[Federal Register Volume 68, Number 168 (Friday, August 29, 2003)]
[Rules and Regulations]
[Pages 51912-51917]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-21548]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 447

[CMS-2175-FC]
RIN 0938-AM20


Medicaid Program; Time Limitation on Price Recalculations and 
Recordkeeping Requirements Under the Drug Rebate Program

AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION: Final rule with comment period.

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SUMMARY: On September 19, 1995, we published a proposed rule in the 
Federal Register that introduced requirements for States and 
manufacturers pertaining to the Medicaid drug rebate program. We 
received several comments from States and manufacturers regarding 
recordkeeping requirements and drug price recalculations. This final 
rule with comment period finalizes separately, in an accelerated 
timeframe, two specific provisions of the September 1995 proposed rule. 
It establishes new recordkeeping requirements for drug manufacturers 
under the Medicaid drug rebate program. It also sets forth a 3-year 
time limitation during which manufacturers must report changes to 
average manufacturer price and best price for purposes of reporting 
data to us. In addition, it announces the pressing need for 
codification of fundamental recordkeeping requirements. Furthermore, it 
announces our intention to continue to work on finalizing the complete 
drug rebate regulation for the Medicaid drug rebate program.

DATES: Effective Date: October 1, 2003.
    Comment Date: Comments will be considered if we receive them at the 
appropriate address, as provided below, no later than 5 p.m. on October 
28, 2003.

ADDRESSES: In commenting, please refer to file code CMS-2175-FC. 
Because of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission or e-mail. Mail written comments (one 
original and three copies) to the following address ONLY: Centers for 
Medicare & Medicaid Services, Department of Health and Human Services, 
Attention: CMS-2175-FC, PO Box 8016, Baltimore, MD 21244-8016.
    Please allow sufficient time for mailed comments to be timely 
received in the event of delivery delays.
    If you prefer, you may deliver (by hand or courier) your written 
comments (one original and three copies) to one of the following 
addresses:

Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., 
Washington, DC 20201, or
Room C5-14-03, 7500 Security Boulevard, Baltimore, MD 21244-1850.

    (Because access to the interior of the HHH Building is not readily 
available to persons without Federal Government identification, 
commenters are encouraged to leave their comments in the CMS drop slots 
located in the main lobby of the building. A stamp-in clock is 
available for commenters wishing to retain a proof of filing by 
stamping in and retaining an extra copy of the comments being filed.)
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and could be considered late.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Marge Watchorn, (410) 786-4361.

SUPPLEMENTARY INFORMATION:
    Inspection of Public Comments: Comments received timely will be 
available for public inspection as they are received, generally 
beginning approximately 3 weeks after publication of a document, at the 
headquarters of the Centers for Medicare & Medicaid Services, 7500 
Security Boulevard, Baltimore, Maryland 21244, Monday through Friday of 
each week from 8:30 a.m. to 4 p.m. To schedule an appointment to view 
public comments, call telephone number: (410) 786-7195.
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I. Background

A. Overview

    We are publishing this final rule with comment period to address 
the issues of manufacturer recordkeeping requirements and price 
recalculations under the Medicaid drug rebate program. We decided to 
issue a final rule with comment period rather than a final rule to give 
interested parties an additional opportunity to provide comments on 
these provisions. We believe the additional comment period is 
appropriate given the time that has elapsed between the publication of 
the September 19, 1995 proposed rule (60 FR 48442) and the publication 
of this rule.
    We are publishing this rule to address concerns regarding the 
administration of the Medicaid drug rebate program for manufacturers 
and States. In the absence of a regulatory recordkeeping requirement, 
manufacturers are in effect required to retain pricing data for an 
indefinite period. The 3-year recordkeeping requirement will enable 
manufacturers to close their books within a reasonable timeframe. This 
recordkeeping requirement will mirror the 3-year timeframe established 
for States to retain records at 42 CFR 433.32.
    We believe establishing a timeframe for manufacturers to submit 
revised pricing data to us also streamlines the administration of the 
Medicaid drug rebate program. Due to recalculations involving hundreds 
of millions of State and Federal Medicaid dollars and over 10 years of 
paperwork, we believe it is essential that a standard timeframe be 
established within which manufacturers and CMS, or States, are 
permitted to submit revised drug prices. This timeframe will also 
assist States that would otherwise be required to retain their drug 
utilization data indefinitely to verify changes in rebate amounts 
resulting from retroactive manufacturer recalculations. Therefore, as 
of the effective date of this rule, manufacturers will have 12 quarters 
from the quarter in which the data were originally due to submit 
revised pricing data to us. This timeframe is described in further 
detail in section IV of the preamble, ``Provisions of the Final Rule.''

