugs from coverage as 
specified in paragraphs (b) and (c) of this section; and
    (3) Restricting the quantity of drugs per prescription and the 
number of refills, as specified in paragraph (e) of this section.
    (b) A State may exclude or restrict from coverage, as an outpatient 
drug subject to rebate, any drug if--
    (1) The prescribed use of the drug is not for a medically accepted 
indication;
    (2) The drug, the class of drug, or its medical use is contained on 
the list as specified in paragraph (c) of this section;
    (3) The drug is subject to restrictions in an existing or new 
manufacturer rebate agreement with the State agency that has been 
authorized by HCFA in accordance with Sec. 447.510; or
    (4) The State has excluded coverage of the drug from its formulary 
established in accordance with section 1927(d)(4) of the Act.
    (c) A State may exclude or restrict from coverage, as outpatient 
drugs subject to rebate, any of the prescribed drugs it has elected to 
cover under its approved State Medicaid plan that fall within the 
following descriptions of drugs, classes of drugs, or their medical 
uses:
    (1) Agents when used for anorexia, weight loss, or weight gain.
    (2) Agents when used to promote fertility.
    (3) Agents when used for cosmetic purposes or hair growth.
    (4) Agents when used for the symptomatic relief of cough or colds.
    (5) Agents when used to promote smoking cessation.
    (6) Prescription vitamins and mineral products, except prenatal 
vitamins and fluoride preparation.
    (7) Nonprescription drugs.
    (8) Covered outpatient drugs for which the manufacturer seeks to 
require, as a condition of sale, that associated tests or monitoring 
services be purchased exclusively from the manufacturer or its 
designee.
    (9) Barbiturates.
    (10) Benzodiazepines.
    (d) HCFA will periodically update, by regulation, the list of drugs 
subject to restriction as specified in paragraph (c) of this section by 
adding drugs, classes of drugs, or medical uses if it determines that 
there is evidence of clinical abuse or inappropriate use. HCFA will 
make this determination on the basis of data collected by the State 
Medicaid agency's surveillance and utilization review (SUR) program 
under part 456 of this subchapter.
    (e) A State may restrict the minimum and maximum quantities of 
covered outpatient drugs per prescription and the number of refills 
within a therapeutic class of drugs. A State may also restrict one or 
more package sizes of a drug to be dispensed as long as the restriction 
does not result in a participating manufacturer's drugs not being 
covered at all under the Medicaid program.
    (f) The agency must specify in its State Medicaid plan that, except 
for the restrictions and exclusions specified in this section, and 
drugs excluded from its formulary which meets the requirements of 
section 1927(d)(4) of the Social Security Act, the formulary will 
permit coverage of covered outpatient drugs of manufacturers which have 
met the requirements of Sec. 447.506 that are prescribed for a 
medically accepted indication.
    (g) The agency must include in its State Medicaid plan a list of 
covered outpatient drugs, classes of drugs, or medical uses under 
paragraph (c) of this section that it is excluding or restricting from 
coverage under this section and specify the limitations or conditions 
on coverage.


Sec. 447.526  Prior authorization programs.

    (a) A State agency may establish a prior authorization program for 
any covered outpatient drug under which the drug must be approved 
before it is dispensed for any medically accepted indication.
    (b) A State agency may determine which persons (for example, 
physician, pharmacist) are permitted to request prior authorization of 
a drug.
    (c) Under a prior authorization program, the State agency must--
    (1) Provide for a response by telephone or telecommunications 
device to a request for prior authorization 

