[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]
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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.
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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