[[Page 51913]]

    In this rule, we intend the terms ``manufacturer,'' ``average 
manufacturer price (AMP),'' and ``best price (BP)'' to have the same 
meaning as described and set forth in the national drug rebate 
agreements signed by manufacturers and the Secretary (on behalf of 
States). We also have used these terms in guidance documents that we 
have issued over the years pertaining to the Medicaid drug rebate 
program. We do not intend to alter these definitions in this rule. 
Rather, the primary purpose of this rule is to establish procedural 
requirements pertaining to manufacturer recordkeeping and pricing 
changes. We will set forth regulatory definitions of these terms in a 
subsequent document we will publish in the Federal Register.

B. 1995 Proposed Rule

    On September 19, 1995, we published a proposed rule (60 FR 48442) 
in the Federal Register that specified requirements for State Medicaid 
agencies and conditions under which Federal payments would be made 
under the Medicaid program for covered outpatient drugs. The rule also 
specified the conditions for approval and renewal of rebate agreements 
with drug manufacturers participating in the Medicaid program.
    In the September 1995 proposed rule, we also discussed prior period 
adjustments and pricing changes. A prior period adjustment is a change 
in the unit rebate amount based on a manufacturer's revised AMP or BP 
data for a prior rebate period after that rebate period's pricing data 
have been submitted to us. The prior period adjustments generally 
consist of a manufacturer's changes to pricing data resulting from 
sales data not being available before pricing submissions to us or 
changes in the methodology used to establish AMP or BP. We use the 
manufacturer's pricing data to generate the unit rebate amount for each 
9-digit national drug code, which States use to calculate rebate 
amounts due from manufacturers. Any changes to a manufacturer's AMP or 
BP result in changes to the unit rebate amount and rebates due from the 
manufacturer. Thus, the prior period adjustments are necessary to 
correct rebate amounts that are owed by manufacturers or credits due to 
manufacturers.
    Since the publication of the September 1995 proposed rule, States 
have expressed concerns regarding pricing changes and recalculations 
under the Medicaid drug rebate program. We have received requests for 
pricing recalculations for drug prices submitted as far back as 1991. 
The statute does not specifically provide for such recalculations; 
however, we have permitted the recalculations where revisions were made 
to conform to the statute or rebate agreement. Unfortunately, there is 
a significant burden on States and manufacturers to maintain pricing 
data and supporting documentation for timeframes dating back to 1991. 
We have seen a recent increase in the number of these requests and the 
dollar value of the recalculations. In addition, manufacturers have 
expressed concerns regarding recordkeeping burdens. In response to 
these concerns, we are finalizing the recordkeeping requirements and 
the time limit on pricing recalculations proposed in the September 1995 
rule. We will address the remaining provisions of the September 1995 
rule in a subsequent rule we will publish in the Federal Register.

C. Legislative History

    Section 1927 of the Social Security Act (the Act) authorizes the 
Medicaid drug rebate program. Section 1927 of the Act was amended by 
section 4401 of the Omnibus Budget Reconciliation Act of 1990 (OBRA 
`90) and section 13602 of the Omnibus Budget Reconciliation Act of 1993 
(OBRA `93). Under section 1927 of 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).

D. Requirements for Manufacturer's Data

    Section 1927(b) of the Act gives the Secretary the authority to 
publish regulations that establish manufacturer recordkeeping 
requirements and the time limit for manufacturer pricing changes. To 
implement these provisions, we will require that a manufacturer must 
retain pricing data for 3 years from the date the manufacturer reports 
that period's data to us. Although the statute sets forth requirements 
on data reported to us by manufacturers, it does not provide 
recordkeeping requirements for manufacturer data. In the national drug 
rebate agreement, we did not establish a timeframe during which records 
must be maintained. The 3-year time period comports with the 
requirements for the maintenance of records on State Medicaid 
expenditures imposed on States. Section 433.32 requires that States 
retain records for 3 years from the date of submission of a final 
expenditure report for Federal financial participation.