[[Page 48486]]
within 24 hours of receipt of a request; and
    (2) In emergency situations, provide for dispensing of at least a 
72-hour supply of drugs, except for those drugs that are excluded or 
restricted as outpatient prescribed drugs under Sec. 447.524.
    (i) The State agency must specify in its State plan the process 
that will be used to determine what constitutes an emergency situation.
    (ii) The State agency must ensure that its response to a prior 
authorization request is given to the dispenser before the emergency 
supply is exhausted.
    (iii) In emergency situations, the State must provide a mechanism 
so that a dispenser or physician can make a prior authorization request 
24 hours before the supply is exhausted and a response returned by the 
State within that 24-hour period.
    (d) State staff who place drugs in a prior authorization system 
must be licensed to prescribe or dispense drugs in the State, for 
example, physicians or pharmacists.
    (e) State staff who respond to prior authorization requests are not 
limited to persons licensed to prescribe or dispense drugs as long as 
all decisions involving drugs subject to prior authorization are made--
    (i) In consultation with these licensed professionals; or
    (ii) Under guidelines promulgated by such individuals as long as 
States provide access to these licensed professionals in difficult or 
unusual cases.
    (f) The State agency must establish a process to ensure that 
recipients have access to medically necessary covered outpatient drugs 
and must provide annual written assurances to HCFA that its prior 
authorization program does not prevent recipients from gaining access 
to medically needed drugs.


Sec. 447.530  State reporting requirements.

    (a) Basic requirement. The State agency must provide to 
manufacturers with drug rebate agreements State drug utilization data 
specified in paragraph (b) of this section for which Medicaid payments 
have been made during a rebate period. For purposes of this section--
    (1) The agency must use the 11-digit NDC number to report drug 
utilization data.
    (2) Unit means the lowest commonly identifiable amount of a drug--
for example, tablet or capsule for solid dosage forms, milliliter for 
liquid forms, and gram for ointments or creams, as described in the 
rebate agreement and accompanying appendices.
    (b) Type of data to be reported. The State agency must submit to 
manufacturers the following information, based on claims paid by the 
agency during a rebate period:
    (1) State identification;
    (2) Rebate period and year for which data apply;
    (3) The NDC number;
    (4) Total units paid for during a rebate period by NDC.
    (5) The product name (FDA registration name);
    (6) Total amount of rebate that a State claims for each NDC;
    (7) Total number of prescriptions paid for during the rebate period 
by NDC number; and
    (8) The rebate amount per unit and the total amount paid for during 
the rebate period by NDC number to verify rebate payment.
    (c) Timeframe for reporting.
    (1) The State agency must report the utilization data no later than 
60 days after the end of each rebate period.
    (2) In the event that a due date falls on a weekend or Federal 
holiday, the report or other item will be due on the first business day 
following that weekend or Federal holiday.
    (3) If a State does not submit its rebate period utilization data 
to the manufacturer within 1 year after the rebate period ends--
    (i) A manufacturer is not required to pay a rebate on those drugs; 
and
    (ii) A State may be considered out of compliance with section 1927 
of the Act for failure to collect rebates.
    (d) Format of report. The State agency must report the utilization 
data, using the NDC number, in a form prescribed by HCFA.
    (e) Administrative procedures for data collection. The State agency 
must--
    (1) Inform Medicaid participating drug dispensers that they are 
required to use accurate NDC numbers for the drugs dispensed in 
submitting their Medicaid claims and of potential payment denial, 
sanctions, including those for fraud and abuse, and possible 
termination of provider agreements, for incorrect coding of NDC 
numbers;
    (2) Establish and implement an oversight and auditing plan to 
ensure proper pharmacy coding and reporting practices;
    (3) Establish and implement procedures for investigating at the 
pharmacy level allegations of erroneous utilization data by 
manufacturers with rebate agreements; and
    (4) Establish procedures for taking actions necessary to ensure 
accurate coding.
    (f) Use of data edits. The State must verify the accuracy of 
utilization data through the use of data edits such as, but not limited 
to--
    (1) Unit types are appropriate for NDCs;
    (2) Units match amount paid by the State; and
    (3) Amount paid by the State is appropriate for the drug.
    (g) Use of rounding indicators. States must identify by NDC number 
those drugs for which the number of units has been rounded by showing a 
rounding indicator for the number of units dispensed.


Sec. 447.534  Manufacturer reporting requirements.