E. Manufacturer's Pricing Data

    Section 1927(b)(3)(A)(i) requires that manufacturers submit pricing 
information no later than 30 days after the end of each quarter. 
However, it does not establish a time limitation regarding pricing 
changes. While we recognize the need to permit manufacturers to submit 
revised prices within a timeframe, States and manufacturers should be 
protected from potential liabilities resulting from no time limit. We 
will require that manufacturers submit changes to AMP or BP within 3 
years from the date that period's data are due. The timeframe for 
pricing changes set forth in this final rule is more fully described in 
section IV of the preamble, ``Provisions of the Final Rule.''

II. Provisions of the Proposed Rule

    In the September 19, 1995 proposed rule, we solicited comments on 
proposed requirements for State Medicaid agencies, the conditions under 
which Federal payments would be made under the Medicaid program for 
covered outpatient drugs, and the conditions for approval and renewal 
of rebate agreements with drug manufacturers. In this final rule with 
comment period, we are finalizing two of the provisions of the 
September 1995 proposed rule. We will address the remaining provisions 
of the September 1995 proposed rule and will publish a subsequent rule 
in the Federal Register.
    In the September 1995 proposed rule, we proposed to add to part 447 
a new subpart I entitled ``Payment for Outpatient Prescription Drugs 
Under Drug Rebate Agreements.'' Within that subpart, we proposed a new 
Sec.  447.534(g) to establish a 3-year recordkeeping requirement for 
manufacturer data pertaining to AMP and BP calculations. We also 
proposed a new Sec.  447.534(h) to establish a 3-year time limit for 
manufacturers to report revised AMP or BP to us.

III. Analysis of and Response to Public Comments on the September 19, 
1995 Proposed Rule

    We received 19 timely comments in response to the September 19, 
1995 proposed rule. We received comments from State government 
officials and representatives of the pharmaceutical industry including 
manufacturers, pharmacists, attorneys, and consultants. Although we 
received comments on a variety of topics pertaining to the proposed 
rule, we are addressing only the comments that pertain to the 
manufacturer recordkeeping requirements and the 3-year limitation

[[Page 51914]]

on price recalculations set forth in this final rule with comment 
period. These comments and our responses are summarized below:

A. Manufacturer Recordkeeping Requirements

    Comment: One commenter noted that the 3-year records retention 
standard will provide a useful records management timeframe.
    Response: We agree; therefore, we are issuing this final rule with 
comment period to establish the 3-year recordkeeping requirements for 
manufacturers.

B. Time Limitation on Manufacturer Price Recalculations

    Comment: One commenter expressed the opinion that the burden for 
calculating the amount of rebate adjustments should rest with the 
manufacturer when the adjustment results from changes to AMP or BP, 
rather than the State.
    Response: The State has never been responsible for calculating the 
amount of rebate adjustments. The manufacturer is responsible for 
recalculating the amount of rebate adjustments.
    Comment: One commenter noted the need to clarify the 3-year 
timeframe as it applies to prior period adjustments.
    Response: We concur with the need to provide clarification. We 
define the 3-year limitation as equivalent to 12 quarters because the 
Medicaid drug rebate program operates on a quarterly basis. Pricing 
information is exchanged and processed on a quarterly basis and rebates 
are due and paid on a quarterly basis. Therefore, wherever we refer in 
this document to a 3-year timeframe for recalculations and pricing 
changes, we interpret it as 12 quarters from the quarter in which the 
data were due.
    Comment: One commenter noted that 3 years is too long a timeframe 
for applying retroactive prior period adjustments and recommended that 
the allowed retroactive period not exceed 24 months.
    Response: We recognize the potential burden for States and 
manufacturers to apply prior period adjustments during a 3-year 
retroactive timeframe, as opposed to a 24-month timeframe. 
Nevertheless, as we discussed earlier in the ``Background'' section of 
this preamble, we continue to believe that a 3-year timeframe is 
reasonable because it comports with requirements for maintenance of 
records on State Medicaid expenditures. Furthermore, it is consistent 
with the manufacturer's recordkeeping requirements set forth in this 
document.
    Comment: One commenter noted that the 3-year prior period 
adjustment standard will provide a useful records management timeframe. 
Other commenters expressed appreciation for the 3-year time limitation, 
saying that it is essential to enable a manufacturer to close its books 
for a fiscal year.
    Response: As discussed earlier in the ``Background'' section of 
this preamble, we agree.