    (a) Basic requirements. Under the terms of the drug rebate 
agreement, a manufacturer must--
    (1) Supply HCFA with a list of all covered outpatient drugs (as 
specified in paragraph (c) of this section), the average manufacturer 
price, and, for single source and innovator multiple source drugs, the 
best price (as specified in paragraph (d) of this section) within 30 
calendar days of entering into an agreement;
    (2) Update the list of covered outpatient drugs as provided for in 
paragraph (b) of this section;
    (3) Supply the information specified in paragraph (e) of this 
section for each rebate period in a format prescribed by HCFA in 
regulations or instructions; and
    (4) Complete and submit to States the HCFA Form 302, the Remittance 
Advice Report (RAR), in a format prescribed by HCFA in regulations or 
instructions. The RAR must include the information specified in 
paragraph (f) of this section, along with any rebate period rebates due 
within 30 days of receiving from the State Medicaid drug utilization 
data.
    (b) Update to manufacturer's drug list. A manufacturer must update 
its list of all covered outpatient drugs for each rebate period, 
including the average manufacturer price of each drug, and, for single 
source and innovator multiple source drugs, the manufacturer's best 
price.
    (1) The updated list must be reported by the manufacturer to HCFA 
no later than 30 days after the last day of each rebate period.
    (2) The updated list reported by the manufacturer must include the 
NDC number for each covered outpatient drug currently marketed by the 
manufacturer and for all drugs that the manufacturer no longer markets 
until the supply of the drug under an NDC has expired, the drug has 
been taken off the market, or for any other reason, there no longer 
exists the potential that the drug may be paid for under the 
manufacturer's NDC number. 

[[Page 48487]]

    (c) ``Average manufacturer price'' defined.
    (1) ``Average manufacturer price'' (AMP) means, with respect to a 
covered outpatient drug of the manufacturer for a rebate period, the 
average unit price paid to the manufacturer for the drug in the State 
by wholesalers for drugs distributed to the retail pharmacy class of 
trade (excluding sales to hospitals, health maintenance organizations 
and to wholesalers where the drug is relabeled under that distributor's 
NDC number), after deducting customary prompt pay discounts.
    (2) Federal supply schedule prices are not included in the 
calculation of AMP.
    (3) AMP includes cash discounts allowed and all other price 
reductions (other than rebates under this subpart), which reduce the 
actual price paid.
    (4) AMP is calculated as a weighted average of prices for all the 
manufacturer's package sizes for each covered outpatient drug sold by 
the manufacturer during that rebate period. It is calculated as net 
sales divided by numbers of units sold, excluding goods or any other 
items given away, but not contingent on any purchase requirements. 
``Net sales'' means quarterly gross sales revenues less cash discounts 
allowed and all other price reductions (other than rebates under 
section 1927 of the Act) which reduce the actual price paid. For 
bundled sales, the allocation of the discount is made proportionately 
to the dollar value of the units of each drug sold under the bundled 
arrangement. ``Bundled sales'' refers to the packaging of drugs of 
different types where the condition of rebate or discount is that more 
than one drug type is purchased, or where the resulting discount or 
rebate is greater than that which would have been received had the drug 
been purchased separately.
    (5) The manufacturer must adjust the AMP for a rebate period if 
cumulative discounts or other arrangements subsequently adjust the 
prices actually realized.
    (d) ``Best price'' defined.
    (1) ``Best price'' means, with respect to single source and 
innovator multiple source drugs, the lowest single price at which the 
manufacturer sells the covered outpatient drug to any purchaser in the 
United States in any package size in any pricing structure (including 
capitated payments), in the same quarter for which the AMP is computed.
    (2) To determine best price, use the following prices in the best 
price calculation:
    (i) Prices included in best price.
    (A) Except for those prices specifically exempted by law, as 
specified in paragraphs (d)(2)(i)(B) and (d)(2)(ii) of this section, 
best price includes prices to wholesalers, retailers, providers, HMOs, 
nonprofit entities, or governmental entities within the States 
(excluding depot prices and single award contract prices of any agency 
of the Federal Government).
    (B) For periods January 1, 1991, through October 27, 1991, and July 
1, 1992, through September 30, 1992, best price includes any prices 
charged under the Federal Supply Schedule of the General Services 
Administration, including prices for drugs and biologicals paid by the 
DVA and drugs and biologicals in contracts administered by the DVA.
    (ii) Prices excluded from best price.
    (A) For periods beginning on or after October 1, 1992, best price 
excludes any prices charged to the Indian Health Service, the DVA, a 
State home receiving funds under 38 U.S.C. 1741, the Department of 
Defense, the Public Health Service, or a covered entity described in 
section 1927(a)(5)(B) of the Social Security Act; any prices charged 
for drugs and biologicals under the Federal Supply Schedule of the 
General Services Administration; or any prices used under a State 
pharmaceutical assistance program.
    (B) For the period October 28, 1991, through June 30, 1992, best 
price excludes any prices charged under the Federal Supply Schedule of 
the General Services Administration for drugs and biologicals paid by 
the DVA and drugs and biologicals in contracts administered by the DVA.
    (3) Calculations of best prices must include cash discounts, free 
goods that are contingent on any purchase requirements, volume 
discounts, and rebates, other than rebates under section 1927 of the 
Act.
    (4) Best price must be determined on a unit basis without regard to 
special packaging, labeling, or identifiers on the dosage form or 
product or package, and must not take into account prices that are 
nominal in amount.
    (5) For bundled sales, the allocation of the discount is made 
proportionately to the dollar value of the units of each drug sold 
under the bundled arrangement.
    (6) The manufacturer must adjust the best price for a rebate period 
if cumulative discounts, rebates, or other arrangements subsequently 
adjust the prices actually realized.
    (7) For purpose of this section, provider means a physician, 
hospital and other health maintenance organizations or entities that 
treat individuals for illnesses or injuries or provides services or 
items in the provisions of health care.
    (e) Contents of quarterly report. The manufacturer's quarterly 
reports to HCFA must include--
    (1) NDC number with labeler code, product code, and package size 
code;
    (2) Period covered for rebates (rebate period and year);
    (3) Product FDA registration name;
    (4) Drug category of single source, innovator multiple source, or 
noninnovator multiple source;
    (5) Indicator for drug reviewed under the Drug Efficacy Study 
Implementation (DESI) program;
    (6) FDA therapeutic equivalence explanation code;
    (7) Unit type;
    (8) Units per package size;
    (9) AMP;
    (10) Basedate AMP;
    (11) Best price;
    (12) FDA approval date;
    (13) Date drug entered market;
    (14) Drug termination date;
    (15) Drug type; and
    (16) Correction record flag which signals that the record contains 
corrected information from a previous submission.
    (f) Contents of Remittance Advice Report (RAR) (HCFA Form 304). The 
manufacturer's RARs to States must include--
    (1) Manufacturer name, labeler code, address, and name, telephone 
number, and facsimile number of contact person;
    (2) State;
    (3) Rebate period and year for which the information applies;
    (4) Invoice number, if State provided one;
    (5) NDC number and product name;
    (6) Rebate amount per unit;
    (7) Units invoiced;
    (8) Rebate amount invoiced;
    (9) Rebate amount paid;
    (10) Adjusted rebate per unit, if applicable;
    (11) Adjustment code, if applicable;
    (12) Credit/debit indicator, if applicable;
    (13) Adjusted invoice amount, if applicable;
    (14) Units disputed, if applicable;
    (15) Dispute code, if applicable;
    (16) Withheld invoice amount, if applicable;
    (17) Total rebate amount invoiced;
    (18) Total rebate amount paid;
    (19) Total adjusted invoice amount, if applicable; and
    (20) Total withheld invoice amount, if applicable.
    (g) Recordkeeping requirements.
    (1)(i) Except as set forth in paragraph (e) of this section, a 
manufacturer must retain records (written or electronic) for 

[[Page 48488]]
3 years from the date the manufacturer reports that rebate period's 
data. The records must include the data and any other materials from 
which the calculations of the AMP and best price are derived, including 
a record of any assumptions made in the calculations.
    (ii) A manufacturer must retain records beyond the 3-year period if 
audit findings have not been resolved.
    (2) Both the State and manufacturer must retain supporting 
documentation (written or electronic) related to the dispute resolution 
process and the RAR for 3 years from the date a dispute is resolved 
between the manufacturer and State.
    (h) Timeframe for reporting revised AMP or best price. A 
manufacturer must report changes to AMP or best price for 3 years after 
the quarter to which the data pertains.