IV. Provisions of the Final Rule

    This final rule with comment period incorporates two of the 
provisions in the proposed rule issued on September 19, 1995. We will 
address the remaining provisions of the September 1995 proposed rule in 
a subsequent document we will publish in the Federal Register. This 
rule adopts the following provisions in the September 1995 proposed 
rule:
    Under part 447, ``Payments for Services,'' we are adding a new 
subpart I, entitled ``Payment for Outpatient Prescription Drugs Under 
Drug Rebate Agreements.'' We are reserving Sec.  447.500 through Sec.  
447.532 and Sec.  447.536 through Sec.  447.550.
    Under Sec.  447.534, ``Manufacturer reporting requirements,'' we 
are reserving paragraphs (a) through (f). We are redesignating 
paragraph (g) in the September 1995 proposed rule as paragraph (h) and 
are reserving the newly redesignated paragraph (g). We are also 
redesignating paragraph (h) as paragraph (i). We are revising newly 
redesignated paragraphs (h) and (i).
    Under Sec.  447.534(h), we are establishing a requirement that 
manufacturers must retain for 3 years from the date the manufacturer 
reports that rebate period's data to us, all records (written or 
electronic) of these data, and any other materials from which the 
calculations of the AMP and BP were derived. A manufacturer must retain 
records beyond the 3-year period if one or more of the following 
circumstances exist:
    [sbull] The records are the subject of an audit or of a government 
investigation of which the manufacturer is aware related to average 
manufacturer price or best price.
    [sbull] The audit findings or investigation related to the AMP and 
BP have not been resolved.
    If the audit findings or investigation have been resolved, 
manufacturers are not required to retain historical pricing data that 
fall outside the 3-year recordkeeping requirement. We want to clarify 
that Sec.  447.534(h) was not designed to address recordkeeping 
requirements when a manufacturer is the subject of an audit or 
government investigation by the Office of Inspector General (OIG) or 
any other government entity. In the September 1995 proposed rule, we 
proposed requiring manufacturers to retain data beyond the 3-year 
timeframe if the records are the subject of an audit. Because we did 
not specifically address OIG investigations in the September 1995 
proposed rule, we want to clarify this point in this final rule. 
Therefore, we are revising Sec.  447.534(h) from the language in the 
September 1995 proposed rule to specify that manufacturers must retain 
data beyond 3 years if the records are the subject of an audit or a 
government investigation.
    Under Sec.  447.534(i), we are establishing a 3-year time 
limitation for a manufacturer to submit drug pricing changes. We define 
the 3-year period as 12 quarters. Therefore, we require that the 
manufacturer report to us changes to AMP or BP for a period not to 
exceed 12 quarters from the quarter in which the data were due.
    The terms of the Medicaid Drug Rebate Agreement require 
manufacturers to submit pricing data for each calendar quarter no later 
than 30 days after the end of that quarter. For example, for data 
pertaining to the second quarter of 2003 (April 1, 2003 through June 
30, 2003), the due date for submitting pricing data is July 30, 2003, 
which falls during the third quarter of 2003.
    For purposes of implementing the 3-year timeframe for reporting 
pricing changes to us, we define 3 years as 12 quarters from the 
quarter in which the data were due. For example, data from the second 
quarter of the year 2000 (April 1, 2000 through June 30, 2000) were due 
July 30, 2000 (the third quarter of 2000). Twelve quarters from the 
third quarter of 2000 (the quarter in which the data were due) is the 
third quarter of 2003. Based on the due date for submitting pricing 
data, data submitted during the third quarter of 2003 were due on July 
30, 2003. Therefore, pricing changes pertaining to data from the second 
quarter of 2000 were due to us no later than July 30, 2003.
    As with all pricing data submitted under the Medicaid drug rebate 
program, if CMS, the Office of Inspector General, or another authorized 
government agency reviews a manufacturer's pricing data and determines 
that adjustments or revisions are necessary, irrespective of the 
quarter, the manufacturer is bound under the Medicaid Drug Rebate 
Agreement to comply with that determination.

[[Page 51915]]

V. Response to Comments

    Because of the large number of items of correspondence we normally 
receive on Federal Register documents published for comment, we are not 
able to acknowledge or respond to them individually. We will consider 
all comments we receive by the date and time specified in the ``DATES'' 
section of this preamble, and, when we proceed with a subsequent 
document, we will respond to the comments in the preamble to that 
document.

VI. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995, we are required to 
provide 60-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the Office of Management and Budget (OMB) for review and approval. In 
order to fairly evaluate whether an information collection should be 
approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act 
of 1995 requires that we solicit comment on the following issues:
    [sbull] The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
    [sbull] The accuracy of our estimate of the information collection 
burden.
    [sbull] The quality, utility, and clarity of the information to be 
collected.
    [sbull] Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    Under paragraph (h) of Sec.  447.534, there are two recordkeeping 
requirements:
    (1) A manufacturer must retain records (written or electronic) for 
3 years from the date the manufacturer reports that rebate period's 
data to CMS. The records must include these data and any other 
materials from which the calculations of the average manufacturer price 
and best price are derived, including a record of any assumptions made 
in the calculations.
    (2) A manufacturer must retain records beyond the 3-year period if 
one or more of the following circumstances exist: (A) The records are 
the subject of an audit or of a government investigation of which the 
manufacturer is aware related to average manufacturer price or best 
price, and (B) The audit findings or investigation related to the 
average manufacturer price and best price have not been resolved.
    Under paragraph (i), there is a reporting requirement: A 
manufacturer must report to CMS changes to average manufacturer price 
or best price for a period not to exceed 12 quarters from the quarter 
in which the data were due.
    These information collection requirements already exist. The 
recordkeeping requirements are in the contract between the drug 
manufacturer and CMS and are in any event usual and customary business 
practices. The regulation specifies timeframes; however, under the 
contract, we did not establish a timeframe.
    The reporting requirement is currently approved under OMB number 
0938-0578. The regulation merely adds a time limit in which the 
manufacturer must report changes; currently, there is none.
    If you comment on these information collection and recordkeeping 
requirements, please mail copies directly to the following:

Centers for Medicare & Medicaid Services, Office of Strategic 
Operations and Regulatory Affairs, Regulations Development and 
Issuances Groups, Attn.: Julie Brown, CMS-2175-FC, Room C5-14-03, 7500 
Security Boulevard, Baltimore, MD 21244-1850; and
Office of Information and Regulatory Affairs, Office of Management and 
Budget, Room 10235, New Executive Office Building, Washington, DC 
20503, Attn.: Brenda Aguilar, CMS Desk Officer.

VII. Regulatory Impact Analysis

A. Overall Impact

    We have examined the impacts of this rule as required by Executive 
Order 12866 (September 1993, Regulatory Planning and Review), the 
Regulatory Flexibility Act (RFA) (September 16, 1980, Pub. L. 96-354), 
section 1102(b) of the Social Security Act, the Unfunded Mandates 
Reform Act of 1995 (Pub. L. 104-4), and Executive Order 13132.
    Executive Order 12866 (as amended by Executive Order 13258, which 
merely assigns responsibility of duties) directs agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). A 
regulatory impact analysis (RIA) must be prepared for major rules with 
economically significant effects ($100 million or more in any 1 year). 
We believe this rule will have an economically significant effect. We 
believe the rule will save $90 million annually over the next 5 years 
($50 million Federal savings and $40 million State savings as shown in 
the table below). This figure represents 0.4 percent of total Medicaid 
drug expenditures in Federal fiscal year 2002. We consider this rule to 
be a major rule.

                                     State and Federal Savings Over 5 Years
----------------------------------------------------------------------------------------------------------------
                       FY                            2004         2005         2006         2007         2008
----------------------------------------------------------------------------------------------------------------
State..........................................     *$40,000      $40,000      $40,000      $40,000      $40,000
Federal........................................      $50,000      $50,000      $50,000      $50,000     $50,000
----------------------------------------------------------------------------------------------------------------
*Note: Figures are in thousands.