Sec. 447.536  Resolution of disputes relating to information reported.

    (a) Resolving data inconsistencies.
    (1) The manufacturer must attempt to identify and resolve data 
inconsistencies in State Medicaid drug utilization data prior to 
initiating the dispute resolution process described in paragraphs (b) 
and (c) of this section.
    (2) The manufacturer must attempt to resolve any data 
inconsistencies under paragraph (a)(1) of this section with the State 
by no later than 30 days after receipt of State Medicaid drug 
utilization data. The manufacturer may initiate this process through 
telephone contact with the State.
    (3) If data inconsistencies are resolved by the manufacturer and 
State, the manufacturer must record this fact on the RAR and the State 
must maintain supporting documentation to substantiate the resolution 
of the data inconsistencies.
    (b) Reporting disputes.
    (1) If, in any rebate period, a manufacturer and the State are 
unable to resolve data inconsistencies under paragraph (a) of this 
section or other disputed items within 30 days after the manufacturer 
receives State Medicaid drug utilization data, the manufacturer must 
complete and submit the RAR to the State in accordance with 
Sec. 447.534(a)(4) or the State's utilization data are considered final 
and binding and the entire rebate payment is due.
    (2) The RAR must include the information specified in 
Sec. 447.534(f) and identify by each NDC the reason(s) why the 
manufacturer is disputing the data.
    (3) The manufacturer must submit to the State supporting 
documentation for certain types of disputes as indicated on the RAR. 
The manufacturer must submit supporting documentation for certain types 
of disputes as indicated on the RAR if a State requests the 
documentation to verify information.
    (4) The RAR must be postmarked by the United States Postal Service 
or common mail carrier on or prior to the due date for the rebate 
period payment of the rebates to the State agency.
    (c) Resolving disputes.
    (1) Within 90 days after the State receives the RAR, the State must 
contact the manufacturer in writing or by telephone to discuss the 
dispute and to present the State's preliminary response on the disputed 
items to the manufacturer. If the dispute is resolved, the manufacturer 
and the State must both maintain supporting documentation of the 
resolution for 3 years from the date the dispute is resolved.
    (2) If the dispute is not resolved in accordance with paragraph 
(c)(1) of this section, the State must, within 150 days after the State 
receives the RAR and in accordance with State confidentiality laws--
    (i) Provide the manufacturer with drug utilization data, such as 
zip code-level data, pharmacy-level data, sampling of pharmacy claims, 
or historical trends on those items in dispute; and
    (ii) Submit to the manufacturer the same type of drug utilization 
data used by the manufacturer to identify disputed items.
    (3) If State confidentiality laws prohibit the State from releasing 
the types of information in paragraph (c)(2) of this section, the State 
may require the manufacturer to provide the data upon which the 
manufacturer based the dispute to the State. Upon such request, the 
manufacturer must furnish such data to the State within 150 days after 
the State receives the RAR.
    (4) Within 240 days after the State receives the RAR, the State and 
manufacturer must complete negotiations. One of the following actions 
must occur:
    (i) The State ceases the dispute resolution process based on a 
cost-effectiveness determination in accordance with paragraph (k) of 
this section;
    (ii) The State and the manufacturer settle on the State Medicaid 
drug utilization data and agree to make appropriate adjustments to any 
rebate amounts;
    (iii) The State and the manufacturer agree to a resolution based on 
mutually acceptable data which is more representative of actual 
Medicaid utilization;
    (iv) If no resolution is reached, the State must schedule a hearing 
in accordance with paragraph (d) of this section or the State may be 
subject to a compliance action by HCFA; or
    (v) In lieu of a State hearing, the State and manufacturer may 
agree to arbitration or mediation to settle the dispute.
    (5) The State must maintain documentation which clearly describes 
its decision to--
    (i) Cease the dispute resolution based on cost-effectiveness as 
specified in paragraph (k) of this section; or
    (ii) Agree with the manufacturer on a settlement as specified in 
paragraphs (c)(4)(ii) or (c)(4)(iii) of this section.
    (d) State hearing.
    (1) If no settlement has been reached between the State and the 
manufacturer within 240 days after the State receives the RAR, the 
State, must within 30 days, schedule a hearing. The hearing must be 
conducted within 1 year from the 240th day after the State receives the 
manufacturer's RAR.
    (2) The manufacturer may require a State to schedule a hearing at 
any stage of the process if the State does not take the required 
actions of the dispute process within the specified timeframes. The 
State must, within 30 days, schedule a hearing.
    (3) If the manufacturer does not comply with its timeframes 
specified in the agreement, the State may--
    (i) At any stage of the process schedule a hearing which must be 
conducted within 1 year from the 240th day after the State received the 
manufacturer's RAR;
    (ii) Follow the administrative law or judicial process for 
collecting rebate payments; and/or
    (iii) Request HCFA, through the Regional Office, to terminate the 
manufacturer's national rebate agreement.
    (e) Use of arbitration or mediation. 
    (1) In lieu of a State hearing, the State and the manufacturer may 
agree to arbitration or mediation to resolve the dispute.
    (2) The State must maintain documentation which clearly describes 
the agreement with the manufacturer to resolve the dispute through 
arbitration or mediation rather than a State hearing.
    (3) The State must maintain documentation for a period of 3 years 
from the date the dispute is resolved through arbitration or mediation.
    (f) Payment of rebate pending resolution of disputes.
    (1) The manufacturer must pay the State agency that portion of the 
rebate claimed which is not in dispute by the due date of the required 
rebate period rebate payment. 