    The RFA requires agencies to analyze options for regulatory relief 
of small businesses. For purposes of the RFA, small entities include 
small businesses, nonprofit organizations, and government agencies. 
Most hospitals and most other providers and suppliers are small 
entities, either by nonprofit status or by having revenues of $6 
million to $29 million or less in any 1 year. For purposes of the RFA, 
pharmaceutical manufacturers with 750 or fewer employees are considered 
small businesses according to the Small Business Administration's size 
standards matched to North American Industry Classification System, 
effective October 1, 2002, http://www.sba.gov/size/sizetable2002.html). 
Use of the Small Business Administration's size standards matched to 
North American Industry Classification System is in compliance with the 
Small Business Administration's regulation that set forth size 
standards for health care industries at 65 FR 69432. Individuals and 
States are not included in the definition of a small entity. This rule 
will not have a significant impact on small businesses.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a rule may have a

[[Page 51916]]

significant impact on the operations of a substantial number of small 
rural hospitals. This 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 100 beds. This rule 
will not have a significant impact on small rural hospitals because the 
provisions contained herein do not pertain to hospitals.
    Section 202 of the Unfunded Mandates Reform Act of 1995 also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule that may result in expenditure in any 1 year by State, 
local, or tribal governments, in the aggregate, or by the private 
sector, of $110 million. We anticipate this rule will impact State 
governments through increased Medicaid savings, in the aggregate, of 
$40 million per year. We anticipate this rule will impact the private 
sector, in the aggregate, by less than $110 million. We anticipate this 
rule will cost drug manufacturers, in the aggregate, $90 million per 
year.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule (and subsequent 
final rule) that imposes substantial direct requirement costs on State 
and local governments, preempts State law, or otherwise has Federalism 
implications. We do not anticipate this rule will impose direct 
requirement costs on State governments.

B. Anticipated Effects

1. Effects on Drug Manufacturers
    We anticipate the rule will cost drug manufacturers $90 million in 
the aggregate. To derive this estimate, we examined the rebate 
adjustment data from several States for the four quarters from the 
third quarter of 2001 through the second quarter of 2002. We separated 
the data from adjustments for each quarter into two parts:
    [sbull] Adjustments over the previous 12 quarters; and
    [sbull] Adjustments beyond the previous 12 quarters. From those 
data, we estimated the percentage of total rebate adjustments within 12 
quarters nationally. We then projected what percentage of total 
adjustments would not occur given the 12-quarter limit. Then we 
estimated the national rebate adjustments by quarter by calculating the 
adjustments as a percentage of total rebates by State and multiplying 
that by the total national rebates. We then multiplied the projected 
total national rebate adjustments by the projected percentage of 
rebates that would not occur within 12 quarters to estimate the total 
impact of the proposal. Over the four quarters of data (third quarter 
of 2001 through the second quarter of 2002), we found that that 
resulted in approximately $90 million.
    The estimated number of drug manufacturers currently participating 
in the Medicaid Drug Rebate Program is approximately 550. As previously 
indicated, businesses with 750 employees or fewer are considered small 
businesses. At this time, we are unable to determine how many of the 
550 drug manufacturers have 750 or fewer employees. No single 
manufacturer will be affected significantly by this rule. As a group, 
the participating drug manufacturers will probably have a mixed 
reaction to this rule. We anticipate that some drug manufacturers will 
likely object to a narrowing of their window of opportunity to submit 
pricing changes to us. We are unable to quantitatively address the 
burden to manufacturers with respect to recordkeeping. Absent this 
rule, manufacturers are in effect required to retain their pricing and 
sales records indefinitely. Therefore, some of the manufacturers may be 
relieved that we are setting forth clear guidelines for records 
retention that closely mirror the industry standard for records 
retention.
    We do not anticipate that this rule will adversely affect a drug 
manufacturer's participation in the Medicaid Drug Rebate program nor 
impact the current level of access and availability of prescription 
drugs for Medicaid beneficiaries. There is no impact to contractors or 
providers.
2. Effects on the Medicaid Program
    We anticipate the rule will result in $50 million in Federal 
Medicaid savings and save State Medicaid programs $40 million in the 
aggregate. This rule will have a positive effect on the State Medicaid 
agencies. State Medicaid agencies are having difficulty fully funding 
their Medicaid programs. They will likely be relieved that we are 
setting forth a rule that will limit their fiscal vulnerability for 
manufacturers implementing retroactive pricing changes that result in 
greatly increased costs to their programs.
    We are unable to quantitatively address the burden to States with 
respect to recordkeeping. Absent this rule, States are in effect 
required to retain drug utilization data indefinitely in order to 
verify the revised or reduced rebates from manufacturers attributable 
to retroactive pricing changes. Therefore, we expect that a majority of 
the States will be relieved that we are setting forth clear guidelines 
for manufacturer records retention.
    This rule will not adversely affect a State's ability to obtain 
manufacturers rebates nor impact the current level of access and 
availability of prescription drugs for Medicaid beneficiaries. There is 
no impact to Medicaid providers or contractors.