[[Page 48489]]

    (2) The manufacturer may, at its option, make payment on the 
disputed portion of the data.
    (g) Interest on disputed amounts.
    (1) The manufacturer or the State agency must pay or credit the 
balance due, if any, plus a rate of interest as specified in section 
1903(d)(5) of the Act by the due date of the first rebate period 
payment after resolution of the dispute.
    (2) For disputed amounts withheld by the manufacturer and due the 
State, the interest is computed from the 38th day after the State mails 
its Medicaid drug utilization data and stops accruing on the later of 
the date the dispute is resolved, and the date the disputed amount is 
paid or credited to the proper party.
    (3) For amounts paid by the manufacturer on the disputed the 
amount, interest must be paid by the State when resolution results in 
payment to the manufacturer. Interest must be paid for the period from 
the date of receipt of payment for the disputed data to the date the 
dispute is resolved and the disputed amount is paid or credited to the 
manufacturer.
    (h) Adjustment of rebate payment. The State agency must adjust 
rebate payments if information indicates that Medicaid utilization data 
was greater or less than previously specified on the State's invoice 
for rebate payments.
    (i) Availability of FFP for rebates lost in a dispute. FFP is 
available for otherwise properly dispensed drugs that involve disputed 
drug utilization data, and the Federal portion of the rebate is not 
required from the State, when--
    (1) A dispute was terminated because the State determined and 
adequately documented that the dispute resolution process was not cost-
effective as specified in paragraph (k) of this section; or
    (2) Less than the full rebate resulted from a dispute resolution 
between a State and a manufacturer as specified in paragraph (c)(4)(ii) 
or (c)(4)(iii) of this section.
    (j) Rebate tolerances--(1) Administrative cost tolerance. 
Generally, the State is not required to invoice manufacturers for 
rebates per labeler code which are less than the administrative cost 
tolerance of $50 associated with the preparation of the invoice.
    (2) Updates to administrative cost tolerance. HCFA will update the 
administrative cost tolerance through Medicaid program instructions.
    (k) Cost-effectiveness tolerance for disputed amounts--(1) Cost-
effectiveness tolerance. Under paragraph (c)(4)(i) of this section, a 
State may cease the dispute resolution process based on the following 
cost-effectiveness tolerances:
    (i) The disputed amount is less than $10,000 per labeler code; and
    (ii) The disputed amount is less than $1,000 per product code.
    (2) Updates to cost-effectiveness tolerance. HCFA will update the 
cost-effectiveness tolerances through Medicaid program instructions.


Sec. 447.538  Resolution of disputes relating to drug access and State 
systems.