C. Alternatives Considered

Delay Publication of This Final Rule
    We considered not publishing this final rule. However, we believe 
this rule is necessary to address the burden to States and 
manufacturers with respect to recordkeeping in the Medicaid drug rebate 
program. We chose to issue this rule given the concerns repeatedly 
expressed by manufacturers and States regarding the recordkeeping 
requirements and the time limit on pricing changes.
Establish a Different Time Limitation
    Another alternative would be to establish a longer or a shorter 
time limitation for recordkeeping and pricing changes. We did not 
choose a longer recordkeeping timeframe because it would not relieve a 
reasonable amount of the burden to manufacturers. In addition, a longer 
time limit on pricing changes would not sufficiently alleviate States' 
fiscal vulnerability with regard to retroactive pricing changes. We did 
not choose a shorter recordkeeping timeframe because it would create a 
disparity among Federal recordkeeping requirements. The 3-year 
timeframe set forth for both requirements mirrors existing records 
retention requirements for States. Furthermore, because the 
recordkeeping and pricing change provisions are interrelated, we 
believe the timeframes should be the same for these provisions.

D. Conclusion

    For these reasons, we are not preparing analyses for either the RFA 
or section 1102(b) of the Act because we have determined, and we 
certify, that this rule will not have a significant economic impact on 
a substantial number of small entities or a significant impact on the 
operations of a substantial number of small rural hospitals.
    In accordance with the provisions of Executive Order 12866, this 
regulation was reviewed by the Office of Management and Budget.

List of Subjects in 42 CFR Part 447

    Accounting, Administrative practice and procedure, Drugs, Grant 
programs-health, Health facilities, Health professions, Medicaid, 
Reporting and

[[Page 51917]]

recordkeeping requirements, Rural areas.

0
For the reasons set forth in the preamble, the Centers for Medicare & 
Medicaid Services amends 42 CFR chapter IV part 447 as set forth below:

PART 447--PAYMENTS FOR SERVICES

0
1. The authority citation for part 447 continues to read as follows:


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


0
2. A new subpart I, consisting of Sec.  447.500 through Sec.  447.550, 
is added to read as follows:
Subpart I--Payment for Outpatient Prescription Drugs Under Drug Rebate 
Agreements
Sec.
447.500-447.532 [Reserved]
447.534 Manufacturer reporting requirements.
447.536-447.550 [Reserved]

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


Sec. Sec.  447.500-447.532  [Reserved]


Sec.  447.534  Manufacturer reporting requirements.

    (a)-(g) [Reserved]
    (h) Recordkeeping requirements. (1)(i) A manufacturer must retain 
records (written or electronic) for 3 years from the date the 
manufacturer reports that rebate period's data to CMS. The records must 
include these data and any other materials from which the calculations 
of the average manufacturer price 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 
one or more of the following circumstances exist:
    (A) The records are the subject of an audit or of a government 
investigation of which the manufacturer is aware related to average 
manufacturer price or best price.
    (B) The audit findings or investigation related to the average 
manufacturer price and best price have not been resolved.
    (2) [Reserved]
    (i) Timeframe for reporting revised average manufacturer price or 
best price. A manufacturer must report to CMS revisions to average 
manufacturer price or best price for a period not to exceed 12 quarters 
from the quarter in which the data were due.
    (ii) [Reserved]


Sec. Sec.  447.536-447.550  [Reserved]

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

    Dated: January 16, 2003.
Thomas A. Scully,
Administrator, Centers for Medicare & Medicaid Services.
    Approved: April 29, 2003.
Tommy G. Thompson,
Secretary.

    Editorial Note: This document was received in the Office of the 
Federal Register on August 19, 2003.

[FR Doc. 03-21548 Filed 8-28-03; 8:45 am]
BILLING CODE 4120-01-P