    (a) A manufacturer may request HCFA to initiate compliance action 
against a State if the State fails to comply with section 1927 of the 
Act. The manufacturer may also request HCFA to initiate compliance 
action when the State agency shows a pattern or history of inaccuracy 
in reporting Medicaid drug utilization data.
    (b) Any compliance action initiated by HCFA will not relieve the 
manufacturer from its obligation of making the rebate payment as 
provided in Sec. 447.546.


Sec. 447.540  Confidentiality of reported information.

    (a) State agency requirements.
    (1) Except as specified in paragraph (a)(2) of this section and 
notwithstanding other laws, including, but not limited to, the Freedom 
of Information Act (5 U.S.C. 552), the State agency and its contractors 
must not disclose any manufacturer-specific pricing data collected or 
reported in connection with a rebate agreement in any form that reveals 
the manufacturer or wholesaler of a drug or prices for the drugs that 
are charged by the manufacturer or wholesaler.
    (2) The State agency and its contractors must provide to HCFA 
information that is necessary to carry out the provisions of section 
1927 of the Act and to permit review under section 1927 of the Act by 
the Comptroller General and the Director of the Congressional Budget 
Office.
    (3) A State agency may release its utilization data, excluding 
manufacturer-specific pricing data, to the extent such release of 
information is allowed under a State's confidentiality laws.
    (b) Manufacturer requirements.
    (1) A manufacturer or its contractors must not disclose information 
contained in the State's drug utilization reports.
    (2) A manufacturer must observe State confidentiality laws and 
regulations.


Sec. 447.542  Penalties for failure to report or reporting false 
information.

    (a) Surveys and audits.
    (1) HHS surveys wholesalers, manufacturers, and direct sellers that 
distribute covered outpatient drugs, when necessary, to verify 
manufacturer prices reported to HCFA.
    (2) HHS may audit a manufacturer's calculations of AMP and best 
price of covered outpatient drugs, as necessary, to verify reported 
data.
    (b) Imposition of penalties.
    (1) The Secretary may impose on any wholesaler, manufacturer, or 
direct seller of a covered outpatient drug that refuses a request for 
information about charges or prices in connection with a survey or 
knowingly provides false information a civil monetary penalty in an 
amount not to exceed $100,000 for each item.
    (2) The Secretary may impose on a manufacturer who fails to provide 
the required information on AMP and best price or the list of covered 
outpatient drugs on a timely basis a civil money penalty of $10,000 for 
each day beyond the due date that the information is not provided.
    (i) If the information is not reported within 90 days of the due 
date, HCFA may suspend the drug rebate agreement after the end of the 
90-day period.
    (ii) The suspension is for a period of at least 30 days and 
continues until the information is provided.
    (3) The Secretary may impose on a manufacturer that knowingly 
provides false information an additional penalty not to exceed $100,000 
for each item of false information. These civil money penalties are in 
addition to other penalties as may be prescribed by law.
    (c) Procedures for imposing penalties. The imposition of a civil 
money penalty will be made in accordance with the provisions of 
sections 1128A and 1927(b)(3) of the Act.


Sec. 447.546  Payment of rebates.

    (a) Basic requirements. In order for FFP to be available to a State 
for expenditures for covered outpatient drugs of a manufacturer, the 
manufacturer must agree to--
    (1) Calculate a rebate payment using the formulas specified in 
paragraph (b) of this section and make a rebate payment to each State 
Medicaid agency for the manufacturer's covered outpatient drugs paid 
for by the State Medicaid agency during the rebate period;
    (2) Make the rebate payments for each rebate period within 30 days 
after receiving from the State Medicaid drug utilization data on the 
total number of units of covered outpatient drugs, by NDC number, paid 
by the State under the plan during the rebate period, as 

[[Page 48490]]
reported in accordance with Sec. 447.530; and
    (3) Continue to make rebate payments for all of its covered 
outpatient drugs for as long as an agreement is in force and drug 
utilization data reports are made and until--
    (i) The entire supply of the drug under an NDC number has expired;
    (ii) The drug has been taken off the market; or
    (iii) For another reason, there no longer exists the potential that 
the drug may be paid for under the manufacturer's NDC number.
    (b) Formulas for rebates.
    (1) The basic rebate for single source drugs and innovator multiple 
source drugs is--
    (i) For January 1, 1991, through December 31, 1991: The greater of 
12.5 percent of the AMP or the AMP minus best price. (The rebate is 
capped at 25 percent of AMP.)
    (ii) For January 1, 1992, through September 30, 1992: The greater 
of 12.5 percent of the AMP or the AMP minus best price. (The rebate is 
capped at 50 percent of AMP.)
    (iii) For October 1, 1992, through December 31, 1993: The greater 
of 15.7 percent of the AMP or the AMP minus best price. (The rebate is 
capped at 50 percent of the AMP for the rebate period of October 1, 
1992, through December 31, 1992.)
    (iv) For January 1, 1994, through December 31, 1994: The greater of 
15.4 percent of the AMP or the AMP minus best price.
    (v) For January 1, 1995, through December 31, 1995: The greater of 
15.2 percent of the AMP or the AMP minus best price.
    (vi) For January 1, 1996, and thereafter: The greater of 15.1 
percent of the AMP or the AMP minus best price.
    (2) The additional rebate for single source and innovator multiple 
source drugs is for calendar years 1991 through 1993: On a drug-by-drug 
basis, the amount by which the increase in the AMP exceeds the increase 
in the Consumer Price Index-Urban (CPI-U) from October 1, 1990, to the 
month before the rebate period of the rebate.
    (3) The rebate for noninnovator multiple source and other drugs 
is--
    (i) For calendar years 1991 through 1993: 10 percent of the AMP.
    (ii) For calendar years 1994 and thereafter: 11 percent of the AMP.
    (c) Late submittal of data. The manufacturer is not required to pay 
a rebate if the State does not submit its rebate period utilization 
data to the manufacturer within 1 year after the rebate period ended.


Sec. 447.548  Computation of unit rebate amount.

    (a) HCFA computes a per drug unit rebate amount on the basis of the 
formulas specified in Sec. 447.546(b). The rebate amount will be based 
on unit pricing information supplied by the manufacturer in accordance 
with Sec. 447.534.
    (b) HCFA supplies the per drug unit rebate amount to each State on 
a rebate period basis. The State must compute the total rebate 
anticipated, based on its own utilization records, and send an invoice 
to the manufacturers for a total rebate amount due. However, the 
manufacturer remains responsible for correctly calculating the rebate 
amount based on State reported utilization data and its correct 
determination of AMP and, where applicable, base date AMP and best 
price, as defined in Sec. 447.534.


Sec. 447.550  Denial of FFP.

    (a) Except for those drugs described in Sec. 447.518, FFP will be 
denied for payment of any dispensed covered outpatient drug of a 
manufacturer that does not have in effect and comply with:
    (1) A drug rebate agreement, as specified in this subpart;
    (2) A pharmaceutical pricing agreement with the Public Health 
Service, in accordance with section 340B of the Public Health Service 
Act, for all covered outpatient drugs purchased by a covered entity (as 
described in section 340B(a)(4) of the Public Health Service Act) on or 
after December 1, 1992; and
    (3) A pharmaceutical pricing agreement with the DVA, in accordance 
with 38 U.S.C. 8126, for all single source drugs, innovator multiple 
source drugs, biologicals, and insulin, effective January 1, 1993.
    (b) FFP is not available for payment for expenditures that exceed 
the upper payment limit for an innovator multiple source drug that is 
subject to the Federal upper limits in Secs. 447.332(a) and 447.335 
dispensed on or after July 1, 1991, if, under applicable State law, a 
less expensive noninnovator multiple source drug could have been 
dispensed.

(Catalog of Federal Domestic Assistance Program No. 93.778, Medical 
Assistance Programs)

    Dated: April 12, 1995.
Bruce C. Vladeck,
Administrator, Health Care Financing Administration.
    Dated: August 31, 1995.
Donna E. Shalala,
Secretary.
[FR Doc. 95-22860 Filed 9-18-95; 8:45 am]
BILLING CODE 4120-01-P